Non-retroactivity of rulings (Sec.

246, NIRC)
G.R. No. 168129 April 24, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. PHILIPPINE HEALTH CARE PROVIDERS, INC., Respondent. DECISION SANDOVAL-GUTIERREZ, J.: For our resolution is the instant Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, seeking to reverse the Decision 1 dated February 18, 2005 and Resolution dated May 9, 2005 of the Court of Appeals (Fifteenth Division) in CA-G.R. SP No. 76449. The factual antecedents of this case, as culled from the records, are: The Philippine Health Care Providers, Inc., herein respondent, is a corporation organized and existing under the laws of the Republic of the Philippines. Pursuant to its Articles of Incorporation,2 its primary purpose is "To establish, maintain, conduct and operate a prepaid group practice health care delivery system or a health maintenance organization to take care of the sick and disabled persons enrolled in the health care plan and to provide for the administrative, legal, and financial responsibilities of the organization."
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On July 25, 1987, President Corazon C. Aquino issued Executive Order (E.O.) No. 273, amending the National Internal Revenue Code of 1977 (Presidential Decree No. 1158) by imposing ValueAdded Tax (VAT) on the sale of goods and services. This E.O. took effect on January 1, 1988. Before the effectivity of E.O. No. 273, or on December 10, 1987, respondent wrote the Commissioner of Internal Revenue (CIR), petitioner, inquiring whether the services it provides to the participants in its health care program are exempt from the payment of the VAT. On June 8, 1988, petitioner CIR, through the VAT Review Committee of the Bureau of Internal Revenue (BIR), issued VAT Ruling No. 231-88 stating that respondent, as a provider of medical services, is exempt from the VAT coverage. This Ruling was subsequently confirmed by Regional Director Osmundo G. Umali of Revenue Region No. 8 in a letter dated April 22, 1994. Meanwhile, on January 1, 1996, Republic Act (R.A.) No. 7716 (Expanded VAT or E-VAT Law) took effect, amending further the National Internal Revenue Code of 1977. Then on January 1, 1998, R.A. No. 8424 (National Internal Revenue Code of 1997) became effective. This new Tax

Code substantially adopted and reproduced the provisions of E.O. No. 273 on VAT and R.A. No. 7716 on E-VAT. In the interim, on October 1, 1999, the BIR sent respondent a Preliminary Assessment Notice for deficiency in its payment of the VAT and documentary stamp taxes (DST) for taxable years 1996 and 1997. On October 20, 1999, respondent filed a protest with the BIR. On January 27, 2000, petitioner CIR sent respondent a letter demanding payment of "deficiency VAT" in the amount of P100,505,030.26 and DST in the amount of P124,196,610.92, or a total of P224,702,641.18 for taxable years 1996 and 1997. Attached to the demand letter were four (4) assessment notices. On February 23, 2000, respondent filed another protest questioning the assessment notices. Petitioner CIR did not take any action on respondent's protests. Hence, on September 21, 2000, respondent filed with the Court of Tax Appeals (CTA) a petition for review, docketed as CTA Case No. 6166. On April 5, 2002, the CTA rendered its Decision, the dispositive portion of which reads: WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Petitioner is hereby ORDERED TO PAY the deficiency VAT amounting to P22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25% surcharge plus 20% interest from January 20, 1998 until paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No. 231-88 is declared void and without force and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST deficiency tax.
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SO ORDERED. Respondent filed a motion for partial reconsideration of the above judgment concerning its liability to pay the deficiency VAT. In its Resolution3 dated March 23, 2003, the CTA granted respondent's motion, thus: WHEREFORE, in view of the foregoing, the instant Motion for Partial Reconsideration is GRANTED. Accordingly, the VAT assessment issued by herein respondent against petitioner for the taxable years 1996 and 1997 is hereby WITHDRAWN and SET ASIDE. SO ORDERED.

The CTA held: Moreover, this court adheres to its conclusion that petitioner is a service contractor subject to VAT since it does not actually render medical service but merely acts as a conduit between the members and petitioner's accredited and recognized hospitals and clinics. However, after a careful review of the facts of the case as well as the Law and jurisprudence applicable, this court resolves to grant petitioner's "Motion for Partial Reconsideration." We are in accord with the view of petitioner that it is entitled to the benefit of non-retroactivity of rulings guaranteed under Section 246 of the Tax Code, in the absence of showing of bad faith on its part. Section 246 of the Tax Code provides: Sec. 246. Non-Retroactivity of Rulings. - Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers, x x x. Clearly, undue prejudice will be caused to petitioner if the revocation of VAT Ruling No. 231-88 will be retroactively applied to its case. VAT Ruling No. 231-88 issued by no less than the respondent itself has confirmed petitioner's entitlement to VAT exemption under Section 103 of the Tax Code. In saying so, respondent has actually broadened the scope of "medical services" to include the case of the petitioner. This VAT ruling was even confirmed subsequently by Regional Director Ormundo G. Umali in his letter dated April 22, 1994 (Exhibit M). Exhibit P, which served as basis for the issuance of the said VAT ruling in favor of the petitioner sufficiently described the business of petitioner and there is no way BIR could be misled by the said representation as to the real nature of petitioner's business. Such being the case, this court is convinced that petitioner's reliance on the said ruling is premised on good faith. The facts of the case do not show that petitioner deliberately committed mistakes or omitted material facts when it obtained the said ruling from the Bureau of Internal Revenue. Thus, in the absence of such proof, this court upholds the application of Section 246 of the Tax Code. Consequently, the pronouncement made by the BIR in VAT Ruling No. 231-88 as to the VAT exemption of petitioner should be upheld. Petitioner seasonably filed with the Court of Appeals a petition for review, docketed as CA-G.R. SP No. 76449. In its Decision dated February 18, 2005, the Court of Appeals affirmed the CTA Resolution. Petitioner CIR filed a motion for reconsideration, but it was denied by the appellate court in its Resolution4 dated May 9, 2005. Hence, the instant petition for review on certiorari raising these two issues: (1) whether respondent's services are subject to VAT; and (2) whether VAT Ruling No. 231-88 exempting respondent from payment of VAT has retroactive application.

On the first issue, respondent is contesting petitioner's assessment of its VAT liabilities for taxable years 1996 and 1997. Section 1025 of the National Internal Revenue Code of 1977, as amended by E.O. No. 273 (VAT Law) and R.A. No. 7716 (E-VAT Law), provides: SEC. 102. Value-added tax on sale of services and use or lease of properties. - (a) Rate and base of tax. - There shall be levied, assessed and collected, a value-added tax equivalent to 10% of gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase "sale or exchange of service" means the performance of all kinds of services in the Philippines for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors x x x. Section 1036 of the same Code specifies the exempt transactions from the provision of Section 102, thus: SEC. 103. Exempt Transactions. - The following shall be exempt from the value-added tax: xxx (l) Medical, dental, hospital and veterinary services except those rendered by professionals xxx The import of the above provision is plain. It requires no interpretation. It contemplates the exemption from VAT of taxpayers engaged in the performance of medical, dental, hospital, and veterinary services. In Commissioner of International Revenue v. Seagate Technology (Philippines),7 we defined an exempt transaction as one involving goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT, under the Tax Code, without regard to the tax status of the party in the transaction. In Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.) Inc.,8 we reiterated this definition. In its letter to the BIR requesting confirmation of its VAT-exempt status, respondent described its services as follows: Under the prepaid group practice health care delivery system adopted by Health Care, individuals enrolled in Health Care's health care program are entitled to preventive, diagnostic, and corrective medical services to be dispensed by Health Care's duly licensed physicians, specialists, and other professional technical staff participating in said group practice health care delivery system established and operated by Health Care. Such medical services will be dispensed in a hospital or clinic owned, operated, or accredited by Health Care. To be entitled to receive such medical services from Health Care, an individual must enroll in Health Care's

health care program and pay an annual fee. Enrollment in Health Care's health care program is on a year-to-year basis and enrollees are issued identification cards. From the foregoing, the CTA made the following conclusions:
a) Respondent "is not actually rendering medical service but merely acting as a conduit between the members and their accredited and recognized hospitals and clinics." b) It merely "provides and arranges for the provision of pre-need health care services to its members for a fixed prepaid fee for a specified period of time." c) It then "contracts the services of physicians, medical and dental practitioners, clinics and hospitals to perform such services to its enrolled members;" and d) Respondent "also enters into contract with clinics, hospitals, medical professionals and then negotiates with them regarding payment schemes, financing and other procedures in the delivery of health services."

We note that these factual findings of the CTA were neither modified nor reversed by the Court of Appeals. It is a doctrine that findings of fact of the CTA, a special court exercising particular expertise on the subject of tax, are generally regarded as final, binding, and conclusive upon this Court, more so where these do not conflict with the findings of the Court of Appeals.9 Perforce, as respondent does not actually provide medical and/or hospital services, as provided under Section 103 on exempt transactions, but merely arranges for the same, its services are not VAT-exempt. Relative to the second issue, Section 246 of the 1997 Tax Code, as amended, provides that rulings, circulars, rules and regulations promulgated by the Commissioner of Internal Revenue have no retroactive application if to apply them would prejudice the taxpayer. The exceptions to this rule are: (1) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; (2) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based, or (3) where the taxpayer acted in bad faith. We must now determine whether VAT Ruling No. 231-88 exempting respondent from paying its VAT liabilities has retroactive application. In its Resolution dated March 23, 2003, the CTA found that there is no showing that respondent "deliberately committed mistakes or omitted material facts" when it obtained VAT Ruling No. 231-88 from the BIR. The CTA held that respondent's letter which served as the basis for the VAT ruling "sufficiently described" its business and "there is no way the BIR could be misled by the said representation as to the real nature" of said business. In sustaining the CTA, the Court of Appeals found that "the failure of respondent to refer to itself as a health maintenance organization is not an indication of bad faith or a deliberate

attempt to make false representations." As "the term health maintenance organization did not as yet have any particular significance for tax purposes," respondent's failure "to include a term that has yet to acquire its present definition and significance cannot be equated with bad faith." We agree with both the Tax Court and the Court of Appeals that respondent acted in good faith. In Civil Service Commission v. Maala,10 we described good faith as "that state of mind denoting honesty of intention and freedom from knowledge of circumstances which ought to put the holder upon inquiry; an honest intention to abstain from taking any unconscientious advantage of another, even through technicalities of law, together with absence of all information, notice, or benefit or belief of facts which render transaction unconscientious." According to the Court of Appeals, respondent's failure to describe itself as a "health maintenance organization," which is subject to VAT, is not tantamount to bad faith. We note that the term "health maintenance organization" was first recorded in the Philippine statute books only upon the passage of "The National Health Insurance Act of 1995" (Republic Act No. 7875). Section 4 (o) (3) thereof defines a health maintenance organization as "an entity that provides, offers, or arranges for coverage of designated health services needed by plan members for a fixed prepaid premium." Under this law, a health maintenance organization is one of the classes of a "health care provider." It is thus apparent that when VAT Ruling No. 231-88 was issued in respondent's favor, the term "health maintenance organization" was yet unknown or had no significance for taxation purposes. Respondent, therefore, believed in good faith that it was VAT exempt for the taxable years 1996 and 1997 on the basis of VAT Ruling No. 231-88. In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals,11 this Court held that under Section 246 of the 1997 Tax Code, the Commissioner of Internal Revenue is precluded from adopting a position contrary to one previously taken where injustice would result to the taxpayer. Hence, where an assessment for deficiency withholding income taxes was made, three years after a new BIR Circular reversed a previous one upon which the taxpayer had relied upon, such an assessment was prejudicial to the taxpayer. To rule otherwise, opined the Court, would be contrary to the tenets of good faith, equity, and fair play. This Court has consistently reaffirmed its ruling in ABS-CBN Broadcasting Corp. in the later cases ofCommissioner of Internal Revenue v. Borroughs, Ltd.,12 Commissioner of Internal Revenue v. Mega Gen. Mdsg. Corp.13 Commissioner of Internal Revenue v. Telefunken Semiconductor (Phils.) Inc.,14 andCommissioner of Internal Revenue v. Court of Appeals.15 The rule is that the BIR rulings have no retroactive effect where a grossly unfair deal would result to the prejudice of the taxpayer, as in this case. More recently, in Commissioner of Internal Revenue v. Benguet Corporation,16 wherein the taxpayer was entitled to tax refunds or credits based on the BIR's own issuances but later was suddenly saddled with deficiency taxes due to its subsequent ruling changing the category of

the taxpayer's transactions for the purpose of paying its VAT, this Court ruled that applying such ruling retroactively would be prejudicial to the taxpayer. WHEREFORE, we DENY the petition and AFFIRM the assailed Decision and Resolution of the Court of Appeals in CA-G.R. SP No. 76449. No costs. SO ORDERED. ANGELINA SANDOVAL GUTIERREZ Associate Justice
G.R. No. 112024 January 28, 1999 PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX APPEALS and COURT OF APPEALS,respondent.

QUISUMBING, J.:

This petition for review assails the Resolution 1 of the Court of Appeals dated September 22, 1993 affirming the Decision 2 and a Resolution 3 of the Court Of Tax Appeals which denied the claims of the petitioner for tax refund and tax credits, and disposing as follows:
IN VIEW OF ALL, THE FOREGOING, the instant petition for review, is DENIED due course. The Decision of the Court of Tax Appeals dated May 20, 1993 and its resolution dated July 20, 1993, are hereby AFFIRMED in toto.
SO ORDERED.
4

The Court of Tax Appeals earlier ruled as follows: WHEREFORE, Petitioner's claim for refund/tax credits of overpaid income tax for 1985 in the amount of P5,299,749.95 is hereby denied for having been filed beyond the reglementary period. The 1986 claim for refund amounting to P234,077.69 is likewise denied since petitioner has opted and in all likelihood automatically credited the same to the succeeding year. The petition for review is dismissed for lack of merit.
SO ORDERED.
5

The facts on record show the antecedent circumstances pertinent to this case.

Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation duly organized under Philippine laws, filed its quarterly income tax returns for the first and second quarters of 1985, reported profits, and paid the total income tax of P5,016,954.00. The taxes due were settled by applying PBCom's tax credit memos and accordingly, the Bureau of Internal Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85 for P3,401,701.00 and P1,615,253.00, respectively. Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns for the year-ended December 31, 1986, the petitioner likewise reported a net loss of P14,129,602.00, and thus declared no tax payable for the year. But during these two years, PBCom earned rental income from leased properties. The lessees withheld and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986. On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others, for a tax credit of P5,016,954.00 representing the overpayment of taxes in the first and second quarters of 1985. Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69. Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted a Petition for Review on November 18, 1988 before the Court of Tax Appeals (CTA). The petition was docketed as CTA Case No. 4309 entitled: "Philippine Bank of Communications vs. Commissioner of Internal Revenue." The losses petitioner incurred as per the summary of petitioner's claims for refund and tax credit for 1985 and 1986, filed before the Court of Tax Appeals, are as follows: 1985 1986 Net Income (Loss) (P25,317,288.00) (P14,129,602.00) Tax Due NIL NIL Quarterly tax. Payments Made 5,016,954.00 Tax Withheld at Source 282,795.50 234,077.69

Excess Tax Payments P5,299,749.50* P234,077.69 =============== ============= * CTA's decision reflects PBCom's 1985 tax claim as P5,299,749.95. A forty five centavo difference was noted. On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the request of petitioner for a tax refund or credit in the sum amount of P5,299,749.95, on the ground that it was filed beyond the two-year reglementary period provided for by law. The petitioner's claim for refund in 1986 amounting to P234,077.69 was likewise denied on the assumption that it was automatically credited by PBCom against its tax payment in the succeeding year.

On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTA's decision but the same was denied due course for lack of merit. 6
Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA with the Court of Appeals. However on September 22, 1993, the Court of Appeals affirmed in toto the CTA's resolution dated July 20, 1993. Hence this petition now before us. The issues raised by the petitioner are:
I. Whether taxpayer PBCom which relied in good faith on the formal assurances of BIR in RMC No. 7-85 and did not immediately file with the CTA a petition for review asking for the refund/tax credit of its 1985-86 excess quarterly income tax payments can be prejudiced by the subsequent BIR rejection, applied retroactivity, of its assurances in RMC No. 7-85 that the prescriptive period for the refund/tax credit of excess quarterly income tax 7 payments is not two years but ten (10). II. Whether the Court of Appeals seriously erred in affirming the CTA decision which denied PBCom's claim for the refund of P234,077.69 income tax overpaid in 1986 on the mere speculation, without proof, that there were 8 taxes due in 1987 and that PBCom availed of tax-crediting that year.

Simply stated, the main question is: Whether or not the Court of Appeals erred in denying the plea for tax refund or tax credits on the ground of prescription, despite petitioner's reliance on RMC No. 7-85, changing the prescriptive period of two years to ten years? Petitioner argues that its claims for refund and tax credits are not yet barred by prescription relying on the applicability of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985. The circular states that overpaid income taxes are not covered by the two-year prescriptive period under the tax Code and that taxpayers may claim refund or tax credits for the excess quarterly income tax with the BIR within ten (10) years under Article 1144 of the Civil Code. The pertinent portions of the circular reads: REVENUE MEMORANDUM CIRCULAR NO. 7-85

SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF EXCESS CORPORATE INCOME TAX RESULTING FROM THE FILING OF THE FINAL ADJUSTMENT RETURN. TO: All Internal Revenue Officers and Others Concerned. Sec. 85 And 86 Of the National Internal Revenue Code provide: xxx xxx xxx The foregoing provisions are implemented by Section 7 of Revenue Regulations Nos. 10-77 which provide; xxx xxx xxx It has been observed, however, that because of the excess tax payments, corporations file claims for recovery of overpaid income tax with the Court of Tax Appeals within the two-year period from the date of payment, in accordance with sections 292 and 295 of the National Internal Revenue Code. It is obvious that the filing of the case in court is to preserve the judicial right of the corporation to claim the refund or tax credit. It should he noted, however, that this is not a case of erroneously or illegally paid tax under the provisions of Sections 292 and 295 of the Tax Code. In the above provision of the Regulations the corporation may request for the refund of the overpaid income tax or claim for automatic tax credit. To insure prompt action on corporate annual income tax returns showing refundable amounts arising from overpaid quarterly income taxes, this Office has promulgated Revenue Memorandum Order No. 32-76 dated June 11, 1976, containing the procedure in processing said returns. Under these procedures, the returns are merely pre-audited which consist mainly of checking mathematical accuracy of the figures of the return. After which, the refund or tax credit is granted, and, this procedure was adopted to facilitate immediate action on cases like this.
In this regard, therefore, there is no need to file petitions for review in the Court of Tax Appeals in order to preserve the right to claim refund or tax credit the two year period. As already stated, actions hereon by the Bureau are immediate after only a cursory pre-audit of the income tax returns. Moreover, a taxpayer may recover from the Bureau of Internal Revenue excess income tax paid under the provisions of Section 86 of the Tax Code within 10 years from the date of payment considering that it is an obligation created by law (Article 1144 of the Civil 9 Code). (Emphasis supplied.)

Petitioner argues that the government is barred from asserting a position contrary to its declared circular if it would result to injustice to taxpayers. Citing ABS CBN Broadcasting Corporation vs. Court of Tax Appeals 10petitioner claims that rulings or circulars promulgated by

the Commissioner of Internal Revenue have no retroactive effect if it would be prejudicial to taxpayers, In ABS-CBN case, the Court held that the government is precluded from adopting a position inconsistent with one previously taken where injustice would result therefrom or where there has been a misrepresentation to the taxpayer.
Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides for this rules as follows: Sec. 246 Non-retroactivity of rulings Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers except in the following cases: a). where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; b). where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; c). where the taxpayer acted in bad faith.

Respondent Commissioner of Internal Revenue, through Solicitor General, argues that the twoyear prescriptive period for filing tax cases in court concerning income tax payments of Corporations is reckoned from the date of filing the Final Adjusted Income Tax Return, which is generally done on April 15 following the close of the calendar year. As precedents, respondent Commissioner cited cases which adhered to this principle, to wit ACCRA Investments Corp. vs. Court of Appeals, et al., 11 and Commissioner of Internal Revenue vs. TMX Sales, Inc., et al.. 12 Respondent Commissioner also states that since the Final Adjusted Income Tax Return of the petitioner for the taxable year 1985 was supposed to be filed on April 15, 1986, the latter had only until April 15, 1988 to seek relief from the court. Further, respondent Commissioner stresses that when the petitioner filed the case before the CTA on November 18, 1988, the same was filed beyond the time fixed by law, and such failure is fatal to petitioner's cause of action.
After a careful study of the records and applicable jurisprudence on the matter, we find that, contrary to the petitioner's contention, the relaxation of revenue regulations by RMC 7-85 is not warranted as it disregards the two-year prescriptive period set by law.

Basic is the principle that "taxes are the lifeblood of the nation." The primary purpose is to generate funds for the State to finance the needs of the citizenry and to advance the common weal. 13 Due process of law under the Constitution does not require judicial proceedings in tax

cases. This must necessarily be so because it is upon taxation that the government chiefly relies to obtain the means to carry on its operations and it is of utmost importance that the modes adopted to enforce the collection of taxes levied should be summary and interfered with as little as possible. 14
From the same perspective, claims for refund or tax credit should be exercised within the time fixed by law because the BIR being an administrative body enforced to collect taxes, its functions should not be unduly delayed or hampered by incidental matters. Sec. 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997) provides for the prescriptive period for filing a court proceeding for the recovery of tax erroneously or illegally collected, viz.: Sec. 230. Recovery of tax erroneously or illegally collected. No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceedings shall begun after the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment;Provided however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid. (Emphasis supplied) The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of Internal Revenue, within two (2) years after payment of tax, before any suit in CTA is commenced. The two-year prescriptive period provided, should be computed from the time of filing the Adjustment Return and final payment of the tax for the year.

In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co., 15 this Court explained the application of Sec. 230 of 1977 NIRC, as follows:
Clearly, the prescriptive period of two years should commence to run only from the time that the refund is ascertained, which can only be determined after a final adjustment return is accomplished. In the present case, this date is April 16, 1984, and two years from this date would be April 16, 1986. . . . As we have earlier said in the TMX Sales case, Sections 16 17 18 68. 69, and 70 on Quarterly Corporate Income Tax Payment and Section 321 should be 19 considered in conjunction with it

When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two years to ten years on claims of excess quarterly income tax payments, such circular

created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines contrary to the statute passed by Congress.

It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more specific and less general interpretations of tax laws) which are issued from time to time by the Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to be erroneous. 20 Thus, courts will not countenance administrative issuances that override, instead of remaining consistent and in harmony with the law they seek to apply and implement. 21 In the case of People vs. Lim, 22 it was held that rules and regulations issued by administrative officials to implement a law cannot go beyond the terms and provisions of the latter.
Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only inconsistent with but is contrary to the provisions and spirit of Act. No 4003 as amended, because whereas the prohibition prescribed in said Fisheries Act was for any single period of time not exceeding five years duration, FAO No 37-1 fixed no period, that is to say, it establishes an absolute ban for all time. This discrepancy between Act No. 4003 and FAO No. 37-1 was probably due to an oversight on the part of Secretary of Agriculture and Natural Resources. Of course, in case of discrepancy, the basic Act prevails, for the reason that the regulation or rule issued to implement a law cannot go beyond the terms and provisions of the latter. . . . In this connection, the attention of the technical men in the offices of Department Heads who draft rules and regulation is called to the importance and necessity of closely following the terms and provisions of the law which they intended to implement, this to avoid 23 any possible misunderstanding or confusion as in the present case.

Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors of its officials or agents. 24 As pointed out by the respondent courts, the nullification of RMC No. 7-85 issued by the Acting Commissioner of Internal Revenue is an administrative interpretation which is not in harmony with Sec. 230 of 1977 NIRC. for being contrary to the express provision of a statute. Hence, his interpretation could not be given weight for to do so would, in effect, amend the statute.
It is likewise argued that the Commissioner of Internal Revenue, after promulgating RMC No. 785, is estopped by the principle of non-retroactively of BIR rulings. Again We do not agree. The Memorandum Circular, stating that a taxpayer may recover the excess income tax paid within 10 years from date of payment because this is an obligation created by law, was issued by the Acting Commissioner of Internal Revenue. On the other hand, the decision, stating that the taxpayer should still file a claim for a refund or tax credit and corresponding petition fro review within the two-year prescription period, and that the lengthening of the period of limitation on refund from two to ten years would be adverse to public policy and run counter to the positive mandate of Sec. 230, NIRC, - was the ruling and judicial interpretation of the Court of Tax Appeals. Estoppel has no application in the case at bar because it was not the Commissioner of Internal Revenue who denied petitioner's claim of refund or tax credit. Rather, it was the Court of Tax Appeals

who denied (albeit correctly) the claim and in effect, ruled that the RMC No. 7-85 issued by the Commissioner of Internal Revenue is an administrative interpretation which is out of harmony with or contrary to the express provision of a statute (specifically Sec. 230, NIRC), hence, cannot 25 be given weight for to do so would in effect amend the statute.

Art. 8 of the Civil Code 26 recognizes judicial decisions, applying or interpreting statutes as part of the legal system of the country. But administrative decisions do not enjoy that level of recognition. A memorandum-circular of a bureau head could not operate to vest a taxpayer with shield against judicial action. For there are no vested rights to speak of respecting a wrong construction of the law by the administrative officials and such wrong interpretation could not place the Government in estoppel to correct or overrule the same. 27 Moreover, the nonretroactivity of rulings by the Commissioner of Internal Revenue is not applicable in this case because the nullity of RMC No. 7-85 was declared by respondent courts and not by the Commissioner of Internal Revenue. Lastly, it must be noted that, as repeatedly held by this Court, a claim for refund is in the nature of a claim for exemption and should be construed in strictissimi juris against the taxpayer. 28
On the second issue, the petitioner alleges that the Court of Appeals seriously erred in affirming CTA's decision denying its claim for refund of P234,077.69 (tax overpaid in 1986), based on mere speculation, without proof, that PBCom availed of the automatic tax credit in 1987.

Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997 NIRC) provides that any excess of the total quarterly payments over the actual income tax computed in the adjustment or final corporate income tax return, shall either(a) be refunded to the corporation, or (b) may be credited against the estimated quarterly income tax liabilities for the quarters of the succeeding taxable year.
The corporation must signify in its annual corporate adjustment return (by marking the option box provided in the BIR form) its intention, whether to request for a refund or claim for an automatic tax credit for the succeeding taxable year. To ease the administration of tax collection, these remedies are in the alternative, and the choice of one precludes the other. As stated by respondent Court of Appeals:
Finally, as to the claimed refund of income tax over-paid in 1986 the Court of Tax Appeals, after examining the adjusted final corporate annual income tax return for taxable year 1986, found out that petitioner opted to apply for automatic tax credit. This was the basis used ( visavis the fact that the 1987 annual corporate tax return was not offered by the petitioner as evidence) by the CTA in concluding that petitioner had indeed availed of and applied the automatic tax credit to the succeeding year, hence it can no longer ask for refund, as to [sic] the 30 two remedies of refund and tax credit are alternative.

That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977 NIRC, as specified in its 1986 Final Adjusted Income Tax Return, is a finding of fact which we must respect. Moreover, the 1987 annual corporate tax return of the petitioner was not offered as evidence to contovert said fact. Thus, we are bound by the findings of fact by

respondent courts, there being no showing of gross error or abuse on their part to disturb our reliance thereon. 31
WHEREFORE, the, petition is hereby DENIED, The decision of the Court of Appeals appealed from is AFFIRMED, with COSTS against the petitioner.
1wphi1.nt

SO ORDERED. Bellosillo, Puno, Mendoza, and Buena, JJ., concur.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G.R. No. 117982 February 6, 1997 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS, COURT OF TAX APPEALS and ALHAMBRA INDUSTRIES, INC., respondents.

BELLOSILLO, J.: ALHAMBRA INDUSTRIES, INC., is a domestic corporation engaged in the manufacture and sale of cigar and cigarette products. On 7 May 1991 private respondent received a letter dated 26 April 1991 from the Commissioner of Internal Revenue assessing it deficiency Ad Valorem Tax (AVT) in the total amount of Four Hundred Eighty-Eight Thousand Three Hundred Ninety-Six Pesos and Sixty-Two Centavos (P488,396.62), inclusive of increments, on the removals of cigarette products from their place of production during the period 2 November 1990 to 22 January 1991. 1 Petitioner computes the deficiency thus
Total AVT due per manufacturer's declaration P 4,279,042.33 Less: AVT paid under BIR Ruling No. 473-88 3,905,348.85 Deficiency AVT 373,693.48 Add: Penalties: 25% Surcharge (Sec. 248[c][3] NIRC) 93,423.37 20% Interest (P467,116.85 x 82/360 days) 21,279.27

 Total Amount Due P 488,396.62

In a letter dated 22 May 1991 received by petitioner on even date, private respondent thru counsel filed a protest against the proposed assessment with a request that the same be withdrawn and cancelled. On 31 May 1991 private respondent received petitioner's reply dated 27 May 1991 denying its protest and request for cancellation stating that the decision was final, and at the same time requesting payment of the revised amount of Five Hundred Twenty Thousand Eight Hundred Thirty-Five Pesos and Twenty-Nine Centavos (P520,835.29), with interest updated, within ten (10) days from receipt thereof. In a letter dated 10 June 1991 which petitioner received on the same day, private respondent requested for the reconsideration of petitioner's denial of its protest. Without waiting for petitioner's reply to its request for reconsideration, private respondent filed on 19 June 1991 a petition for review with the Court of Tax Appeals. On 25 June 1991 private respondent received from petitioner a letter dated 21 June 1991 denying its request for reconsideration declaring again that its decision was final. On 8 July 1991 private respondent paid under protest the disputed ad valorem tax in the sum of P520,835.29. 2 In its Decision 3 of 1 December 1993 the Court of Tax Appeals ordered petitioner to refund to private respondent the amount of Five Hundred Twenty Thousand Eight Hundred Thirty-Five Pesos and Twenty-Nine Centavos (P520,835.29) representing erroneously paid ad valorem tax for the period 2 November 1990 to 22 January 1991.
The Court of Tax Appeals explained that the subject deficiency excise tax assessment resulted from private respondent's use of the computation mandated by BIR Ruling 473-88 dated 4 October 1988 as basis for computing the fifteen percent (15%) ad valorem tax due on its removals of cigarettes from 2 November 1990 to 22 January 1991. BIR Circular 473-88 was issued by Deputy Commissioner Eufracio D. Santos to Insular-Yebana Tobacco Corporation allowing the latter to exclude the value-added tax (VAT) in the determination of the gross selling price for purposes of computing the ad valorem tax of its cigar and cigarette products in accordance with Sec. 127 of the Tax Code as amended by Executive Order No. 273 which provides as follows: Sec. 127. Payment of excise taxes on domestic products. . . . . (b) Determination of gross selling price of goods subject to ad valorem tax. Unless otherwise provided, the price, excluding the value-added tax, at which the goods are sold at wholesale in the place of production or through their sales agents to the public shall constitute the gross selling price. The computation, pursuant to the ruling, is illustrated by way of example thus P 44.00x1/1 = P 4.00 VAT P 44.00 - P 4.00 = P 40.00 price without VAT P 40.00 x 15% = P 6.00 Ad Valorem Tax

For the period 2 November 1990 to 22 January 1991 private respondent paid P3,905,348.85 ad valorem tax, applying Sec. 127 (b) of the NIRC as interpreted by BIR Ruling 473-88 by excluding the VAT in the determination of the gross selling price. Thereafter, on 11 February 1991, petitioner issued BIR Ruling 017-91 to Insular-Yebana Tobacco Corporation revoking BIR Ruling 473-88 for being violative of Sec. 142 of the Tax Code. It included back the VAT to the gross selling price in determining the tax base for computing the ad valorem tax on cigarettes. Cited as basis by petitioner is Sec. 142 of the Tax Code, as amended by E.O. No. 273 Sec. 142. Cigar and cigarettes . . . For purposes of this section, manufacturer's or importer's registered. wholesale price shall include the ad valorem tax imposed in paragraphs (a), (b), (c) or (d) hereof and the amount intended to cover the value added tax imposed under Title IV of this Code.

Petitioner sought to apply the revocation retroactively to private respondent's removals of cigarettes for the period starting 2 November 1990 to 22 January 1991 on the ground that private respondent allegedly acted in bad faith which is an exception to the rule on nonretroactivity of BIR Rulings. 4
On appeal, the Court of Appeals affirmed the Court of Tax Appeals holding that the retroactive application of BIR Ruling 017-91 cannot be allowed since private respondent did not act in bad faith; private respondent's computation under BIR Ruling 473-88 was not shown to be motivated by ill will or dishonesty partaking the nature of fraud; hence, this petition. Petitioner imputes error to the Court of Appeals: (1) in failing to consider that private respondent's reliance on BIR Ruling 473-88 being contrary to Sec. 142 of the Tax Code does not confer vested rights to private respondent in the computation of its ad valorem tax; (2) in failing to consider that good faith and prejudice to the taxpayer in cases of reliance on a void BIR Ruling is immaterial and irrelevant and does not place the government in estoppel in collecting taxes legally due; (3) in holding that private respondent acted in good faith in applying BIR Ruling 473-88; and, (4) in failing to consider that the assessment of petitioner is presumed to be regular and the claim for tax refund must be strictly construed against private respondent for being in derogation of sovereign authority.

Petitioner claims that the main issue before us is whether private respondent's reliance on a void BIR ruling conferred upon the latter a vested right to apply the same in the computation of its ad valorem tax and claim for tax refund. Sec. 142 (d) of the Tax Code, which provides for the inclusion of the VAT in the tax base for purposes of computing the 15% ad valorem tax, is the applicable law in the instant case as it specifically applies to the manufacturer's wholesale price of cigar and cigarette products and not Sec. 127 (b) of the Tax Code which applies in general to the wholesale of goods or domestic products. Sec. 142 being a specific provision applicable to cigar and cigarettes must perforce prevail over Sec. 127 (b), a general provision of law insofar as the imposition of the ad valorem tax on cigar and cigarettes is concerned. 5 Consequently, the application of Sec. 127 (b) to the wholesale price of cigar and cigarette products for

purposes of computing the ad valorem tax is patently erroneous. Accordingly, BIR Ruling 47388 is void ab initio as it contravenes the express provisions of Sec. 142 (d) of the Tax Code. 6 Petitioner contends that BIR Ruling 473-88 being an erroneous interpretation of Sec. 142 (b) of the Tax Code does not confer any vested right to private respondent as to exempt it from the retroactive application of BIR Ruling 017-91. Thus Art. 2254 of the New Civil Code is explicit that "(n)o vested or acquired right can arise from acts or omissions which are against the law . . . " 7 It is argued that the Court of Appeals erred in ruling that retroactive application cannot be made since private respondent acted in good faith. The following circumstances would show that private respondent's reliance on BIR Ruling 473-88 was induced by ill will: first, private respondent despite knowledge that Sec. 142 of the Tax Code was the specific provision applicable still shifted its accounting method pursuant to Sec. 127 (b) of the Tax Code; and, second, the shift in accounting method was made without any prior consultation with the BIR. 8 It is further contended by petitioner that claims for tax refund must be construed against private respondent. A tax refund being in the nature of a tax exemption is regarded as in derogation of the sovereign authority and is strictly construed against private respondent as the same partakes the nature of a tax exemption. Tax exemptions cannot merely be implied but must be categorically and unmistakably expressed. 9
We cannot sustain petitioner. The deficiency tax assessment issued by petitioner against private respondent is without legal basis because of the prohibition against the retroactive application of the revocation of BIR rulings in the absence of bad faith on the part of private respondent. The present dispute arose from the discrepancy in the taxable base on which the excise tax is to apply on account of two incongruous BIR Rulings: (1) BIR Ruling 473-88 dated 4 October 1988 which excluded the VAT from the tax base in computing the fifteen percent (15%) excise tax due; and, (2) BIR Ruling 017-91 dated 11 February 1991 which included back the VAT in computing the tax base for purposes of the fifteen percent (15%) ad valorem tax. The question as to the correct computation of the excise tax on cigarettes in the case at bar has been sufficiently addressed by BIR Ruling 017-91 dated 11 February 1991 which revoked BIR Ruling 473-88 dated 4 October 1988 It is to be noted that Section 127 (b) of the Tax Code as amended applies in general to domestic products and excludes the value-added tax in the determination of the gross selling price, which is the tax base for purposes of the imposition of ad valorem tax. On the other hand, the last paragraph of Section 142 of the same Code which includes the value-added tax in the computation of the ad valorem tax, refers specifically to cigar and cigarettes only. It does not include/apply to any other articles or goods subject to the ad valorem tax. Accordingly, Section 142 must perforce prevail over Section 127 (b) which is a general provision of law insofar as the imposition of the ad valorem tax on cigar and cigarettes is concerned.

Moreover, the phrase unless otherwise provided in Section 127 (b) purports of exceptions to the general rule contained therein, such as that of Section 142, last paragraph thereof which explicitly provides that in the case of cigarettes, the tax base for purposes of the ad valorem tax shall include, among others, the valueadded tax. Private respondent did not question the correctness of the above BIR ruling. In fact, upon knowledge of the effectivity of BIR Ruling No. 017-91, private respondent immediately implemented the method of computation mandated therein by restoring the VAT in computing the tax base for purposes of the 15% ad valorem tax.

However, well-entrenched is the rule that rulings and circulars, rules and regulations promulgated by the Commissioner of Internal Revenue would have no retroactive application if to so apply them would be prejudicial to the taxpayers. 10
The applicable law is Sec. 246 of the Tax Code which provides Sec. 246. Non-retroactivity of rulings. Any revocation, modification, or reversal of any rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner of Internal Revenue shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayers except in the following cases: a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or c) where the taxpayer acted in bad faith. Without doubt, private respondent would be prejudiced by the retroactive application of the revocation as it would be assessed deficiency excise tax. What is left to be resolved is petitioner's claim that private respondent falls under the third exception in Sec. 246,i.e., that the taxpayer has acted in bad faith.

Bad faith imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It partakes of the nature of fraud; a breach of a known duty through some motive of interest or ill will. 11 We find no convincing evidence that private respondent's implementation of the computation mandated by BIR Ruling 473-88 was ill-motivated or attended with a dishonest purpose. To the contrary, as a sign of good faith, private respondent immediately reverted to the computation mandated by BIR Ruling 017-91 upon knowledge of its issuance on 11 February 1991.
As regards petitioner's argument that private respondent should have made consultations with it before private respondent used the computation mandated by BIR Ruling 473-88, suffice it to state that the aforesaid BIR Ruling was clear and categorical thus leaving no room for interpretation. The

failure of private respondent to consult petitioner does not imply bad faith on the part of the former.

Admittedly the government is not estopped from collecting taxes legally due because of mistakes or errors of its agents. But like other principles of law, this admits of exceptions in the interest of justice and fair play, as where injustice will result to the taxpayer. 12
WHEREFORE, there being no reversible error committed by respondent Court of Appeals, the petition is DENIED and petitioner COMMISSIONER OF INTERNAL REVENUE is ordered to refund private respondent ALHAMBRA INDUSTRIES, INC., the amount of P520,835.29 upon finality of this Decision. SO ORDERED. Padilla, Kapunan and Hermosisima, Jr., JJ., concur.

Separate Opinions

VITUG, J., concurring:

I concur in the ponencia written by my esteemed colleague, Mr. Justice Josue N. Bellosillo. I only would like to stress that the 1988 opinion of the Commissioner of Internal Revenue cannot be considered void, considering that it evinces what the former Commissioner must have felt to be a real inconsistency between Section 127 and Section 142 of the Tax Code. The non-retroactivity proscription under Section 246 of the Tax Code can thus aptly apply. I reserve my vote, however, in a situation where, as the Solicitor General so points out, the revoked ruling is patently null and void in which case it could possibly be disregarded as being in existent from the very beginning.

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION

G.R. No. 153205

January 22, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO, INC., Respondent. DECISION CARPIO, J.: The Case This petition for review1 seeks to set aside the 16 April 2002 Decision2 of the Court of Appeals in CA-G.R. SP No. 66341 affirming the 8 August 2001 Decision3 of the Court of Tax Appeals (CTA). The CTA ordered the Commissioner of Internal Revenue (petitioner) to issue a tax credit certificate for P6,994,659.67 in favor of Burmeister and Wain Scandinavian Contractor Mindanao, Inc. (respondent). The Antecedents The CTA summarized the facts, which the Court of Appeals adopted, as follows: [Respondent] is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines with principal address located at Daruma Building, Jose P. Laurel Avenue, Lanang, Davao City. It is represented that a foreign consortium composed of Burmeister and Wain Scandinavian Contractor A/S (BWSC-Denmark), Mitsui Engineering and Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered into a contract with the National Power Corporation (NAPOCOR) for the operation and maintenance of [NAPOCORs] two power barges. The Consortium appointed BWSC-Denmark as its coordination manager. BWSC-Denmark established [respondent] which subcontracted the actual operation and maintenance of NAPOCORs two power barges as well as the performance of other duties and acts which necessarily have to be done in the Philippines.

NAPOCOR paid capacity and energy fees to the Consortium in a mixture of currencies (Mark, Yen, and Peso). The freely convertible non-Peso component is deposited directly to the Consortiums bank accounts in Denmark and Japan, while the Peso-denominated component is deposited in a separate and special designated bank account in the Philippines. On the other hand, the Consortium pays [respondent] in foreign currency inwardly remitted to the Philippines through the banking system. In order to ascertain the tax implications of the above transactions, [respondent] sought a ruling from the BIR which responded with BIR Ruling No. 023-95 dated February 14, 1995, declaring therein that if [respondent] chooses to register as a VAT person and the consideration for its services is paid for in

acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas, the aforesaid services shall be subject to VAT at zero-rate. [Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the Certificate of Registration bearing RDO Control No. 95-113-007556 was issued in favor of [respondent] by the Revenue District Office No. 113 of Davao City. For the year 1996, [respondent] seasonably filed its quarterly Value-Added Tax Returns reflecting, among others, a total zero-rated sales of P147,317,189.62 with VAT input taxes of P3,361,174.14, detailed as follows:
Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax 1st E 04-18-96 07-16-96 10-14-96 01-20-97 Totals P 33,019,651.07 37,108,863.33 34,196,372.35 42,992,302.87 P608,953.48 756,802.66 930,279.14 1,065,138.86

2nd F 3rd 4th G H

P147,317,189.62 P3,361,174.14

On December 29, 1997, [respondent] availed of the Voluntary Assessment Program (VAP) of the BIR. It allegedly misinterpreted Revenue Regulations No. 5-96 dated February 20, 1996 to be applicable to its case. Revenue Regulations No. 5-96 provides in part thus: SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95 are hereby amended to read as follows: Section 4.102-2(b)(2) "Services other than processing, manufacturing or repacking for other persons doing business outside the Philippines for goods which are subsequently exported, as well as services by a resident to a non-resident foreign client such as project studies, information services, engineering and architectural designs and other similar services, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP." x x x x x x x x x x. In [conformity] with the aforecited Revenue Regulations, [respondent] subjected its sale of services to the Consortium to the 10% VAT in the total amount of P103,558,338.11 representing April to December 1996 sales since said Revenue Regulations No. 5-96 became effective only on April 1996. The sum of P43,893,951.07, representing January to March 1996 sales was subjected to zero rate. Consequently, [respondent] filed its 1996 amended VAT return consolidating therein the VAT output and input taxes for the four calendar quarters of 1996. It paid the amount of P6,994,659.67 through BIRs collecting agent, PCIBank, as its output tax liability for the year 1996, computed as follows:

Amount subject to 10% VAT P103,558,338.11 Multiply by 10% VAT Output Tax P 10,355,833.81 Less: 1996 Input VAT P 3,361,174.14 VAT Output Tax Payable P 6,994,659.67

On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-99 from the VAT Review Committee which reconfirmed BIR Ruling No. 023-95 "insofar as it held that the services being rendered by BWSCMI is subject to VAT at zero percent (0%)." On the strength of the aforementioned rulings, [respondent] on April 22,1999, filed a claim for the issuance of a tax credit certificate with Revenue District No. 113 of the BIR. [Respondent] believed that it erroneously paid the output VAT for 1996 due to its availment of the Voluntary Assessment Program (VAP) of the BIR.4 On 27 December 1999, respondent filed a petition for review with the CTA in order to toll the running of the two-year prescriptive period under the Tax Code. The Ruling of the Court of Tax Appeals In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax credit certificate for P6,994,659.67 in favor of respondent. The CTAs ruling stated: [Respondents] sale of services to the Consortium [was] paid for in acceptable foreign currency inwardly remitted to the Philippines and accounted for in accordance with the rules and regulations of Bangko Sentral ng Pilipinas. These were established by various BPI Credit Memos showing remittances in Danish Kroner (DKK) and US dollars (US$) as payments for the specific invoices billed by [respondent] to the consortium. These remittances were further certified by the Branch Manager x x x of BPI-Davao Lanang Branch to represent payments for sub-contract fees that came from Den Danske Aktieselskab BankDenmark for the account of [respondent]. Clearly, [respondents] sale of services to the Consortium is subject to VAT at 0% pursuant to Section 108(B)(2) of the Tax Code. xxxx The zero-rating of [respondents] sale of services to the Consortium was even confirmed by the [petitioner] in BIR Ruling No. 023-95 dated February 15, 1995, and later by VAT Ruling No. 003-99 dated January 7,1999, x x x. Since it is apparent that the payments for the services rendered by [respondent] were indeed subject to VAT at zero percent, it follows that it mistakenly availed of the Voluntary Assessment Program by paying output tax for its sale of services. x x x

x x x Considering the principle of solutio indebiti which requires the return of what has been delivered by mistake, the [petitioner] is obligated to issue the tax credit certificate prayed for by [respondent]. x x x5 Petitioner filed a petition for review with the Court of Appeals, which dismissed the petition for lack of merit and affirmed the CTA decision.6 Hence, this petition. The Court of Appeals Ruling In affirming the CTA, the Court of Appeals rejected petitioners view that since respondents services are not destined for consumption abroad, they are not of the same nature as project studies, information services, engineering and architectural designs, and other similar services mentioned in Section 4.1022(b)(2) of Revenue Regulations No. 5-967 as subject to 0% VAT. Thus, according to petitioner, respondents services cannot legally qualify for 0% VAT but are subject to the regular 10% VAT.8 The Court of Appeals found untenable petitioners contention that under VAT Ruling No. 040-98, respondents services should be destined for consumption abroad to enjoy zero-rating. Contrary to petitioners interpretation, there are two kinds of transactions or services subject to zero percent VAT under VAT Ruling No. 040-98. These are (a) services other than repacking goods for other persons doing business outside the Philippines which goods are subsequently exported; and (b) services by a resident to a non-resident foreign client, such as project studies, information services, engineering and architectural designs and other similar services, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP).9 The Court of Appeals stated that "only the first classification is required by the provision to be consumed abroad in order to be taxed at zero rate. In x x x the absence of such express or implied stipulation in the statute, the second classification need not be consumed abroad."10 The Court of Appeals further held that assuming petitioners interpretation of Section 4.102-2(b)(2) of Revenue Regulations No. 5-96 is correct, such administrative provision is void being an amendment to the Tax Code. Petitioner went beyond merely providing the implementing details by adding another requirement to zero-rating. "This is indicated by the additional phrase as well as services by a resident to a non-resident foreign client, such as project studies, information services and engineering and architectural designs and other similar services. In effect, this phrase adds not just one but two requisites: (a) services must be rendered by a resident to a non-resident; and (b) these must be in the nature of project studies, information services, etc."11 The Court of Appeals explained that under Section 108(b)(2) of the Tax Code,12 for services which were performed in the Philippines to enjoy zero-rating, these must comply only with two requisites, to wit: (1) payment in acceptable foreign currency and (2) accounted for in accordance with the rules of the BSP. Section 108(b)(2) of the Tax Code does not provide that services must be "destined for consumption abroad" in order to be VAT zero-rated.13 The Court of Appeals disagreed with petitioners argument that our VAT law generally follows the destination principle (i.e., exports exempt, imports taxable).14 The Court of Appeals stated that "if

indeed the destination principle underlies and is the basis of the VAT laws, then petitioners proper remedy would be to recommend an amendment of Section 108(b)(2) to Congress. Without such amendment, however, petitioner should apply the terms of the basic law. Petitioner could not resort to administrative legislation, as what [he] had done in this case."15 The Issue The lone issue for resolution is whether respondent is entitled to the refund of P6,994,659.67 as erroneously paid output VAT for the year 1996.16 The Ruling of the Court We deny the petition. At the outset, the Court declares that the denial of the instant petition is not on the ground that respondents services are subject to 0% VAT. Rather, it is based on the non-retroactivity of the prejudicial revocation of BIR Ruling No. 023-9517 and VAT Ruling No. 003-99,18 which held that respondents services are subject to 0% VAT and which respondent invoked in applying for refund of the output VAT. Section 102(b) of the Tax Code,19 the applicable provision in 1996 when respondent rendered the services and paid the VAT in question, enumerates which services are zero-rated, thus: (b) Transactions subject to zero-rate. The following services performed in the Philippines by VATregistered persons shall be subject to 0%:
(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (2) Services other than those mentioned in the preceding sub-paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero rate; (4) Services rendered to vessels engaged exclusively in international shipping; and (5) Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production. (Emphasis supplied)

In insisting that its services should be zero-rated, respondent claims that it complied with the requirements of the Tax Code for zero rating under the second paragraph of Section 102(b). Respondent asserts that (1) the payment of its service fees was in acceptable foreign currency, (2) there

was inward remittance of the foreign currency into the Philippines, and (3) accounting of such remittance was in accordance with BSP rules. Moreover, respondent contends that its services which "constitute the actual operation and management of two (2) power barges in Mindanao" are not "even remotely similar to project studies, information services and engineering and architectural designs under Section 4.102-2(b)(2) of Revenue Regulations No. 5-96." As such, respondents services need not be "destined to be consumed abroad in order to be VAT zero-rated." Respondent is mistaken. The Tax Code not only requires that the services be other than "processing, manufacturing or repacking of goods" and that payment for such services be in acceptable foreign currency accounted for in accordance with BSP rules. Another essential condition for qualification to zero-rating under Section 102(b)(2) is that the recipient of such services is doing business outside the Philippines. While this requirement is not expressly stated in the second paragraph of Section 102(b), this is clearly provided in the first paragraph of Section 102(b) where the listed services must be "for other persons doing business outside the Philippines." The phrase "for other persons doing business outside the Philippines" not only refers to the services enumerated in the first paragraph of Section 102(b), but also pertains to the general term "services" appearing in the second paragraph of Section 102(b). In short, services other than processing, manufacturing, or repacking of goods must likewise be performed for persons doing business outside the Philippines. This can only be the logical interpretation of Section 102(b)(2). If the provider and recipient of the "other services" are both doing business in the Philippines, the payment of foreign currency is irrelevant. Otherwise, those subject to the regular VAT under Section 102(a) can avoid paying the VAT by simply stipulating payment in foreign currency inwardly remitted by the recipient of services. To interpret Section 102(b)(2) to apply to a payer-recipient of services doing business in the Philippines is to make the payment of the regular VAT under Section 102(a) dependent on the generosity of the taxpayer. The provider of services can choose to pay the regular VAT or avoid it by stipulating payment in foreign currency inwardly remitted by the payer-recipient. Such interpretation removes Section 102(a) as a tax measure in the Tax Code, an interpretation this Court cannot sanction. A tax is a mandatory exaction, not a voluntary contribution. When Section 102(b)(2) stipulates payment in "acceptable foreign currency" under BSP rules, the law clearly envisions the payer-recipient of services to be doing business outside the Philippines. Only those not doing business in the Philippines can be required under BSP rules20 to pay in acceptable foreign currency for their purchase of goods or services from the Philippines. In a domestic transaction, where the provider and recipient of services are both doing business in the Philippines, the BSP cannot require any party to make payment in foreign currency. Services covered by Section 102(b) (1) and (2) are in the nature of export sales since the payer-recipient of services is doing business outside the Philippines. Under BSP rules,21 the proceeds of export sales must be reported to the Bangko Sentral ng Pilipinas. Thus, there is reason to require the provider of services under Section 102(b) (1) and (2) to account for the foreign currency proceeds to the BSP. The same rationale does not apply if the provider and recipient of the services are both doing business in the Philippines since their transaction is not in the nature of an export sale even if payment is denominated in foreign currency.

Further, when the provider and recipient of services are both doing business in the Philippines, their transaction falls squarely under Section 102(a) governing domestic sale or exchange of services. Indeed, this is a purely local sale or exchange of services subject to the regular VAT, unless of course the transaction falls under the other provisions of Section 102(b). Thus, when Section 102(b)(2) speaks of "[s]ervices other than those mentioned in the preceding subparagraph," the legislative intent is that only the services are different between subparagraphs 1 and 2. The requirements for zero-rating, including the essential condition that the recipient of services is doing business outside the Philippines, remain the same under both subparagraphs. Significantly, the amended Section 108(b)22 [previously Section 102(b)] of the present Tax Code clarifies this legislative intent. Expressly included among the transactions subject to 0% VAT are "[s]ervices other than those mentioned in the [first] paragraph [of Section 108(b)] rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP." In this case, the payer-recipient of respondents services is the Consortium which is a joint-venture doing business in the Philippines. While the Consortiums principal members are non-resident foreign corporations, the Consortium itself is doing business in the Philippines. This is shown clearly in BIR Ruling No. 023-95 which states that the contract between the Consortium and NAPOCOR is for a 15year term, thus: This refers to your letter dated January 14, 1994 requesting for a clarification of the tax implications of a contract between a consortium composed of Burmeister & Wain Scandinavian Contractor A/S ("BWSC"), Mitsui Engineering & Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd. ("MITSUI"), all referred to hereinafter as the "Consortium", and the National Power Corporation ("NAPOCOR") for the operation and maintenance of two 100-Megawatt power barges ("Power Barges") acquired by NAPOCOR for a 15-year term.23 (Emphasis supplied) Considering this length of time, the Consortiums operation and maintenance of NAPOCORs power barges cannot be classified as a single or isolated transaction. The Consortium does not fall under Section 102(b)(2) which requires that the recipient of the services must be a person doing business outside the Philippines. Therefore, respondents services to the Consortium, not being supplied to a person doing business outside the Philippines, cannot legally qualify for 0% VAT. Respondent, as subcontractor of the Consortium, operates and maintains NAPOCORs power barges in the Philippines. NAPOCOR pays the Consortium, through its non-resident partners, partly in foreign currency outwardly remitted. In turn, the Consortium pays respondent also in foreign currency inwardly remitted and accounted for in accordance with BSP rules. This payment scheme does not entitle respondent to 0% VAT. As the Court held in Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch),24the place of payment is immaterial, much less is the place where the output of the service is ultimately used. An essential condition for entitlement to 0% VAT under Section 102(b)(1) and (2) is that the recipient of the services is a person doing business outside the Philippines. In this case, the recipient of the services is the Consortium, which is doing business not outside, but within the Philippines because it has a 15-year contract to operate and maintain NAPOCORs two 100-megawatt power barges in Mindanao.

The Court recognizes the rule that the VAT system generally follows the "destination principle" (exports are zero-rated whereas imports are taxed). However, as the Court stated in American Express, there is an exception to this rule.25 This exception refers to the 0% VAT on services enumerated in Section 102 and performed in the Philippines. For services covered by Section 102(b)(1) and (2), the recipient of the services must be a person doing business outside the Philippines. Thus, to be exempt from the destination principle under Section 102(b)(1) and (2), the services must be (a) performed in the Philippines; (b) for a person doing business outside the Philippines; and (c) paid in acceptable foreign currency accounted for in accordance with BSP rules. Respondents reliance on the ruling in American Express26 is misplaced. That case involved a recipient of services, specifically American Express International, Inc. (Hongkong Branch), doing business outside the Philippines. There, the Court stated: Respondent [American Express International, Inc. (Philippine Branch)] is a VAT-registered person that facilitates the collection and payment of receivables belonging to its non-resident foreign client [American Express International, Inc. (Hongkong Branch)], for which it gets paid in acceptable foreign currency inwardly remitted and accounted for in accordance with BSP rules and regulations. x x x x27 (Emphasis supplied) In contrast, this case involves a recipient of services the Consortium which is doing business in the Philippines. Hence, American Express services were subject to 0% VAT, while respondents services should be subject to 10% VAT. Nevertheless, in seeking a refund of its excess output tax, respondent relied on VAT Ruling No. 00399,28 which reconfirmed BIR Ruling No. 023-9529 "insofar as it held that the services being rendered by BWSCMI is subject to VAT at zero percent (0%)." Respondents reliance on these BIR rulings binds petitioner. Petitioners filing of his Answer before the CTA challenging respondents claim for refund effectively serves as a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95. However, such revocation cannot be given retroactive effect since it will prejudice respondent. Changing respondents status will deprive respondent of a refund of a substantial amount representing excess output tax.30 Section 246 of the Tax Code provides that any revocation of a ruling by the Commissioner of Internal Revenue shall not be given retroactive application if the revocation will prejudice the taxpayer. Further, there is no showing of the existence of any of the exceptions enumerated in Section 246 of the Tax Code for the retroactive application of such revocation. However, upon the filing of petitioners Answer dated 2 March 2000 before the CTA contesting respondents claim for refund, respondents services shall be subject to the regular 10% VAT.31 Such filing is deemed a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95. WHEREFORE, the Court DENIES the petition. SO ORDERED. ANTONIO T. CARPIO Associate Justice

EN BANC COMMISSIONER OF INTERNAL REVENUE, Petitioner, G. R. No. 163653

-versus-

FILINVEST DEVELOPMENT CORPORATION, Respondent.

x-------------------------------------x COMMISSIONER OF INTERNAL G. R. No. 167689 REVENUE, Petitioner, Present: CORONA, C.J., CARPIO, VELASCO, JR., LEONARDO-DE CASTRO, BRION, PERALTA, BERSAMIN, DEL CASTILLO, ABAD, VILLARAMA, JR., PEREZ, MENDOZA, and

-versus-

FILINVEST DEVELOPMENT CORPORATION, Respondent.

SERENO,* JJ.

Promulgated: July 19, 2011 x----------------------------------------------------------------------------------------------- x DECISION

PEREZ, J.: Assailed in these twin petitions for review on certiorari filed pursuant to Rule 45 of the 1997 Rules of Civil Procedure are the decisions rendered by the Court of Appeals (CA) in the following cases: (a) Decision dated 16 December 2003 of the then Special Fifth Division in CA-G.R. SP No. 72992;[1] and, (b) Decision dated 26 January 2005 of the then Fourteenth Division in CA-G.R. SP No. 74510.[2]

The Facts
The owner of 80% of the outstanding shares of respondent Filinvest Alabang, Inc. (FAI), respondent Filinvest Development Corporation (FDC) is a holding company which also owned 67.42% of the outstanding shares of Filinvest Land, Inc. (FLI). On 29 November 1996, FDC and FAI entered into a Deed of Exchange with FLI whereby the former both transferred in favor of the latter parcels of land appraised at P4,306,777,000.00. In exchange for said parcels which were intended to facilitate development of medium-rise residential and commercial buildings, 463,094,301 shares of stock of FLI were issued to FDC and FAI.[3] As a result of the exchange, FLIs ownership structure was changed to the extent reflected in the following tabular prcis, viz.:

of Number and Percentage Stockholder Number and Percentage Number of Shares Held Prior to the Additional Shares of Shares Held After the Exchange Issued Exchange FDC FAI OTHERS 2,537,358,000 67.42% 0 0 42,217,000 420,877,000 0 -------------463,094,301 2,579,575,000 61.03% 420,877,000 9.96%

1,226,177,000 32.58% ----------------- ----------3,763,535,000 100%

1,226,177,000 29.01% --------------4,226,629,000 (100%)

On 13 January 1997, FLI requested a ruling from the Bureau of Internal Revenue (BIR) to the effect that no gain or loss should be recognized in the aforesaid transfer of real properties. Acting on the request, the BIR issued Ruling No. S-34-046-97 dated 3 February 1997, finding that the exchange is among those contemplated under Section 34 (c) (2) of the old National Internal Revenue Code (NIRC)[4] which provides that (n)o gain or loss shall be recognized if property is transferred to a corporation by a person in exchange for a stock in such corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation."[5] With the BIRs reiteration of the foregoing ruling upon the 10 February 1997 request for clarification filed by FLI,[6] the latter, together with FDC and FAI, complied with all the requirements imposed in the ruling.[7] On various dates during the years 1996 and 1997, in the meantime, FDC also extended advances in favor of its affiliates, namely, FAI, FLI, Davao Sugar Central Corporation (DSCC) and Filinvest Capital, Inc. (FCI).[8] Duly evidenced by instructional letters as well as cash and journal vouchers, said cash advances amounted to P2,557,213,942.60 in 1996[9] and P3,360,889,677.48 in 1997.[10] On 15 November 1996, FDC also entered into a Shareholders Agreement with Reco Herrera PTE Ltd. (RHPL) for the formation of a Singapore-based joint venture

company called Filinvest Asia Corporation (FAC), tasked to develop and manage FDCs 50% ownership of its PBCom Office Tower Project (the Project). With their equity participation in FAC respectively pegged at 60% and 40% in the Shareholders Agreement, FDC subscribed to P500.7 million worth of shares in said joint venture company to RHPLs subscription worth P433.8 million. Having paid its subscription by executing a Deed of Assignment transferring to FAC a portion of its rights and interest in the Project worth P500.7 million, FDC eventually reported a net loss of P190,695,061.00 in its Annual Income Tax Return for the taxable year 1996.[11] On 3 January 2000, FDC received from the BIR a Formal Notice of Demand to pay deficiency income and documentary stamp taxes, plus interests and compromise penalties,[12] covered by the following Assessment Notices, viz.: (a) Assessment Notice No. SP-INC-96-00018-2000 for deficiency income taxes in the sum of P150,074,066.27 for 1996; (b) Assessment Notice No. SP-DST-96-000202000 for deficiency documentary stamp taxes in the sum of P10,425,487.06 for 1996; (c) Assessment Notice No. SP-INC-97-00019-2000 for deficiency income taxes in the sum of P5,716,927.03 for 1997; and (d) Assessment Notice No. SPDST-97-00021-2000 for deficiency documentary stamp taxes in the sum of P5,796,699.40 for 1997.[13] The foregoing deficiency taxes were assessed on the taxable gain supposedly realized by FDC from the Deed of Exchange it executed with FAI and FLI, on the dilution resulting from the Shareholders Agreement FDC executed with RHPL as well as the arms-length interest rate and documentary stamp taxes imposable on the advances FDC extended to its affiliates.[14] On 3 January 2000, FAI similarly received from the BIR a Formal Letter of Demand for deficiency income taxes in the sum ofP1,477,494,638.23 for the year 1997.[15] Covered by Assessment Notice No. SP-INC-97-0027-2000,[16] said deficiency tax was also assessed on the taxable gain purportedly realized by FAI from the Deed of Exchange it executed with FDC and FLI.[17] On 26 January 2000 or within the reglementary period of thirty (30) days from notice of the

assessment, both FDC and FAI filed their respective requests for reconsideration/protest, on the ground that the deficiency income and documentary stamp taxes assessed by the BIR were bereft of factual and legal basis.[18] Having submitted the relevant supporting documents pursuant to the 31 January 2000 directive from the BIR Appellate Division, FDC and FAI filed on 11 September 2000 a letter requesting an early resolution of their request for reconsideration/protest on the ground that the 180 days prescribed for the resolution thereof under Section 228 of the NIRC was going to expire on 20 September 2000.[19] In view of the failure of petitioner Commissioner of Internal Revenue (CIR) to resolve their request for reconsideration/protest within the aforesaid period, FDC and FAI filed on 17 October 2000 a petition for review with the Court of Tax Appeals (CTA) pursuant to Section 228 of the 1997 NIRC. Docketed before said court as CTA Case No. 6182, the petition alleged, among other matters, that as previously opined in BIR Ruling No. S-34-046-97, no taxable gain should have been assessed from the subject Deed of Exchange since FDC and FAI collectively gained further control of FLI as a consequence of the exchange; that correlative to the CIR's lack of authority to impute theoretical interests on the cash advances FDC extended in favor of its affiliates, the rule is settled that interests cannot be demanded in the absence of a stipulation to the effect; that not being promissory notes or certificates of obligations, the instructional letters as well as the cash and journal vouchers evidencing said cash advances were not subject to documentary stamp taxes; and, that no income tax may be imposed on the prospective gain from the supposed appreciation of FDC's shareholdings in FAC. As a consequence, FDC and FAC both prayed that the subject assessments for deficiency income and documentary stamp taxes for the years 1996 and 1997 be cancelled and annulled.[20] On 4 December 2000, the CIR filed its answer, claiming that the transfer of property in question should not be considered tax free since, with the resultant diminution of its shares in FLI, FDC did not gain further control of said

corporation. Likewise calling attention to the fact that the cash advances FDC extended to its affiliates were interest free despite the interest bearing loans it obtained from banking institutions, the CIR invoked Section 43 of the old NIRC which, as implemented by Revenue Regulations No. 2, Section 179 (b) and (c), gave him "the power to allocate, distribute or apportion income or deductions between or among such organizations, trades or business in order to prevent evasion of taxes." The CIR justified the imposition of documentary stamp taxes on the instructional letters as well as cash and journal vouchers for said cash advances on the strength of Section 180 of the NIRC and Revenue Regulations No. 9-94 which provide that loan transactions are subject to said tax irrespective of whether or not they are evidenced by a formal agreement or by mere office memo. The CIR also argued that FDC realized taxable gain arising from the dilution of its shares in FAC as a result of its Shareholders' Agreement with RHPL.[21] At the pre-trial conference, the parties filed a Stipulation of Facts, Documents and Issues[22] which was admitted in the 16 February 2001 resolution issued by the CTA. With the further admission of the Formal Offer of Documentary Evidence subsequently filed by FDC and FAI[23] and the conclusion of the testimony of Susana Macabelda anent the cash advances FDC extended in favor of its affiliates,[24] the CTA went on to render the Decision dated 10 September 2002 which, with the exception of the deficiency income tax on the interest income FDC supposedly realized from the advances it extended in favor of its affiliates, cancelled the rest of deficiency income and documentary stamp taxes assessed against FDC and FAI for the years 1996 and 1997,[25] thus:
WHEREFORE, in view of all the foregoing, the court finds the instant petition partly meritorious. Accordingly, Assessment Notice No. SP-INC-96-00018-2000 imposing deficiency income tax on FDC for taxable year 1996, Assessment Notice No. SP-DST-96-00020-2000 and SP-DST-97-00021-2000 imposing deficiency documentary stamp tax on FDC for taxable years 1996 and 1997, respectively and Assessment Notice No. SP-INC-97-0027-2000 imposing deficiency income tax on FAI

for the taxable year 1997 are hereby CANCELLED andSET ASIDE. However, [FDC] is hereby ORDERED to PAY the amount of P5,691,972.03 as deficiency income tax for taxable year 1997. In addition, petitioner is also ORDERED to PAY 20% delinquency interest computed from February 16, 2000 until full payment thereof pursuant to Section 249 (c) (3) of the Tax Code.[26]

Finding that the collective increase of the equity participation of FDC and FAI in FLI rendered the gain derived from the exchange tax-free, the CTA also ruled that the increase in the value of FDC's shares in FAC did not result in economic advantage in the absence of actual sale or conversion thereof. While likewise finding that the documents evidencing the cash advances FDC extended to its affiliates cannot be considered as loan agreements that are subject to documentary stamp tax, the CTA enunciated, however, that the CIR was justified in assessing undeclared interests on the same cash advances pursuant to his authority under Section 43 of the NIRC in order to forestall tax evasion. For persuasive effect, the CTA referred to the equivalent provision in the Internal Revenue Code of the United States (IRC-US), i.e., Sec. 482, as implemented by Section 1.482-2 of 1965-1969 Regulations of the Law of Federal Income Taxation.[27] Dissatisfied with the foregoing decision, FDC filed on 5 November 2002 the petition for review docketed before the CA as CA-G.R. No. 72992, pursuant to Rule 43 of the 1997 Rules of Civil Procedure. Calling attention to the fact that the cash advances it extended to its affiliates were interest-free in the absence of the express stipulation on interest required under Article 1956 of theCivil Code, FDC questioned the imposition of an arm's-length interest rate thereon on the ground, among others, that the CIR's authority under Section 43 of the NIRC: (a) does not include the power to impute imaginary interest on said transactions; (b) is directed only against controlled taxpayers and not against mother or holding corporations; and, (c) can only be invoked in cases of understatement of taxable net income or evident tax evasion.[28] Upholding FDC's position, the CA's then

Special Fifth Division rendered the herein assailed decision dated 16 December 2003,[29] the decretal portion of which states:
WHEREFORE, premises considered, the instant petition is hereby GRANTED. The assailed Decision dated September 10, 2002 rendered by the Court of Tax Appeals in CTA Case No. 6182 directing petitioner Filinvest Development Corporation to pay the amount ofP5,691,972.03 representing deficiency income tax on allegedly undeclared interest income for the taxable year 1997, plus 20% delinquency interest computed from February 16, 2000 until full payment thereof is REVERSED and SET ASIDE and, a new one entered annulling Assessment Notice No. SP-INC-97-00019-2000 imposing deficiency income tax on petitioner for taxable year 1997. No pronouncement as to costs.[30]

With the denial of its partial motion for reconsideration of the same 11 December 2002 resolution issued by the CTA,[31] the CIR also filed the petition for review docketed before the CA as CA-G.R. No. 74510. In essence, the CIR argued that the CTA reversibly erred in cancelling the assessment notices: (a) for deficiency income taxes on the exchange of property between FDC, FAI and FLI; (b) for deficiency documentary stamp taxes on the documents evidencing FDC's cash advances to its affiliates; and (c) for deficiency income tax on the gain FDC purportedly realized from the increase of the value of its shareholdings in FAC.[32] The foregoing petition was, however, denied due course and dismissed for lack of merit in the herein assailed decision dated 26 January 2005[33] rendered by the CA's then Fourteenth Division, upon the following findings and conclusions, to wit:
1. As affirmed in the 3 February 1997 BIR Ruling No. S-34-046-97, the 29 November 1996 Deed of Exchange resulted in the combined control by FDC and FAI of more than 51% of the outstanding shares of FLI, hence, no taxable gain can be recognized from the transaction under Section 34 (c) (2) of the old NIRC;

2.

The instructional letters as well as the cash and journal vouchers evidencing the advances FDC extended to its affiliates are not subject to documentary stamp taxes pursuant to BIR Ruling No. 116-98, dated 30 July 1998, since they do not partake the nature of loan agreements; Although BIR Ruling No. 116-98 had been subsequently modified by BIR Ruling No. 108-99, dated 15 July 1999, to the effect that documentary stamp taxes are imposable on inter-office memos evidencing cash advances similar to those extended by FDC, said latter ruling cannot be given retroactive application if to do so would be prejudicial to the taxpayer; FDC's alleged gain from the increase of its shareholdings in FAC as a consequence of the Shareholders' Agreement it executed with RHPL cannot be considered taxable income since, until actually converted thru sale or disposition of said shares, they merely represent unrealized increase in capital.[34]

3.

4.

Respectively docketed before this Court as G.R. Nos. 163653 and 167689, the CIR's petitions for review on certiorariassailing the 16 December 2003 decision in CA-G.R. No. 72992 and the 26 January 2005 decision in CA-G.R. SP No. 74510 were consolidated pursuant to the 1 March 2006 resolution issued by this Courts Third Division. The Issues

In G.R. No. 163653, the CIR urges the grant of its petition on the following ground:
THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE COURT OF TAX APPEALS AND IN HOLDING THAT THE ADVANCES EXTENDED BY RESPONDENT TO ITS AFFILIATES ARE NOT SUBJECT TO INCOME TAX.[35]

In G.R. No. 167689, on the other hand, petitioner proffers the following issues for resolution:
I THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION IN HOLDING THAT THE EXCHANGE OF SHARES OF STOCK FOR PROPERTY AMONG FILINVEST DEVELOPMENT CORPORATION (FDC), FILINVEST ALABANG, INCORPORATED (FAI) AND FILINVEST LAND INCORPORATED (FLI) MET ALL THE REQUIREMENTS FOR THE NON-RECOGNITION OF TAXABLE GAIN UNDER SECTION 34 (c) (2) OF THE OLD NATIONAL INTERNAL REVENUE CODE (NIRC) (NOW SECTION 40 (C) (2) (c) OF THE NIRC. II THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN HOLDING THAT THE LETTERS OF INSTRUCTION OR CASH VOUCHERS EXTENDED BY FDC TO ITS AFFILIATES ARE NOT DEEMED LOAN AGREEMENTS SUBJECT TO DOCUMENTARY STAMP TAXES UNDER SECTION 180 OF THE NIRC. III THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT GAIN ON DILUTION AS A RESULT OF THE INCREASE IN THE VALUE OF FDCS SHAREHOLDINGS IN FAC IS NOT TAXABLE.[36]

The Courts Ruling While the petition in G.R. No. 163653 is bereft of merit, we find the CIRs petition in G.R. No. 167689 impressed with partial merit. In G.R. No. 163653, the CIR argues that the CA erred in reversing the CTAs finding that theoretical interests can be imputed on the advances FDC extended to its affiliates in 1996 and 1997 considering that, for said purpose, FDC resorted

to interest-bearing fund borrowings from commercial banks. Since considerable interest expenses were deducted by FDC when said funds were borrowed, the CIR theorizes that interest income should likewise be declared when the same funds were sourced for the advances FDC extended to its affiliates. Invoking Section 43 of the 1993 NIRC in relation to Section 179(b) of Revenue Regulation No. 2, the CIR maintains that it is vested with the power to allocate, distribute or apportion income or deductions between or among controlled organizations, trades or businesses even in the absence of fraud, since said power is intended to prevent evasion of taxes or clearly to reflect the income of any such organizations, trades or businesses. In addition, the CIR asseverates that the CA should have accorded weight and respect to the findings of the CTA which, as the specialized court dedicated to the study and consideration of tax matters, can take judicial notice of US income tax laws and regulations.[37] Admittedly, Section 43 of the 1993 NIRC[38] provides that, (i)n any case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner of Internal Revenue is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determines that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization, trade or business. In amplification of the equivalent provision[39] under Commonwealth Act No. 466,[40] Sec. 179(b) of Revenue Regulation No. 2 states as follows:
Determination of the taxable net income of controlled taxpayer. (A) DEFINITIONS. When used in this section (1) The term organization includes any kind, whether it be a sole proprietorship, a partnership, a trust, an estate, or a corporation or association, irrespective of the place where organized, where operated, or where its trade or business is conducted, and regardless of whether domestic or foreign, whether exempt or taxable, or whether affiliated or not.

(2) The terms trade or business include any trade or business activity of any kind, regardless of whether or where organized, whether owned individually or otherwise, and regardless of the place where carried on. (3) The term controlled includes any kind of control, direct or indirect, whether legally enforceable, and however exercisable or exercised. It is the reality of the control which is decisive, not its form or mode of exercise. A presumption of control arises if income or deductions have been arbitrarily shifted. (4) The term controlled taxpayer means any one of two or more organizations, trades, or businesses owned or controlled directly or indirectly by the same interests. (5) The term group and group of controlled taxpayers means the organizations, trades or businesses owned or controlled by the same interests. (6) The term true net income means, in the case of a controlled taxpayer, the net income (or as the case may be, any item or element affecting net income) which would have resulted to the controlled taxpayer, had it in the conduct of its affairs (or, as the case may be, any item or element affecting net income) which would have resulted to the controlled taxpayer, had it in the conduct of its affairs (or, as the case may be, in the particular contract, transaction, arrangement or other act) dealt with the other members or members of the group at arms length. It does not mean the income, the deductions, or the item or element of either, resulting to the controlled taxpayer by reason of the particular contract, transaction, or arrangement, the controlled taxpayer, or the interest controlling it, chose to make (even though such contract, transaction, or arrangement be legally binding upon the parties thereto). (B) SCOPE AND PURPOSE. - The purpose of Section 44 of the Tax Code is to place a controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining, according to the standard of an uncontrolled taxpayer, the true net income from the property and business of a controlled taxpayer. The interests controlling a group of controlled taxpayer are assumed to have complete power to cause each controlled taxpayer so to conduct its affairs that its transactions and accounting records truly reflect the net income from the property and business of each of the controlled taxpayers. If, however, this has

not been done and the taxable net income are thereby understated, the statute contemplates that the Commissioner of Internal Revenue shall intervene, and, by making such distributions, apportionments, or allocations as he may deem necessary of gross income or deductions, or of any item or element affecting net income, between or among the controlled taxpayers constituting the group, shall determine the true net income of each controlled taxpayer. The standard to be applied in every case is that of an uncontrolled taxpayer. Section 44 grants no right to a controlled taxpayer to apply its provisions at will, nor does it grant any right to compel the Commissioner of Internal Revenue to apply its provisions. (C) APPLICATION Transactions between controlled taxpayer and another will be subjected to special scrutiny to ascertain whether the common control is being used to reduce, avoid or escape taxes. In determining the true net income of a controlled taxpayer, the Commissioner of Internal Revenue is not restricted to the case of improper accounting, to the case of a fraudulent, colorable, or sham transaction, or to the case of a device designed to reduce or avoid tax by shifting or distorting income or deductions. The authority to determine true net income extends to any case in which either by inadvertence or design the taxable net income in whole or in part, of a controlled taxpayer, is other than it would have been had the taxpayer in the conduct of his affairs been an uncontrolled taxpayer dealing at arms length with another uncontrolled taxpayer.[41]

As may be gleaned from the definitions of the terms controlled and "controlled taxpayer" under paragraphs (a) (3) and (4) of the foregoing provision, it would appear that FDC and its affiliates come within the purview of Section 43 of the 1993 NIRC. Aside from owning significant portions of the shares of stock of FLI, FAI, DSCC and FCI, the fact that FDC extended substantial sums of money as cash advances to its said affiliates for the purpose of providing them financial assistance for their operational and capital expenditures seemingly indicate that the situation sought to be addressed by the subject provision exists. From the tenor of paragraph (c) of Section 179 of Revenue Regulation No. 2, it may also be seen that the CIR's power to distribute, apportion or allocate gross income or

deductions between or among controlled taxpayers may be likewise exercised whether or not fraud inheres in the transaction/s under scrutiny. For as long as the controlled taxpayer's taxable income is not reflective of that which it would have realized had it been dealing at arm's length with an uncontrolled taxpayer, the CIR can make the necessary rectifications in order to prevent evasion of taxes. Despite the broad parameters provided, however, we find that the CIR's powers of distribution, apportionment or allocation of gross income and deductions under Section 43 of the 1993 NIRC and Section 179 of Revenue Regulation No. 2 does not include the power to impute "theoretical interests" to the controlled taxpayer's transactions. Pursuant to Section 28 of the 1993 NIRC,[42] after all, the term gross income is understood to mean all income from whatever source derived, including, but not limited to the following items: compensation for services, including fees, commissions, and similar items; gross income derived from business; gains derived from dealings in property; interest; rents; royalties; dividends; annuities; prizes and winnings; pensions; and partners distributive share of the gross income of general professional partnership.[43] While it has been held that the phrase "from whatever source derived" indicates a legislative policy to include all income not expressly exempted within the class of taxable income under our laws, the term "income" has been variously interpreted to mean "cash received or its equivalent", "the amount of money comingto a person within a specific time" or "something distinct from principal or capital."[44] Otherwise stated, there must be proof of the actual or, at the very least, probable receipt or realization by the controlled taxpayer of the item of gross income sought to be distributed, apportioned or allocated by the CIR. Our circumspect perusal of the record yielded no evidence of actual or possible showing that the advances FDC extended to its affiliates had resulted to the interests subsequently assessed by the CIR. For all its harping upon the supposed fact that FDC had resorted to borrowings from commercial banks, the CIR had adduced no concrete proof that said funds were, indeed, the source of

the advances the former provided its affiliates. While admitting that FDC obtained interest-bearing loans from commercial banks,[45]Susan Macabelda FDC's Funds Management Department Manager who was the sole witness presented before the CTA - clarified that the subject advances were sourced from the corporation's rights offering in 1995 as well as the sale of its investment in BonifacioLand in 1997.[46] More significantly, said witness testified that said advances: (a) were extended to give FLI, FAI, DSCC and FCI financial assistance for their operational and capital expenditures; and, (b) were all temporarily in nature since they were repaid within the duration of one week to three months and were evidenced by mere journal entries, cash vouchers and instructional letters.[47] Even if we were, therefore, to accord precipitate credulity to the CIR's bare assertion that FDC had deducted substantial interest expense from its gross income, there would still be no factual basis for the imputation of theoretical interests on the subject advances and assess deficiency income taxes thereon. More so, when it is borne in mind that, pursuant to Article 1956 of the Civil Code of the Philippines, no interest shall be due unless it has been expressly stipulated in writing. Considering that taxes, being burdens, are not to be presumed beyond what the applicable statute expressly and clearly declares,[48] the rule is likewise settled that tax statutes must be construed strictly against the government and liberally in favor of the taxpayer.[49] Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication.[50] While it is true that taxes are the lifeblood of the government, it has been held that their assessment and collection should be in accordance with law as any arbitrariness will negate the very reason for government itself.[51] In G.R. No. 167689, we also find a dearth of merit in the CIR's insistence on the imposition of deficiency income taxes on the transfer FDC and FAI effected in exchange for the shares of stock of FLI. With respect to the Deed of Exchange

executed between FDC, FAI and FLI, Section 34 (c) (2) of the 1993 NIRC pertinently provides as follows:
Sec. 34. Determination of amount of and recognition of gain or loss.xxxx (c) Exception x x x x No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for shares of stock in such corporation of which as a result of such exchange said person, alone or together with others, not exceeding four persons, gains control of said corporation; Provided, That stocks issued for services shall not be considered as issued in return of property.

As even admitted in the 14 February 2001 Stipulation of Facts submitted by the parties,[52] the requisites for the non-recognition of gain or loss under the foregoing provision are as follows: (a) the transferee is a corporation; (b) the transferee exchanges its shares of stock for property/ies of the transferor; (c) the transfer is made by a person, acting alone or together with others, not exceeding four persons; and, (d) as a result of the exchange the transferor, alone or together with others, not exceeding four, gains control of the transferee.[53] Acting on the 13 January 1997 request filed by FLI, the BIR had, in fact, acknowledged the concurrence of the foregoing requisites in the Deed of Exchange the former executed with FDC and FAI by issuing BIR Ruling No. S-34046-97.[54] With the BIR's reiteration of said ruling upon the request for clarification filed by FLI,[55] there is also no dispute that said transferee and transferors subsequently complied with the requirements provided for the nonrecognition of gain or loss from the exchange of property for tax, as provided under Section 34 (c) (2) of the 1993 NIRC.[56]

Then as now, the CIR argues that taxable gain should be recognized for the exchange considering that FDC's controlling interest in FLI was actually decreased as a result thereof. For said purpose, the CIR calls attention to the fact that, prior to the exchange, FDC owned 2,537,358,000 or 67.42% of FLI's 3,763,535,000 outstanding capital stock. Upon the issuance of 443,094,000 additional FLI shares as a consequence of the exchange and with only 42,217,000 thereof accruing in favor of FDC for a total of 2,579,575,000 shares, said corporations controlling interest was supposedly reduced to 61%.03 when reckoned from the transferee's aggregate 4,226,629,000 outstanding shares. Without owning a share from FLI's initial 3,763,535,000 outstanding shares, on the other hand, FAI's acquisition of 420,877,000 FLI shares as a result of the exchange purportedly resulted in its control of only 9.96% of said transferee corporation's 4,226,629,000 outstanding shares. On the principle that the transaction did not qualify as a tax-free exchange under Section 34 (c) (2) of the 1993 NIRC, the CIR asseverates that taxable gain in the sum of P263,386,921.00 should be recognized on the part of FDC and in the sum of P3,088,711,367.00 on the part of FAI.[57] The paucity of merit in the CIR's position is, however, evident from the categorical language of Section 34 (c) (2) of the 1993 NIRC which provides that gain or loss will not be recognized in case the exchange of property for stocks results in the control of the transferee by the transferor, alone or with other transferors not exceeding four persons. Rather than isolating the same as proposed by the CIR, FDC's 2,579,575,000 shares or 61.03% control of FLI's 4,226,629,000 outstanding shares should, therefore, be appreciated in combination with the 420,877,000 new shares issued to FAI which represents 9.96% control of said transferee corporation. Together FDC's 2,579,575,000 shares (61.03%) and FAI's 420,877,000 shares (9.96%) clearly add up to 3,000,452,000 shares or 70.99% of FLI's 4,226,629,000 shares. Since the term "control" is clearly defined as "ownership of stocks in a corporation possessing at least fifty-one percent of the total voting power of classes of stocks entitled to one vote" under Section 34 (c) (6) [c] of the 1993 NIRC, the exchange of property

for stocks between FDC FAI and FLI clearly qualify as a tax-free transaction under paragraph 34 (c) (2) of the same provision. Against the clear tenor of Section 34(c) (2) of the 1993 NIRC, the CIR cites then Supreme Court Justice Jose Vitug and CTA Justice Ernesto D. Acosta who, in their book Tax Law and Jurisprudence, opined that said provision could be inapplicable if control is already vested in the exchangor prior to exchange.[58] Aside from the fact that that the 10 September 2002 Decision in CTA Case No. 6182 upholding the tax-exempt status of the exchange between FDC, FAI and FLI was penned by no less than Justice Acosta himself,[59] FDC and FAI significantly point out that said authors have acknowledged that the position taken by the BIR is to the effect that "the law would apply even when the exchangor already has control of the corporation at the time of the exchange."[60] This was confirmed when, apprised in FLI's request for clarification about the change of percentage of ownership of its outstanding capital stock, the BIR opined as follows:
Please be informed that regardless of the foregoing, the transferors, Filinvest Development Corp. and Filinvest Alabang, Inc. still gained control of Filinvest Land, Inc. The term 'control' shall mean ownership of stocks in a corporation by possessing at least 51% of the total voting power of all classes of stocks entitled to vote. Control is determined by the amount of stocks received, i.e., total subscribed, whether for property or for services by the transferor or transferors. In determining the 51% stock ownership, only those persons who transferred property for stocks in the same transaction may be counted up to the maximum of five (BIR Ruling No. 547-93 dated December 29, 1993.[61]

At any rate, it also appears that the supposed reduction of FDC's shares in FLI posited by the CIR is more apparent than real. As the uncontested owner of 80% of the outstanding shares of FAI, it cannot be gainsaid that FDC ideally controls the same percentage of the 420,877,000 shares issued to its said cotransferor which, by itself, represents 7.968% of the outstanding shares of

FLI. Considered alongside FDC's 61.03% control of FLI as a consequence of the 29 November 1996 Deed of Transfer, said 7.968% add up to an aggregate of 68.998% of said transferee corporation's outstanding shares of stock which is evidently still greater than the 67.42% FDC initially held prior to the exchange. This much was admitted by the parties in the 14 February 2001 Stipulation of Facts, Documents and Issues they submitted to the CTA.[62] Inasmuch as the combined ownership of FDC and FAI of FLI's outstanding capital stock adds up to a total of 70.99%, it stands to reason that neither of said transferors can be held liable for deficiency income taxes the CIR assessed on the supposed gain which resulted from the subject transfer. On the other hand, insofar as documentary stamp taxes on loan agreements and promissory notes are concerned, Section 180 of the NIRC provides follows:
Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts, instruments and securities issued by the government or any of its instrumentalities, certificates of deposit bearing interest and others not payable on sight or demand. On all loan agreements signed abroad wherein the object of the contract is located or used in the Philippines; bill of exchange (between points within the Philippines), drafts, instruments and securities issued by the Government or any of its instrumentalities or certificates of deposits drawing interest, or orders for the payment of any sum of money otherwise than at sight or on demand, or on all promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation, and on each renewal of any such note, there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each two hundred pesos, or fractional part thereof, of the face value of any such agreement, bill of exchange, draft, certificate of deposit or note: Provided, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan, whichever will yield a higher tax: Provided however, That loan agreements or promissory notes the aggregate of which does not exceed Two hundred fifty thousand pesos (P250,000.00) executed by an individual for his purchase on installment for his personal use or that of his family and not for business, resale, barter or hire of a house, lot,

motor vehicle, appliance or furniture shall be exempt from the payment of documentary stamp tax provided under this Section.

When read in conjunction with Section 173 of the 1993 NIRC,[63] the foregoing provision concededly applies to "(a)ll loan agreements, whether made or signed in the Philippines, or abroad when the obligation or right arises from Philippine sources or the property or object of the contract is located or used in the Philippines." Correlatively, Section 3 (b) and Section 6 of Revenue Regulations No. 9-94 provide as follows:
Section 3. Definition of Terms. For purposes of these Regulations, the following term shall mean: (b) 'Loan agreement' refers to a contract in writing where one of the parties delivers to another money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid. The term shall include credit facilities, which may be evidenced by credit memo, advice or drawings. The terms 'Loan Agreement" under Section 180 and "Mortgage' under Section 195, both of the Tax Code, as amended, generally refer to distinct and separate instruments. A loan agreement shall be taxed under Section 180, while a deed of mortgage shall be taxed under Section 195." "Section 6. Stamp on all Loan Agreements. All loan agreements whether made or signed in the Philippines, or abroad when the obligation or right arises from Philippine sources or the property or object of the contract is located in the Philippines shall be subject to the documentary stamp tax of thirty centavos (P0.30) on each two hundred pesos, or fractional part thereof, of the face value of any such agreements, pursuant to Section 180 in relation to Section 173 of the Tax Code. In cases where no formal agreements or promissory notes have been executed to cover credit facilities, the documentary stamp tax shall be based on the amount of drawings or availment of the facilities,

which may be evidenced by credit/debit memo, advice or drawings by any form of check or withdrawal slip, under Section 180 of the Tax Code.

Applying the aforesaid provisions to the case at bench, we find that the instructional letters as well as the journal and cash vouchers evidencing the advances FDC extended to its affiliates in 1996 and 1997 qualified as loan agreements upon which documentary stamp taxes may be imposed. In keeping with the caveat attendant to every BIR Ruling to the effect that it is valid only if the facts claimed by the taxpayer are correct, we find that the CA reversibly erred in utilizing BIR Ruling No. 116-98, dated 30 July 1998 which, strictly speaking, could be invoked only by ASB Development Corporation, the taxpayer who sought the same. In said ruling, the CIR opined that documents like those evidencing the advances FDC extended to its affiliates are not subject to documentary stamp tax, to wit:
On the matter of whether or not the inter-office memo covering the advances granted by an affiliate company is subject to documentary stamp tax, it is informed that nothing in Regulations No. 26 (Documentary Stamp Tax Regulations) and Revenue Regulations No. 9-94 states that the same is subject to documentary stamp tax. Such being the case, said inter-office memo evidencing the lendings or borrowings which is neither a form of promissory note nor a certificate of indebtedness issued by the corporation-affiliate or a certificate of obligation, which are, more or less, categorized as 'securities', is not subject to documentary stamp tax imposed under Section 180, 174 and 175 of the Tax Code of 1997, respectively. Rather, the inter-office memo is being prepared for accounting purposes only in order to avoid the co-mingling of funds of the corporate affiliates.

In its appeal before the CA, the CIR argued that the foregoing ruling was later modified in BIR Ruling No. 108-99 dated 15 July 1999, which opined that inter-office memos evidencing lendings or borrowings extended by a corporation to its affiliates are akin to promissory notes, hence, subject to documentary

stamp taxes.[64] In brushing aside the foregoing argument, however, the CA applied Section 246 of the 1993 NIRC[65] from which proceeds the settled principle that rulings, circulars, rules and regulations promulgated by the BIR have no retroactive application if to so apply them would be prejudicial to the taxpayers.[66] Admittedly, this rule does not apply: (a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c) where the taxpayer acted in bad faith.[67] Not being the taxpayer who, in the first instance, sought a ruling from the CIR, however, FDC cannot invoke the foregoing principle on nonretroactivity of BIR rulings. Viewed in the light of the foregoing considerations, we find that both the CTA and the CA erred in invalidating the assessments issued by the CIR for the deficiency documentary stamp taxes due on the instructional letters as well as the journal and cash vouchers evidencing the advances FDC extended to its affiliates in 1996 and 1997. In Assessment Notice No. SP-DST-96-00020-2000, the CIR correctly assessed the sum of P6,400,693.62 for documentary stamp tax, P3,999,793.44 in interests andP25,000.00 as compromise penalty, for a total of P10,425,487.06. Alongside the sum of P4,050,599.62 for documentary stamp tax, the CIR similarly assessed P1,721,099.78 in interests and P25,000.00 as compromise penalty in Assessment Notice No. SP-DST-97-00021-2000 or a total of P5,796,699.40. The imposition of deficiency interest is justified under Sec. 249 (a) and (b) of the NIRC which authorizes the assessment of the same at the rate of twenty percent (20%), or such higher rate as may be prescribed by regulations, from the date prescribed for the payment of the unpaid amount of tax until full payment.[68] The imposition of the compromise penalty is, in turn, warranted under Sec. 250[69] of the NIRC which prescribes the imposition thereof in case of each failure to file an information or return, statement or list, or keep any record or supply any information required on the date prescribed therefor.

To our mind, no reversible error can, finally, be imputed against both the CTA and the CA for invalidating the Assessment Notice issued by the CIR for the deficiency income taxes FDC is supposed to have incurred as a consequence of the dilution of its shares in FAC. Anent FDCs Shareholders Agreement with RHPL, the record shows that the parties were in agreement about the following factual antecedents narrated in the 14 February 2001 Stipulation of Facts, Documents and Issues they submitted before the CTA,[70] viz.:
1.11. On November 15, 1996, FDC entered into a Shareholders Agreement (SA) with Reco Herrera Pte. Ltd. (RHPL) for the formation of a joint venture company named Filinvest Asia Corporation (FAC) which is based in Singapore (pars. 1.01 and 6.11, Petition, pars. 1 and 7, Answer). 1.12. FAC, the joint venture company formed by FDC and RHPL, is tasked to develop and manage the 50% ownership interest of FDC in its PBCom Office Tower Project (Project) with the Philippine Bank of Communications (par. 6.12, Petition; par. 7, Answer). 1.13. Pursuant to the SA between FDC and RHPL, the equity participation of FDC and RHPL in FAC was 60% and 40% respectively. 1.14. In accordance with the terms of the SA, FDC subscribed to P500.7 million worth of shares of stock representing a 60% equity participation in FAC. In turn, RHPL subscribed to P433.8 million worth of shares of stock of FAC representing a 40% equity participation in FAC. 1.15. In payment of its subscription in FAC, FDC executed a Deed of Assignment transferring to FAC a portion of FDCs right and interests in the Project to the extent of P500.7 million. 1.16. FDC reported a net loss of P190,695,061.00 in its Annual Income Tax Return for the taxable year 1996.[71]

Alongside the principle that tax revenues are not intended to be liberally construed,[72] the rule is settled that the findings and conclusions of the CTA are accorded great respect and are generally upheld by this Court, unless there is a clear showing of a reversible error or an improvident exercise of authority.[73] Absent showing of such error here, we find no strong and cogent reasons to depart from said rule with respect to the CTA's finding that no deficiency income tax can be assessed on the gain on the supposed dilution and/or increase in the value of FDC's shareholdings in FAC which the CIR, at any rate, failed to establish. Bearing in mind the meaning of "gross income" as above discussed, it cannot be gainsaid, even then, that a mere increase or appreciation in the value of said shares cannot be considered income for taxation purposes. Since a mere advance in the value of the property of a person or corporation in no sense constitute the income specified in the revenue law, it has been held in the early case of Fisher vs. Trinidad,[74] that it constitutes and can be treated merely as an increase of capital. Hence, the CIR has no factual and legal basis in assessing income tax on the increase in the value of FDC's shareholdings in FAC until the same is actually sold at a profit. WHEREFORE, premises considered, the CIR's petition for review on certiorari in G.R. No. 163653 is DENIED for lack of merit and the CAs 16 December 2003 Decision in G.R. No. 72992 is AFFIRMED in toto. The CIRs petition in G.R. No. 167689 is PARTIALLY GRANTED and the CAs 26 January 2005 Decision in CA-G.R. SP No. 74510 is MODIFIED. Accordingly, Assessment Notices Nos. SP-DST-96-00020-2000 and SP-DST97-00021-2000 issued for deficiency documentary stamp taxes due on the instructional letters as well as journal and cash vouchers evidencing the advances FDC extended to its affiliates are declared valid. The cancellation of Assessment Notices Nos. SP-INC-96-00018-2000, SPINC-97-00019-2000 and SP-INC-97-0027-2000 issued for deficiency income assessed on (a) the arms-length interest from said advances; (b) the gain from

FDCs Deed of Exchange with FAI and FLI; and (c) income from the dilution resulting from FDCs Shareholders Agreement with RHPL is, however, upheld. SO ORDERED.

REMEDIES AVAILABLE TO THE GOVERNMENT

G.R. No. 130430 December 13, 1999 REPUBLIC OF THE PHILIPPINES, represented by the Commissioner of the Bureau of Internal Revenue (BIR), petitioner, vs. SALUD V. HIZON, respondent.

MENDOZA, J.: This is a petition for review of the decision 1 of the Regional Trial Court, Branch 44, San Fernando, Pampanga, dismissing the suit filed by the Bureau of Internal Revenue for collection of tax.
The facts are as follows: On July 18, 1986, the BIR issued to respondent Salud V. Hizon a deficiency income tax assessment of P1,113,359.68 covering the fiscal year 1981-1982. Respondent not having contested the assessment, petitioner, on January 12, 1989, served warrants of distraint and levy to collect the tax deficiency. However, for reasons not known, it did not proceed to dispose of the attached properties. More than three years later, or on November 3, 1992, respondent wrote the BIR requesting a reconsideration of her tax deficiency assessment. The BIR, in a letter dated August 11, 1994, denied the request. On January 1, 1997, it filed a case with the Regional Trial Court, Branch 44, San Fernando, Pampanga to collect the tax deficiency. The complaint was signed by Norberto Salud, Chief of the Legal Division, BIR Region 4, and verified by Amancio Saga, the Bureau's Regional Director in Pampanga.

Respondent moved to dismiss the case on two grounds: (1) that the complaint was not filed upon authority of the BIR Commissioner as required by 221 2 of the National Internal Revenue Code, and (2) that the action had already prescribed. Over petitioner's objection, the trial court, on August 28, 1997, granted the motion and dismissed the complaint. Hence, this petition. Petitioner raises the following issues: 3

I. WHETHER OR NOT THE INSTITUTION OF THE CIVIL CASE FOR COLLECTION OF TAXES WAS WITHOUT THE APPROVAL OF THE COMMISSIONER IN VIOLATION OF SECTION 221 OF THE NATIONAL INTERNAL REVENUE CODE. II. WHETHER OR NOT THE ACTION FOR COLLECTION OF TAXES FILED AGAINST RESPONDENT HAD ALREADY BEEN BARRED BY THE STATUTE OF LIMITATIONS.

First. In sustaining respondent's contention that petitioner's complaint was filed without the authority of the BIR Commissioner, the trial court stated: 4
There is no question that the National Internal Revenue Code explicitly provides that in the matter of filing cases in Court, civil or criminal, for the collection of taxes, etc., the approval of the commissioner must first be secured. . . . [A]n action will not prosper in the absence of the commissioner's approval. Thus, in the instant case, the absence of the approval of the commissioner in the institution of the action is fatal to the cause of the plaintiff . . . . The trial court arrived at this conclusion because the complaint filed by the BIR was not signed by then Commissioner Liwayway Chato. Sec. 221 of the NIRC provides: Form and mode of proceeding in actions arising under this Code. Civil and criminal actions and proceedings instituted in behalf of the Government under the authority of this Code or other law enforced by the Bureau of Internal Revenue shall be brought in the name of the Government of the Philippines and shall be conducted by the provincial or city fiscal, or the Solicitor General, or by the legal officers of the Bureau of Internal Revenue deputized by the Secretary of Justice, but no civil and criminal actions for the recovery of taxes or the enforcement of any fine, penalty or forfeiture under this Code shall begun without the approval of the Commissioner. (Emphasis supplied) To implement this provision Revenue Administrative Order No. 5-83 of the BIR provides in pertinent portions: The following civil and criminal cases are to be handled by Special Attorneys and Special Counsels assigned in the Legal Branches of Revenues Regions: xxx xxx xxx II. Civil Cases 1. Complaints for collection on cases falling within the jurisdiction of the Region . . . .

In all the abovementioned cases, the Regional Director is authorized to sign all pleadings filed in connection therewith which, otherwise, requires the signature of the Commissioner. xxx xxx xxx Revenue Administrative Order No. 10-95 specifically authorizes the Litigation and Prosecution Section of the Legal Division of regional district offices to institute the necessary civil and criminal actions for tax collection. As the complaint filed in this case was signed by the BIR's Chief of Legal Division for Region 4 and verified by the Regional Director, there was, therefore, compliance with the law. However, the lower court refused to recognize RAO No. 10-95 and, by implication, RAO No. 5-83. It held:
[M]emorand[a], circulars and orders emanating from bureaus and agencies whether in the purely public or quasi-public corporations are mere guidelines for the internal functioning of the said offices. They are not laws which courts can take judicial notice of. As such, they have no binding effect upon the courts for such memorand[a] and circulars are not the official acts of the 5 legislative, executive and judicial departments of the Philippines. . . .

This is erroneous. The rule is that as long as administrative issuances relate solely to carrying into effect the provisions of the law, they are valid and have the force of law. 6 The governing statutory provision in this case is 4(d) of the NIRC which provides:
Specific provisions to be contained in regulations. The regulations of the Bureau of Internal Revenue shall, among other things, contain provisions specifying, prescribing, or defining: xxx xxx xxx (d) The conditions to be observed by revenue officers, provincial fiscals and other officials respecting the institution and conduct of legal actions and proceedings. RAO Nos. 5-83 and 10-95 are in harmony with this statutory mandate. As amended by R.A. No. 8424, the NIRC is now even more categorical. Sec. 7 of the present Code authorizes the BIR Commissioner to delegate the powers vested in him under the pertinent provisions of the Code to any subordinate official with the rank equivalent to a division chief or higher, except the following: (a) The power to recommend the promulgation of rules and regulations by the Secretary of Finance; (b) The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau;

(c) The power to compromise or abate under 204 (A) and (B) of this Code, any tax deficiency: Provided, however, that assessment issued by the Regional Offices involving basic deficiency taxes of five hundred thousand pesos (P500,000.00) or less, and minor criminal violations as may be determined by rules and regulations to be promulgated by the Secretary of Finance, upon the recommendation of the Commissioner, discovered by regional and district officials, may be compromised by a regional evaluation board which shall be composed of the Regional Director as Chairman, the Assistant Regional Director, heads of the Legal, Assessment and Collection Divisions and the Revenue District Officer having jurisdiction over the taxpayer, as members; and

(d) The power to assign or reassign internal revenue officers to establishments where articles subject to excise tax are produced or kept. None of the exceptions relates to the Commissioner's power to approve the filing of tax collection cases. Second. With regard to the issue that the case filed by petitioner for the collection of respondent's tax deficiency is barred by prescription, 223(c) of the NIRC provides:
Any internal revenue tax which has been assessed within the period of limitation aboveprescribed may be collected by distraint or levy or by a proceeding in court within three 7 years following the assessment of the tax.

The running of the three-year prescriptive period is suspended 8 for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty days thereafter; when the taxpayer requests for a reinvestigation which is granted by the Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon which the tax is being assessed or collected; provided, that, if the taxpayer informs the Commissioner of any change in address, the running of the statute of limitations will not be suspended; when the warrant of distraint or levy is duly served upon the taxpayer, his authorized representative or a member of his household with sufficient discretion, and no property could be located; and when the taxpayer is out of the Philippines. Petitioner argues that, in accordance with this provision, respondent's request for reinvestigation of her tax deficiency assessment on November 3, 1992 effectively suspended the running of the period of prescription such that the government could still file a case for tax collection. 9

The contention has no merit. Sec. 229 10 of the Code mandates that a request for reconsideration must be made within 30 days from the taxpayer's receipt of the tax deficiency assessment, otherwise the assessment becomes final, unappealable and, therefore, demandable. 11 The notice of assessment for respondent's tax deficiency was issued by petitioner on July 18, 1986. On the other hand, respondent made her request for reconsideration thereof only on November 3, 1992, without stating when she received the

notice of tax assessment. She explained that she was constrained to ask for a reconsideration in order to avoid the harassment of BIR collectors. 12 In all likelihood, she must have been referring to the distraint and levy of her properties by petitioner's agents which took place on January 12, 1989. Even assuming that she first learned of the deficiency assessment on this date, her request for reconsideration was nonetheless filed late since she made it more than 30 days thereafter. Hence, her request for reconsideration did not suspend the running of the prescriptive period provided under 223(c). Although the Commissioner acted on her request by eventually denying it on August 11, 1994, this is of no moment and does not detract from the fact that the assessment had long become demandable. Nonetheless, it is contended that the running of the prescriptive period under 223(c) was suspended when the BIR timely served the warrants of distraint and levy on respondent on January 12, 1989. 13 Petitioner cites for this purpose our ruling in Advertising Associates Inc., v. Court of Appeals. 14 Because of the suspension, it is argued that the BIR could still avail of the other remedy under 223(c) of filing a case in court for collection of the tax deficiency, as the BIR in fact did on January 1, 1997. Petitioner's reliance on the Court's ruling in Advertising Associates Inc. v. Court of Appeals is misplaced. What the Court stated in that case and, indeed, in the earlier case of Palanca v. Commissioner of Internal Revenue, 15is that the timely service of a warrant of distraint or levy suspends the running of the period to collect the tax deficiency in the sense that the disposition of the attached properties might well take time to accomplish, extending even after the lapse of the statutory period for collection. In those cases, the BIR did not file any collection case but merely relied on the summary remedy of distraint and levy to collect the tax deficiency. The importance of this fact was not lost on the Court. Thus, in Advertising Associates, it was held: 16 "It should be noted that the Commissioner did not institute any judicial proceeding to collect the tax. He relied on the warrants of distraint and levy to interrupt the running of the statute of limitations.
Moreover, if, as petitioner in effect says, the prescriptive period was suspended twice, i.e., when the warrants of distraint and levy were served on respondent on January 12, 1989 and then when respondent made her request for reinvestigation of the tax deficiency assessment on November 3, 1992, the three-year prescriptive period must have commenced running again sometime after the service of the warrants of distraint and levy. Petitioner, however, does not state when or why this took place and, indeed, there appears to be no reason for such. It is noteworthy that petitioner raised this point before the lower court apparently as an alternative theory, which, however, is untenable.

For the foregoing reasons, we hold that petitioner's contention that the action in this case had not prescribed when filed has no merit. Our holding, however, is without prejudice to the disposition of the properties covered by the warrants of distraint and levy which petitioner served on respondent, as such would be a mere continuation of the summary remedy it had timely begun. Although considerable time has passed since then, as held inAdvertising Associates Inc. v. Court of Appeals 17 and Palanca v. Commissioner of Internal Revenue, 18 the

enforcement of tax collection through summary proceedings may be carried out beyond the statutory period considering that such remedy was seasonably availed of.
WHEREFORE, the petition is DENIED. Bellosillo, Quisumbing, Buena and De Leon, Jr., JJ., concur.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 169225 November 17, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. HAMBRECHT & QUIST PHILIPPINES, INC., Respondent. DECISION LEONARDO-DE CASTRO, J.: This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking to set aside the Decision1dated August 12, 2005 of the Court of Tax Appeals (CTA) En Banc in C.T.A. E.B. No. 73 (C.T.A. Case No. 6362), entitled "Commissioner of Internal Revenue vs. Hambrecht & Quist Philippines, Inc.," which affirmed the Decision2 dated September 24, 2004 of the CTA Original Division in C.T.A. Case No. 6362 canceling the assessment issued against respondent for deficiency income and expanded withholding tax for the year 1989 for failure of petitioner Commissioner of Internal Revenue (CIR) to enforce collection within the period allowed by law. The CTA summarized the pertinent facts of this case, as follows: In a letter dated February 15, 1993, respondent informed the Bureau of Internal Revenue (BIR), through its West-Makati District Office of its change of business address from the 2nd Floor Corinthian Plaza, Paseo de Roxas, Makati City to the 22nd Floor PCIB Tower II, Makati Avenue corner H.V. De la Costa Streets, Makati City. Said letter was duly received by the BIR-West Makati on February 18, 1993. On November 4, 1993, respondent received a tracer letter or follow-up letter dated October 11, 1993 issued by the Accounts Receivable/Billing Division of the BIRs National Office and signed by then Assistant Chief Mr. Manuel B. Mina, demanding for payment of alleged deficiency income and expanded withholding taxes for the taxable year 1989 amounting to P2,936,560.87.

On December 3, 1993, respondent, through its external auditors, filed with the same Accounts Receivable/Billing Division of the BIRs National Office, its protest letter against the alleged deficiency tax assessments for 1989 as indicated in the said tracer letter dated October 11, 1993. The alleged deficiency income tax assessment apparently resulted from an adjustment made to respondents taxable income for the year 1989, on account of the disallowance of certain items of expense, namely, professional fees paid, donations, repairs and maintenance, salaries and wages, and management fees. The latter item of expense, the management fees, made up the bulk of the disallowance, the examiner alleging, among others, that petitioner failed to withhold the appropriate tax thereon. This is also the same basis for the imposition of the deficiency withholding tax assessment on the management fees. Revenue Regulations No. 6-85 (EWT Regulations) does not impose or prescribe EWT on management fees paid to a nonresident. On November 7, 2001, nearly eight (8) years later, respondents external auditors received a letter from herein petitioner Commissioner of Internal Revenue dated October 27, 2001. The letter advised the respondent that petitioner had rendered a final decision denying its protest on the ground that the protest against the disputed tax assessment was allegedly filed beyond the 30-day reglementary period prescribed in then Section 229 of the National Internal Revenue Code. On December 6, 2001, respondent filed a Petition for Review docketed as CTA Case No. 6362 before the then Court of Tax Appeals, pursuant to Section 7 of Republic Act No. 1125, otherwise known as an Act Creating the Court of Tax Appeals and Section 228 of the NIRC, to appeal the final decision of the Commissioner of Internal Revenue denying its protest against the deficiency income and withholding tax assessments issued for taxable year 1989. 3 In a Decision dated September 24, 2004, the CTA Original Division held that the subject assessment notice sent by registered mail on January 8, 1993 to respondents former place of business was valid and binding since respondent only gave formal notice of its change of address on February 18, 1993. Thus, the assessment had become final and unappealable for failure of respondent to file a protest within the 30-day period provided by law. However, the CTA (a) held that the CIR failed to collect the assessed taxes within the prescriptive period; and (b) directed the cancellation and withdrawal of Assessment Notice No. 001543-89-5668. Petitioners Motion for Reconsideration and Supplemental Motion for Reconsideration of said Decision filed on October 14, 2004 and November 22, 2004, respectively, were denied for lack of merit. Undaunted, the CIR filed a Petition for Review with the CTA En Banc but this was denied in a Decision dated August 12, 2005, the dispositive portion reads: WHEREFORE, the Petition for Review is DENIED DUE COURSE and the case is accordingly DISMISSED for lack of merit.4

Hence, the instant Petition wherein the following issues are raised:
I WHETHER OR NOT THE COURT OF TAX APPEALS HAS JURISDICTION TO RULE THAT THE GOVERNMENTS RIGHT TO COLLECT THE TAX HAS PRESCRIBED. II WHETHER OR NOT THE PERIOD TO COLLECT THE ASSESSMENT HAS PRESCRIBED.5

The petition is without merit. Anent the first issue, petitioner argues that the CTA had no jurisdiction over the case since the CTA itself had ruled that the assessment had become final and unappealable. Citing Protectors Services, Inc. v. Court of Appeals,6 the CIR argued that, after the lapse of the 30-day period to protest, respondent may no longer dispute the correctness of the assessment and its appeal to the CTA should be dismissed. The CIR took issue with the CTAs pronouncement that it had jurisdiction to decide "other matters" related to the tax assessment such as the issue on the right to collect the same since the CIR maintains that when the law says that the CTA has jurisdiction over "other matters," it presupposes that the tax assessment has not become final and unappealable. We cannot countenance the CIRs assertion with regard to this point. The jurisdiction of the CTA is governed by Section 7 of Republic Act No. 1125, as amended, and the term "other matters" referred to by the CIR in its argument can be found in number (1) of the aforementioned provision, to wit: Section 7. Jurisdiction. - The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by appeal, as herein provided 1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code or other law as part of law administered by the Bureau of Internal Revenue . (Emphasis supplied.) Plainly, the assailed CTA En Banc Decision was correct in declaring that there was nothing in the foregoing provision upon which petitioners theory with regard to the parameters of the term "other matters" can be supported or even deduced. What is rather clearly apparent, however, is that the term "other matters" is limited only by the qualifying phrase that follows it. Thus, on the strength of such observation, we have previously ruled that the appellate jurisdiction of the CTA is not limited to cases which involve decisions of the CIR on matters relating to assessments or refunds. The second part of the provision covers other cases that

arise out of the National Internal Revenue Code (NIRC) or related laws administered by the Bureau of Internal Revenue (BIR).7 In the case at bar, the issue at hand is whether or not the BIRs right to collect taxes had already prescribed and that is a subject matter falling under Section 223(c) of the 1986 NIRC, the law applicable at the time the disputed assessment was made. To quote Section 223(c): Any internal revenue tax which has been assessed within the period of limitation aboveprescribed may be collected by distraint or levy or by a proceeding in court within three years following the assessment of the tax. (Emphases supplied.) In connection therewith, Section 3 of the 1986 NIRC states that the collection of taxes is one of the duties of the BIR, to wit: Sec. 3. Powers and duties of Bureau. - The powers and duties of the Bureau of Internal Revenue shall comprehend the assessment and collection of all national internal revenue taxes, fees, and charges and the enforcement of all forfeitures, penalties, and fines connected therewith including the execution of judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts. Said Bureau shall also give effect to and administer the supervisory and police power conferred to it by this Code or other laws. (Emphasis supplied.) Thus, from the foregoing, the issue of prescription of the BIRs right to c ollect taxes may be considered as covered by the term "other matters" over which the CTA has appellate jurisdiction. Furthermore, the phraseology of Section 7, number (1), denotes an intent to view the CTAs jurisdiction over disputed assessments and over "other matters" arising under the NIRC or other laws administered by the BIR as separate and independent of each other. This runs counter to petitioners theory that the latter is qualified by the status of the former, i.e., an "other matter" must not be a final and unappealable tax assessment or, alternatively, must be a disputed assessment. Likewise, the first paragraph of Section 11 of Republic Act No. 1125, as amended by Republic Act No. 9282,8 belies petitioners assertion as the provision is explicit that, for as long as a party is adversely affected by any decision, ruling or inaction of petitioner, said party may file an appeal with the CTA within 30 days from receipt of such decision or ruling. The wording of the provision does not take into account the CIRs restrictive interpretation as it clearly provides that the mere existence of an adverse decision, ruling or inaction along with the timely filing of an appeal operates to validate the exercise of jurisdiction by the CTA. To be sure, the fact that an assessment has become final for failure of the taxpayer to file a protest within the time allowed only means that the validity or correctness of the assessment

may no longer be questioned on appeal. However, the validity of the assessment itself is a separate and distinct issue from the issue of whether the right of the CIR to collect the validly assessed tax has prescribed. This issue of prescription, being a matter provided for by the NIRC, is well within the jurisdiction of the CTA to decide. With respect to the second issue, the CIR insists that its right to collect the tax deficiency it assessed on respondent is not barred by prescription since the prescriptive period thereof was allegedly suspended by respondents request for reinvestigation. Based on the facts of this case, we find that the CIRs contention is without basis. The pertinent provision of the 1986 NIRC is Section 224, to wit:
1avvphi1

Section 224. Suspension of running of statute. The running of the statute of limitations provided in Sections 203 and 223 on the making of assessment and the beginning of distraint or levy or a proceeding in court for collection, in respect of any deficiency, shall be suspended for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty days thereafter; when the taxpayer requests for a re-investigation which is granted by the Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected: Provided, That, if the taxpayer informs the Commissioner of any change in address, the statute will not be suspended; when the warrant of distraint and levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and no property could be located; and when the taxpayer is out of the Philippines. (Emphasis supplied.) The plain and unambiguous wording of the said provision dictates that two requisites must concur before the period to enforce collection may be suspended: (a) that the taxpayer requests for reinvestigation, and (b) that petitioner grants such request. On this point, we have previously held that: The above section is plainly worded. In order to suspend the running of the prescriptive periods for assessment and collection, the request for reinvestigation must be granted by the CIR.9 (Emphasis supplied.) Consequently, the mere filing of a protest letter which is not granted does not operate to suspend the running of the period to collect taxes. In the case at bar, the records show that respondent filed a request for reinvestigation on December 3, 1993, however, there is no indication that petitioner acted upon respondents protest. As the CTA Original Division in C.T.A. Case No. 6362 succinctly pointed out in its Decision, to wit: It is evident that the respondent did not conduct a reinvestigation, the protest having been dismissed on the ground that the assessment has become final and executory. There is nothing in the record that would show what action was taken in connection with the protest of the

petitioner. In fact, petitioner did not hear anything from the respondent nor received any communication from the respondent relative to its protest, not until eight years later when the final decision of the Commissioner was issued (TSN, March 7, 2002, p. 24). In other words, the request for reinvestigation was not granted. x x x.10 (Emphasis supplied.) Since the CIR failed to disprove the aforementioned findings of fact of the CTA which are borne by substantial evidence on record, this Court is constrained to uphold them as binding and true. This is in consonance with our oft-cited ruling that instructs this Court to not lightly set aside the conclusions reached by the CTA, which, by the very nature of its functions, is dedicated exclusively to the resolution of tax problems and has accordingly developed an expertise on the subject unless there has been an abuse or improvident exercise of authority.11 Indeed, it is contradictory for the CIR to argue that respondents December 3, 1993 protest which contained a request for reinvestigation was filed beyond the reglementary period but still claim that the same request for reinvestigation was implicitly granted by virtue of its October 27, 2001 letter. We find no cogent reason to reverse the CTA when it ruled that the prescriptive period for the CIRs right to collect was not suspended under the circumstances of this case. WHEREFORE, the petition is DENIED. The assailed Decision of the Court of Tax Appeals (CTA) En Banc dated August 12, 2005 is AFFIRMED. No costs. SO ORDERED. TERESITA J. LEONARDO-DE CASTRO Associate Justice

ADMINISTRATIVE REMEDIES / SUMMARY REMEDIES

FORFEITURE G.R. No. L-12174 April 26, 1962

MARIA B. CASTRO, petitioner, vs. THE COLLECTOR OF INTERNAL REVENUE, respondent. Rosendo J. Tansinsin and Manuel O. Chan for petitioner. Office of the Solicitor General and Special Attorney Librada del Rosario-Natividad for respondent. REYES, J.B.L., J.: Appeal from a decision of the Court of Tax Appeals (in its C.T.A. Case 141) holding petitioner Maria B. Castro liable under the War Profits Tax Law, Republic Act No. 55, and ordering her to pay a

deficiency war profits tax (including surcharges and interest) in the amount of P1,360,514.66, and costs. The background of this case is set forth in great detail in the decision appealed from. We quote: Petitioner Maria B. Castro, who is authorized to manage her own property, is a duly licensed merchant. Pursuant to the provisions of Section 4 (b) and (c) of Republic Act No. 55, she filed with the Bureau of Internal Revenue on February 28, 1947, her war profits tax returns which showed a net worth on February 26, 1945 in the amount of P431,884.00 and a net worth on December 8, 1941 in the sum of P409,581.57. Although there is indicated an increase in net worth in the amount of P22,302.43, she is totally exempted from paying any war profits tax therefor as the deduction of six per centum (6%) per annum of the net worth on December 8, 1941 therefrom would show only a taxable increase in net worth in the amount of P5,574.61 which is not taxable under the said law. On November 22, 1947, however, Criminal Case No. 4976 was filed against her in the Court of First Instance of Manila for violation of Section 4, in connection with Section 8, of the War Profits Tax Law, for allegedly defrauding the Republic of the Philippines in the total amount of P1,048,687.76. The criminal action, was filed at the instance of respondent and simultaneous with the filing of said action, the petitioner received for the first time the notice of assessment dated November 19, 1947 by registered mail from the Collector of Internal Revenue. The said letter of demand was based on the report of Supervising Examiner Felipe Aquino of the Bureau of Internal Revenue, who recommended that the petitioner be assessed and made to pay the sum of P1,048,687.76 as war profits tax and surcharge, computed as follows: . P 885,694.63 Increase in net worth Cumulative tax on P500,000 90% tax on P385,694.63 Total Tax Add 50% surcharge Total amount due and collectible P 352,000.00 347,125.17 P 699,125.17 349,562.59 P1,048,687.76

Petitioner through counsel filed a motion to quash the criminal action against her and during the pendency of the same, she amended on December 20, 1947, her original war profits tax returns making it to appear that her true net worth on February 26, 1945 was P315,438.32 while her net worth on December 8, 1941 was left unchanged at P409,581.57.

According to the amended return, there was therefore a decrease in net worth in the amount of P94,143.25 instead of an increase of P22,302.43 as originally reported. On February 9, 1948, the motion of petitioner to quash the information was denied by the Court of First Instance of Manila. At the sheduled hearing of the case on the merits on March 7, 1949, the City Fiscal of Manila manifested in open court that after a reinvestigation of the case "the amount of the tax due and for which the accused stands charged for evading payment is only about P700,000.00, instead of P1,048,687.76 as stated in the information." However, at the continuation of the hearing of the case on February 22, 1950, Supervising Examiner Felipe Aquino of the Bureau of Internal Revenue, who testified for the prosecution, declared in answer to questions propounded by the City Fiscal "that as a result of a detailed reinvestigation conducted by his office, it was found out that no war profits tax was due from the accused in connection with the present case." Whereupon, City Fiscal Angeles moved for the dismissal of the case. Finding the petition for dismissal to be well taken, the Court of First Instance of Manila, in an Order dated February 22, 1950, dismissed Criminal Case No. 4976 against petitioner. After the dismissal of the Criminal Case, another report was submitted by the same Supervising Examiner Felipe Aquino to his superiors wherein he changed his previous stand taken before the Court of First Instance of Manila, on the basis of which report another letter of demand for P2,008,293.53 as war profits tax was issued against petitioner on January 24, 1950. Barely one month thereafter, another report was again submitted by the same Supervising Examiner Felipe Aquino to his superiors, on the basis of which another letter of demand for war profits tax was issued by respondent against petitioner for the sum of P2,229,976.94 or an increase of P221,683.31 over that assessment of January 24, 1950. The case was again referred to the City Fiscal's Office for another prosecution based on the earlier demand but the same was again dropped. Following insistent requests of petitioner for reinvestigation of her case, the then Secretary of Finance Pio Pedrosa created a committee on April 11, 1950 to review or re-examine the assessment for war profits tax issued against the petitioner. This committee, otherwise known as the Pedrosa Committee, was chairmanned by Atty. Artemio M. Lobrin of the Bureau of Internal Revenue, with Messrs. Melecio R. Domingo and Roman M. Umali of the same office, Vivencio L. de Peralta of the General Auditing Office and Jose P. Alejandro of the Office of the Solicitor General, as members. After a thorough investigation of the case, the Pedrosa Committee on September 12, 1950, submitted its report, recommending the collection of the amount of P3,593,950.78 as war profits tax due from petitioner inclusive of surcharge and interests, broken down as follows: . Taxable increase in net worth War profits tax due thereon 50% surcharge P1,762,203.95 P1,526,093.75 763,406.88

Total war profits tax and surcharge 15% surcharge 1% monthly interest thereon from April 1947 to September 30, 1950 (42%) Total amount collectible on September 30, 1950

P2,289,140.63 343,371.09 961,439.06

P3,593,950.78

The findings and recommendations of the Pedrosa Committee were forwarded to the President of the Philippines for approval and on September 22, 1950, the President approved the same in toto. Accordingly, on September 23, 1950 the respondent demanded from the petitioner Maria B. Castro the payment of the total amount of P3,593,950.78 as war profits tax computed in detail as follows: . Net worth on February 26, 1945 as per amended war profits tax returns Add: (a) Undeclared cash on February 25, 1945: As per this report Amount declared (b) Overdeclared accounts payable: As per amended return Amount per this report Net worth on February 26, 1945 Less: Net worth on December 8, 1941: Net worth as per amended return Less: Accounts payable Increase in net worth as per this report Less: 6% per annum on P366,034.35 from December 8, 1941 to February 26, 1945 Taxable increase in net worth P 409,581.57 43,547.22 P 366,034.35 P1,832,848.58 70,644.63

P 315,438.32. P1,871,542.13 64,097.52 1,807,444.61

P 106,000.00 30,000.00 76,000.00 P2,198,882.93

P1,762,203.95 War profits tax due thereon:. On P 50,000.00 (P6,000 exempt) On 30,000.00 50% 60% 70% 80% 90% 95% P 22,000.00 30,000.00 140,000.00 160,000.00 450,000.00 724,093.75 P1,526,093.75 763,046.88 343,371.09 961,439.06 P2,289,140.63 P3,593.950.78

On 200,000.00 On 200,000.00 On 500,000.00 On 762,203.95 P 1,762,203.95 50% surcharge 15% surcharge 1% monthly interest from April 1, 1947 to September 30, 1950 (42%)

Total war profits tax and 50% surcharge (carried forward) Total amount collectible on September 30, 1950

In order to enforce collection of this last mentioned assessment of P3,593,950.78, the respondent caused to be advertised on October 18, 1950, the sale at public auction on November 22, and 27, 1950, of various real properties of petitioner to satisfy the war profits tax assessed against her. The petitioner, in order to stop the scheduled sale at public auction, filed on October 18, 1950, before the Court of First Instance of Manila a petition for preliminary injunction (Civil Case No. 12356) against the Collector of Internal Revenue, praying, among others, that an order be issued enjoining said official from proceeding with the collection by summary methods of the war profits tax demanded. Over the objection of respondent that the Court of First Instance had no jurisdiction to entertain the complaint nor to issue a writ of injunction, the said Court entered an order dated November 8, 1950 declaring that it had authority proceed with the case but denied the petition for preliminary injunction. Inasmuch as no preliminary injunction was issued by the Court, respondent proceeded with the distraint and levy and sale at public auction of the properties of petitioner. These properties, which are situated in the Cities of Manila, Pasay and Tagaytay and in the Municipalities of Caloocan and Makati, Rizal, and Moncada, Tarlac, and described more particularly in Exhibits C, C-1, C-2, C-3, C-4 and C-5 of the petition for injunction filed with this Court, were offered for sale on November 22, and 27, 1950 as scheduled, to answer for the war profits tax

liability of petitioner to the Republic of the Philippines in the assessed sum of P3,593,950.78, inclusive of surcharges and interest from April 1, 1947 to September 30, 1950. For lack of bidders on the scheduled dates of sale, the following properties (except those in Tagaytay) with their corresponding assessed value, were forfeited to the Government under Section 328 of the National Internal Revenue Code: . Property Manila Balintawak Pasay Makati Tarlac Tagaytay Assessed Value P233,460.00 521,390.00 18,320.00 4,830.00 12,530.00 62,930.00

In another sale at public auction on April 23, 1954, the property of petitioner situated in Caloocan, Rizal, with an assessed value of P4,990.00 was also offered for sale to answer for her war profits tax liability. There being no bidders in this sale as in the previous sale, this last mentioned real property of petitioner was also forfeited to the Government. The petitioner has not exercised her right of legal redemption with respect to all these real properties with a total assessed value of P858,440.00 which were sold at public auction by the respondent and forfeited in favor of the Government for lack of bidders. Parenthetically, it may be stated that the hearing of Civil Case No. 12356 before the Court of First Instance of Manila for Preliminary Injunction was not continued to its final determination by said court as the Supreme Court in a decision promulgated on October 31, 1951 declared the lower court without jurisdiction to proceed with the trial. (Saturnino David v. The Honorable Simeon Ramos and Maria B. Castro, G.R. No. L-4300).. In the course of the summary methods employed by the respondent to enforce the collection of the war profits tax liability of petitioner, the respondent also distrained and advertised for sale the properties of the Marvel Building Corporation in which the petitioner had a substantial interest. To counter-act the move, the said corporation through counsel filed on November 31, 1950, Civil Case No. 12555 in the Court of First Instance of Manila wherein it sought to enjoin the respondent Collector of Internal Revenue from selling at public auction its various properties described in the complaint. While the corporation was able to secure the injunction from the lower court, the same was dissolved by the Supreme Court in its decision in G.R. No. L-5081, Marvel Building Corporation v. Saturnino David, promulgated on February 24, 1954. Petitioner Maria B. Castro was declared therein as the sole and exclusive owner of all shares of stock of the Marvel Building Corporation and all the other partners are her dummies.

In the meantime, petitioner filed on December 10, 1951, Civil Case No. 15316 with the Court of First Instance of Manila against the respondent Collector of Internal Revenue for the recovery of the properties advertised for saleon November 22 and 27, 1950 which for lack of bidders were forfeited to theGovernment. However, before the case could be tried on the merits before said Court, the Court of Tax Appeals was created by Republic Act No. 1125 and pursuant to Section 22 thereof, the record of the case was remanded for finaldisposition to this Court. This last mentioned case is now pending hearing before this Court. At this juncture, it should be stated that again on December 22, 1951, an additional war profits tax was assessed against the petitioner in the sum of P20,425.00 based allegedly on certain amounts receivable which petitioner received from Magdalena Estate, Inc. Consequently, the total war profits taxliability of petitioner, exclusive of surcharge and interest, as found by the Pedrosa Committee was increased to P1,546,518.75, itemized as follows: .
1wph1.t

Tax due as per Pedrosa Committee Additional war profits tax on account of undeclared amount receivable from the Magdalena Estates, Inc. Total war profits tax exclusive of surcharge and interest.

P1,526,093.75 20,425.00 P1,546,518.75

To satisfy, fully the amount of the war profits tax assessed against petitioner, the respondent on September 29, 1954, caused to be advertised for sale at public auction for November 2, 1954, other real properties of petitioner situated in Manila. These properties are described in detail in Appendix B of the petition for review filed with this Court. According to the "Amended Notice of Sale" (Appendix B, Petition for Review), the properties were seized, distrained and levied upon from petitioner "in satisfaction of internal revenue taxes and penalties amounting to P4,539,556.26, computed as of April 30, 1954" due from her in favor of the Republic of the Philippines. For lack of bidders at the time of the scheduled sale on November 2, 1954, the properties in question were forfeited to the Government under Section 328 of the National Internal Revenue Code for the total amount of P3,547,892.41 which was allegedly the balance of petitioner's tax liability as of that date. Before the expiration of the one-year period provided for in Section 328 of the National Internal Revenue Code within which petitioner may redeem the real properties forfeited in favor of the Government in the sale at public auction held on November 2, 1954, the petitioner filed with this Court on September 30, 1955, a petition for the annulment of said sale and forfeiture on the ground that her properties were advertised for sale on tax claim of the Government far in excess of the alleged war profits tax, surcharges and penalties fixed by respondent. Respondent filed his opposition to the petition and after due hearing where evidence was adduced in support of the petition as well as opposition thereto, this Court, in a resolution dated October 31, 1955, declared the auction sale of November 2, 1954 as well as the resulting forfeiture, null and void and of no legal force and effect because of the admitted discrepancy in the amount of tax stated in the notice of sale for which the properties were auctioned and the actual amount of tax assessed and demanded.

The said resolution being without prejudice to such action and proceedings a respondent may take in accordance with law, respondent demanded from petitioner the amount of P3,594,881.51 not later than November 10, 1955 or he would again proceed with the resale of her properties on December 12, 1955. To stop the sale, petitioner filed a petition for injunction with this Court on November 22, 1955 requesting that respondent be enjoined from proceeding with the resale of her properties scheduled on December 12, 1955; that the said properties be released to her; and that she be declared not liable for the war profits tax assessed and demanded of her. After due hearing of this petition and the opposition thereto, this Court, in a resolution dated December 10, 1955, denied the injunction and held in abeyance the determination of other questions until after the case shall have been heard on the merits. The properties were therefore advertised for sale on December 12, 1955 to answer for a war profits tax liability of petitioner to the Republic of the Philippines for the alleged amount of P3,594,307.51 computed as of that date. For lack of bidders, the same were forfeited to the Government. Those properties and the amounts for which they were forfeited are as follows:. Aguinaldo Building Wise & Co. Building Zobel Mansion Shellborne Hotel Total Add: Prior forfeitures P2,026,517.10 670,291.47 408,501.24 489,491.70 P3,594,801.51 888,440.00 P4,453,241.51

After due hearing and reception of evidence, the Tax Court annulled the last tax sale of December, 1955, covering the found Manila buildings, on account of irregularities in the notices of sale; but for the rest, it found against petitioner and assessed her tax liability as follows: . "Net worth on Feb. 26, 1945 as per amended war profits tax return Add: (a) Underdeclared cash on February 26, 1945: As per Pedrosa Committee report Amount declared (b) Accounts Payable: As per amended return

P 315,438.32

P1,871,542.13 64,097.52 P 106,000.00 1,807.444.61

Amount per Pedrosa Committee Report-P30,000.00 Accounts payable to Lao Kang Suy recognized by Court-P76,000.00 Net worth on Feb. 26, 1945 Less: Net worth on December 8, 1941: Net worth as per amended return Less Accounts payable P43,547.22 Increase in net worth Less 6% per annum on P366,034.35 from Dec. 8, 1941 to Feb. 26, 1945 Taxable increase in net worth Add: Undeclared accounts receivable from Magdalena Estate, Inc. as of Feb. 26, 1945 that was discovered in June, 1951 only Total taxable increase in net worth War Profits tax due thereon: On P50,000.00 (P6,000.00 Exempt) @ 50% 50,000.00 200,000.00 200,000.00 500,000.00 707,703.95 @ 60% @ 70% @ 80% @ 90% @ 95%

106.000.00 P2,122,883.93

P 409,581.57 366,034.35 P1,756,848.58 70,644.63 P1,686,203.95

21,500.00 P1,707,703.95

P 22,000.00 30,000.00 140,000.00 160,000.00 450,000.00 672,318.75

Total . . . . . . . . . . . . . P1,474,318.75 50% surcharge on P1,474,318.75 15% surcharge on P1,474,318.75 P 737,159.37 221,147.81

1% monthly on P1,474,318.75 from 4/l/47 to 11/22/50 Total amount collectible on 11/22/50 . . . . . . . . Less: Values of properties sold: On Nov. 22, 1950 On Nov. 27, 1950 April 20, 1954 Total due as of December 12, 1955 From this decision, Maria Castro appealed to this Court.. P1,556,000 150,900 9,980

644,768.73 P3,077,394.66

1,716,880.00 P1,360,514.66

The nineteen alleged errors committed by the Court of Tax Appeals and discussed by appellant in her printed brief actually revolve around four main defenses: (a) that the War Profits Tax Law (R.A. No. 55) is unconstitutional and void; (b) that said law was improperly applied to the case of the appellant; (c) that even if appellant were subject to the tax liability declared by the court below, such liability was totally extinguished by the levy and forfeiture of certain properties of hers; and (d) that appellant's acquittal in the criminal case instituted against her for violation of the War Profits Tax Law is a bar to the collection of the taxes assessed, and specially of the 50% surcharge. (a) Petitioner's attack on the constitutionality of Republic Act No. 55, commonly known as the War Profits Tax Law, on account of its retrospective operation (Errors XVIII), is now foreclosed by our decision in Republic vs.Oasan Vda. de Fernandez, G.R. No. L-9141, September 25, 1956, wherein thisCourt upheld the validity of the statute; and no reasons are alleged that would justify a departure from the ruling made in that case.. (b) Petitioner Castro complains (Errors I and VI) that the Tax Court had declared subject to the war profits tax her cash transactions from June, 1945to December 31, 1946, when Republic Act No. 55 levies that tax only on the value of the taxpayer's assets (including real and personal property and/orcash in banks) as of February 26, 1945, minus his liabilities.. This argument misconceives the process whereby the Tax Court (and the Pedrosa Committee) arrived at the petitioner's net worth as of February 26,1945. Because of the difficulty in determining the taxpayer's cash on hand on said date (since her books and records did not show her invested capital in 1945), said tax authorities adopted the method of starting from her reported cash on hand on December 31, 1946, and working backwards to February,1945, by adding to the reported cash the disbursements made by Castro during1945 and 1946, and then deducting her receipts from the same period. We see nothing fundamentally erroneous in this method for, as pointed out in the appealed decision, "if cash on hand at the beginning of the period, plus receipts during the period minus disbursements during the period, equals cash on hand at the end of the period, the converse must necessarily be true.".

Such method is in effect but an application (in reverse) of the inventory or networth system that, contrary to appellants contention (Error XIII), has been approved by this Court in Perez vs. Collector of Internal Revenue, G.R. No. L-10507, May 30, 1958; Collector vs. A. P. Reyes, L-11534, November 25, 1958; and Commissioner of Internal Revenue vs. Avelino, L-14847, September 19, 1961. The analysis of petitioner's transactions for 1945 and 1946 merely laid the basis for determining the undisclosed cash funds in her possession as of February 26, 1945 (amounting to P1,807,444.61), and it is this cash thatwas found subject to the war profits tax. It is urged, however, that even if this finding were correct, still, under Republic Act No. 55, only "cash in banks" is expressly mentioned as taxable, and appellant infers that cash on hand not so deposited was not intended to be subject to war profits tax. This thesis appears unmeritorious: cash heldby the taxpayer on February 26, 1945 clearly falls under the description of "assets, including real and personal property" that section 2 of the Act expressly order included in determining the taxable net worth. If "cash in banks" is expressly mentioned by the Act, it is not because cash on hand was intended to be excluded, but because "cash in banks" is not, strictly, speaking, part of the assets of the taxpayer, but assets of the banks where the cash is deposited. It is well established that a so-called "bank deposit" is in reality a loan to the bank, the latter acquiring title to the amount "deposited", subject to its withdrawal (or recall of the loan) on the dates specified. Taxpayer's "assets", therefore, would not per se include cash deposited in banks by the taxpayer; and its inclusion had to be expressly prescribed by the statute in order to remove all doubt as to its taxability. Petitioner endeavored to show (Errors VII to XI) that part of the amount of cash thus arrived at actually originated in receipts from transactions made by her after February 26, 1945 but which were not disclosed in the books and accounts. Aside from the fact that this claim in her behalf contradicted her admission to the Pedrosa Committee that all her 1946 receipts were recorded in her books (v. Respondent's Exhibit 6-A), it lay within the exclusive discretion of the Tax Court to believe or not to believe her evidence and statements, and those of her witnesses regarding the source of the cash in question; and the rule is well settled that in cases of this kind, only errors of law, and not rulings on the weight of evidence, are reviewable by this Court. The same principle precludes us from interfering with the Tax Court's refusal to credit the other deductions claimed by petitioner as amounts obtained from loans from various individuals. The Court of Tax Appeals found those items unproved, except the P76,000.00 payable to Lao Kang Suy, which is accepted, although it had been rejected by the Pedrosa Committee. Similarly, the finding that the petitioner had disbursed in 1946 P1,025,000.00 on account of her subscription to the stock of the Marvel Building Corporation (Error XII) may not be disturbed by us. (c) The third main ground of appeal is predicated on the acquittal of petitioner in case No. 4976 of the Court of First Instance of Manila, wherein she was criminally prosecuted for failure to render a true and accurate return of the war profits tax due from her, with intent to evade payment of the tax. She contends (Assignments of Error II to IV) that the acquittal should operate as a bar to the imposition of the tax and specially the 50% surcharge provided by section 6 of the War Profits law (R.A. No. 55), invoking the ruling in Coffey v. U.S., 29 L. Ed. 436.

With regard to the tax proper, the state correctly points out in its brief that the acquittal in the criminal case could not operate to discharge petitioner from the duty to pay the tax, since that duty is imposed by statute prior to and independently of any attempts on the part of the taxpayer to evade payment. The obligation to pay the tax is not a mere consequence of the felonious acts charged in the information, nor is it a mere civil liability derived from crime that would be wiped out by the judicial declaration that the criminal acts charged did not exist. As to the 50% surcharge, the very United States Supreme Court that rendered the Coffey decision has subsequently pointed out that additions of this kind to the main tax are not penalties but civil administrative sanctions, provided primarily as a safeguard for the protection of the state revenue and to reimburse the government for the heavy expense of investigation and the loss resulting from the taxpayer's fraud (Helvering vs. Mitchell, 303 U.S. 390, 82 L. Ed. 917; Spies vs. U.S. 317 U.S. 492). This is made plain by the fact that such surcharges are enforceable, like the primary tax itself, by distraint or civil suit, and that they are provided in a section of R.A. No. 55 (section 5) that is separate and distinct from that providing for criminal prosecution (section 7). We conclude that the defense of jeopardy and estoppel by reason of the petitioner's acquittal is untenable and without merit. Whether or not there was fraud committed by the taxpayer justifying the imposition of the surcharge is an issue of fact to be inferred from the evidence and surrounding circumstances; and the finding of its existence by the Tax Court is conclusive upon us. (Gutierrez v. Collector, G.R. No. L9771, May 31, 1951 ; Perez vs. Collector, supra). (d) The fourth main ground adduced on behalf of the petitioner (Errors II and XlV) is that the sale and forfeiture to the government (due to lack of bidders) of the properties of petitioner in Manila, Balintawak, Pasay, Makati, Tarlac, Tagaytay and Caloocan which had been levied upon by the respondent Collector of Internal Revenue and advertised for sale in 1950 and 1954, constitutes a full discharge of petitioner's tax liabilities. In so arguing, she relies on the provisions of paragraph 1 of Section 328 of the Internal Revenue Code, reading as follows: . SEC. 328. Forfeiture to Government for Want of Bidder. - In case there is no bidder for real property exposed for sale as herein above provided or if the highest bid is for an amount insufficient to pay the taxes, penalties, and costs, the provincial or city treasurer shall declare the property forfeited to the Government in satisfaction of the claim in question and within two days thereafter shall make a return of his proceedings and the forfeiture, which shall be spread upon the records of his office, and appellant contends that in the provision to the effect that in the absence of bidders, the property is to be "forfeited to the Government in satisfaction of the claim in question", the term "satisfaction" signifies nothing but full discharge of the taxes, penalties, and costs claimed by the state. Carried to its logical conclusion, this theory would permit a clever taxpayer, who is able to conceal most or the more valuable part of his property from the revenue officers, to escape payment of his tax liability by sacrificing an insignificant portion of his holdings; and we can not agree that in providing that the forfeiture of the taxpayer's distrained or levied property, for lack of adequate bids, should operate in satisfaction of the total tax claims even beyond the value of the property forfeited. That the satisfaction prescribed in section 328 of the Revenue Code was intended to mean only a discharge pro tanto is confirmed by the provisions of section 330 of the Revenue Code to the effect that "remedy by distraint of personal property and levy on realty may

be repeated if necessary until the full amount due including all expenses, is collected". This section makes no distinction between forfeitures to the Government and sales to third persons, and we are satisfied that no distinction was intended and that none is warranted. Nor do we see that the petitioner has any ground for complaining that the properties forfeited were undervalued (Error XV). The relation between assessed value and market price being variable, it is not a matter of notice. However, the Court of Tax Appeals appraised the forfeited properties at double their assessed evaluation, and thereby credited her with a part payment on account of her tax liability in the amount of P1,716,880.00. There is no adequate evidence that they were worth more, petitioner's own estimates of value being obviously unreliable, due to her direct interest in the matter under investigation. Since the burden of proof lay evidently on the taxpayer, she is not in a position to complain in this regard. It may be noted in this connection that the validity of the levy and sale of her properties in November of 1950 and April 1954 is assailed by appellant in her fifth assignment of error; but as this point was not raised in the Court below, the same can not be entertained for the first time on appeal. (e) As pointed out by the counsel for the Government, appellant's stand that the undeclared cash should be averaged or spread out for the years 1945, 1946 and 1947 (Error XVI) assumes that what was being subjected to tax was her undeclared income during said years, which is not correct, as previously declared in this opinion. If her expenditures during 1945 and 1946 were scrutinized and analyzed, it was merely to determine the actual value of her taxable net worth as of February 26, 1945, that was subject to the war profits tax, as representing accumulated profits earned during the occupation years. Finally, no argument is needed to show that unless taxes are to be left at the discretion of the taxpayer, she can not be allowed to seek refuge or relief by pleading (Error XVII) the alleged inefficient and erratic manner in which her books of account and supporting papers had been prepared, contrary to the requirements of the revenue laws; and that it is incredible that a trader like the appellant should be able to do business running into millions of pesos without knowing exactly her financial condition. Appellant's alleged Error XIX, being merely pro forma, requires no discussion. Finding no reversible error in the decision appealed from, we hereby affirm the same, with costs against appellant. Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Paredes and Dizon, JJ., concur.

Tax lien
G.R. No. 78391 October 21, 1988

REPUBLIC OF THE PHILIPPINES, petitioner, vs. RAMON G. ENRIQUEZ, Deputy Sheriff of Manila, respondent. The Solicitor General for petitioner. Sison, Ortiz & Associates for petitioner.

PADILLA, J.: Appeal by way of certiorari from the decision * of the Court of Appeals in CA-G.R. SP. No. 09582, dated 30 April 1987, dismissing the petition for prohibition with preliminary injunction, filed by petitioner Republic of the Philippines against respondent Ramon G. Enriquez, Deputy Sheriff of Manila. On 28 January 1985, the petitioner, through the Commissioner of Internal Revenue, served a Warrant of Distraint of Personal Property on the Maritime Company of the. Philippines to satisfy various deficiency taxes of said company in the total amount of P17,284,882.45, pursuant to unappealed and final tax assessments. 1 On 16 April 1985, a Receipt for Goods, and Things Seized Under Authority of the National Internal Revenue Code was executed, wherein Headquarters, First Coast Guard District, Farola Compound, Binondo, Manila, acknowledged receipt from the Commissioner of Internal Revenue of several barges, vehicles and two (2) bodegas of spare parts belonging to the taxpayer (Maritime Company of the Philippines). 2 On 4 October 1985, the corresponding Notice of Seizure of Personal Property, a copy of which was received by a respresentative of the Maritime Company of the Philippines, was issued by the Commissioner of Internal Revenue. 3 Among the properties seized were six (6) barges, Barge MCP-1 to Barge MCP-6. On 11 June 1986, respondent sheriff levied on two (2) barges of the Maritime Company of the Philippines, pursuant to a writ of execution issued on 19 February 1986 by the Regional Trial Court of Manila, Branch 31, in Civil Case No. 85-30134, entitled "Genstar Container Corporation vs. Maritime Company of the Philippines", in favor of the plaintiff therein. Respondent sheriff scheduled a public auction sale, of the levied barges on 23 June 1986. The barges, particularly Barge MCP-1 and Barge MCP-4, were among the aforementioned properties distrained and seized by petitioner, through the Commissioner of Internal Revenue. On 18 June 1986, the Commissioner of Internal Revenue wrote respondent sheriff informing the latter that Barge MCP-1 and Barge MCP-4 were no longer owned by the Maritime Company of the Philippines as said barges had been distrained and seized by the Bureau of Internal Revenue in satisfaction of various deficiency taxes of Maritime Company of the Philippines, thereby registering its adverse claim over said barges. The letter, together with the affidavit of adverse claim and other supporting papers, was filed on 19 June 1986 at the office of respondent deputy sheriff and was received by one Zenriquez, 6-19-86, Staff II." 4

On 23 June 1986, respondent deputy sheriff sold at public auction the two (2) barges, MCP-1 and MCP-4, and issued the corresponding sheriffs certificate of sale on the same date to the highest bidder which was the levying creditor. On 24 July 1986, petitioner filed before the Court of Appeals the aforementioned petition for prohibition with preliminary injunction, alleging that respondent sheriff, Ramon G. Enriquez, acted in excess of his authority or with grave abuse of discretion when he levied on execution and subsequently auctioned the abovesaid two (2) barges which were the subject of a warrant of distraint and notice of seizure by the Commissioner of Internal Revenue. Petitioner prayed that respondent be ordered to desist and refrain from further proceedings in connection with the execution and that respondent's notice of levy be declared null and void. In its decision, dated 30 April 1987, the Court of Appeals dismissed the petition after finding that "(H)e appears to have acted in accordance with law and in keeping with his duties. There is no perceived abuse of authority or grave abuse of discretion." Hence, this appeal. The only issue to be resolved in this appeal is the validity and effectiveness of the BIR warrant of distraint and notice of seizure of personal property as against the writ of execution issued by the Regional Trial Court and the levy on execution and auction sale of the barges in question. It is settled that the claim of the government predicated on a tax lien is superior to the claim of a private litigant predicated on a judgment. The tax lien attaches not only from the service of the warrant of distraint of personal property but from the time the tax became due and payable. 5 Besides, the distraint on the subject properties of Maritime Company of the Philippines as well as the notice of their seizure were made by petitioner, through the Commissioner of Internal Revenue, long before the writ of execution was issued by the Regional Trial Court of Manila, Branch 31. There is no question then that at the time the writ of execution was issued, the two (2) barges, MCP-1 and MCP-4, were no longer properties of the Maritime Company of the Philippines. The power of the court in execution of judgments extends only to properties unquestionably belonging to the judgment debtor. Execution sales affect the rights of the judgment debtor only, and the purchaser in an auction sale acquires only such right as the judgment debtor had at the time of sale. It is also well-settled that the sheriff is not authorized to attach or levy on property not belonging to the judgment debtor. 6 While it is correct for the Court of Appeals to declare that there are other remedies available to the government in connection with its tax claims, yet, the filing of a separate action, in accordance with Section 17, Rule 39, of the Rules of Court would only delay final satisfaction of the tax liabilities of the Maritime Company of the Philippines. The purpose of said rule is to afford a claimant an opportunity to vindicate his ownership over the property levied upon by the sheriff. In the case at bar, however, there is no further need for petitioner to establish its rights over the two (2) barges in question as the evidence on record clearly proves that the barges are under distraint and, in fact, seized by petitioner, through the Commissioner of Internal Revenue, in satisfaction of various final deficiency taxes of the Maritime Company of the Philippines. The Court of Appeals gave much weight to the claim of respondent sheriff that he was unaware of any adverse claim over the subject barges. This claim is belied by receipt in the office of respondent by one "Zenriquez, 6-19-86, Staff II" of the letter dated 18 June 1986, from the Commissioner of Internal Revenue informing respondent that the two (2) barges were under distraint and no longer

owned by the Maritime Company of the Philippines. It was incumbent upon respondent to have reminded members of his staff to notify him immediately of important communications or papers affecting the discharge of his official duties. Proof of due receipt by respondent's office of the petitioner's adverse claim prevails over respondent's denial thereof. It was not necessary that respondent'spersonal receipt of the BIR Commissioner's letter be shown on the face of the letter. It is standard operating procedure in government offices to maintain log books which record the inward and outward flow of official documents and papers. Besides, respondent never denied that Zenriquez Staff II" was a member of his office staff on 19 June 1986 when the BIR Commissioner's letter registering the petitioner's adverse claim to the subject barges, was received in respondent's office. WHEREFORE, the instant petition is GRANTED, The appealed decision is SET ASIDE. The notice of levy upon as well as execution sale of Barges MCP-1 and MCP-4 are ANNULLED and the respondent is ENJOINED from further proceeding with their sale in Civil Case No. 85-30134 of the Regional Trial Court of Manila, Branch 31. In the event that the execution sale, having been consummated, results in non-recovery of the aforesaid barges, respondent is ordered to remit to the Bureau of Internal Revenue the proceeds of the execution sale of said barges, to be applied in partial satisfaction of the tax liabilities of Maritime Company of the Philippines to the Philippine government. SO ORDERED. G.R. No. 74965 November 9, 1994 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. NATIONAL LABOR RELATIONS COMMISSION, DEPUTY CITY SHERIFF CARMELO V. CACHERO, MARITIME COMPANY OF THE PHILIPPINES, DOMINGO C. NIANGAR, DANIEL C. SABINO, FERNANDO S. TULIAO and TULMAR TRADING CORPORATION, respondents. Reynaldo L. Libanan for respondent deputy sheriff. Joaquin G. Chung, Jr. Law Office for respondent Tulmar Trading Corp. Eliodoro C. Cruz & Arsenio P. Dizon for Maritime Co. of the Philippines.

MENDOZA, J.: This is a petition for certiorari to set aside the resolution dated April 4, 1986 1 of the National Labor Relations Commission in NLRC Case No. NCR-12-4233-84 (Domingo C. Niangar v. Maritime Company of the Philippines), affirming the denial by the Labor Arbiter 2 of petitioner's motion to annul the sheriff's sale of four barges or, in the alternative, to order him to remit the proceeds of

his sale to the Bureau of the Internal Revenue for the satisfaction of the tax liabilities of private respondent Maritime Company of the Philippines. The facts are as follows: On January 12, 1984 the Commissioner of the Internal Revenue sent two letters 3 of demand to the respondent Maritime Company of the Philippines for deficiency common carrier's tax, fixed tax, 6% Commercial Broker's tax, documentary stamp tax, income tax and withholding taxes in the total amount of P17,284,882.45. The assessment became final and executory as private respondent did not contest it. But as private respondent did not pay its tax liability either, the Commissioner of Internal Revenue issued warrants of distraint of personal property and levy of real property of private respondent. Copies of the warrants, both dated January 23, 1985, were served on January 28, 1985 on Yoly T. Petrache, private respondent's accountant. 4 On April 16, 1985 a "Receipt for Goods, Articles, and Things Seized 5 under Authority of the National Internal Revenue Code" was executed, covering, among other things, six barges identified as MCP1,2,3,4,5 and 6. This receipt is required by 303 (now 206) of the NIRC as proof of the constructive distraint of property. It is an undertaking by the taxpayer or person in possession of the property covered that he will preserve the property and deliver it upon order of the court or the Internal Revenue Commissioner. Receipt for Goods, Articles, and Things Seized under Authority of the National Internal Revenue Code" was executed which covers 6 barges. Said receipt was pursuant to Section 303 (now 206) as proof of constructive distraint of property. It is an undertaking by the taxpayer or person in possession of the property covered that he will preserve the property and deliver it upon order of the court or the CIR. However the receipt was not signed by Maritime Co. The receipt was prepared by the BIR for the signature of a representative of respondent Maritime Company of the Philippines, but it was not in fact signed. Petitioner later explained that the individuals who had possession of the barges had refused to sign the receipt. This circumstance has given rise to the question in this case as it appears that four of the barges placed under constructive distraint were levied upon execution by respondent deputy sheriff of Manila on July 20, 1985 to satisfy a judgment for unpaid wages and other benefits of employees of respondent Maritime Company of the Philippines. However, it appears that the 4 barges under constructive distraint were levied upon execution by the Sheriff of Manila to satisfy a judgment of unpaid wages and other benefits of its employees.

More specifically, the question in this case is the validity of the warrant of distraint served by the Revenue Seizure Officer against the writ of execution subsequently levied upon the same property by the deputy sheriff of Manila to satisfy the claims of employees in NLRC Case No. NCR-12-423384 (Domingo C. Niangar, et al. v. Maritime Company of the Philippines) for P490,749.21. The four barges were sold by respondent deputy sheriff at a public auction on August 12, 1985. The highest bidder, Daniel C. Sabino, subsequently sold them to private respondents Fernando S. Tuliao and Tulmar Trading Corporation. On September 4, 1985, petitioner asked the Labor Arbiter to annul the sale and to enjoin the sheriff from disposing of the proceeds of the sale or, in the alternative, to remit them to the Bureau of Internal Revenue so that the amount could be applied to the payment of private respondent Maritime Company's tax liabilities. In an order dated September 30, 1985, Labor Arbiter Ceferina Diosana denied the motion on the ground that petitioner Commissioner of Internal Revenue failed to show that the barges which were levied upon in execution and sold at public auction had been validly placed under constructive distraint. 6 The Labor Arbiter likewise rejected petitioner's contention that the government's claim for taxes was preferred under Art. 2247, in relation to Art. 2241(1) of the Civil Code, on the ground that under this provisions only taxes and fees which are due on specific movables enjoy preference, whereas the taxes claimed by petitioner were not due on the four barges in question. The order was appealed to the NLRC, which in resolution dated April 4, 1986, affirmed the denial of the Internal Revenue Commissioner's motion. Hence this petition for certiorari. For reasons to be presently stated, the petition is granted. The National Internal Revenue Code provides for the collection of delinquent taxes by any of the following remedies: (a) distraint of personal property or levy of real property of the delinquent taxpayer and (b) civil or criminal action. With respect to the four barges in question, petitioner resorted to constructive distraint pursuant to 303 (now 206) of the NLRC. This provisions states: Constructive distraint of the property of a taxpayer. To safeguard the interest of the Government, the Commissioner of Internal Revenue may place under constructive distraint the property of a delinquent taxpayer or any taxpayer who, in his opinion, is retiring from any business subject to tax, or intends to leave the Philippines, or remove his property therefrom, or hide or conceal his property, or perform any act tending to obstruct the proceedings, for collecting the tax due or which may be due from him. The constructive distraint of personal property shall be effected by requiring the taxpayer or any person having possession or control of such property to sign a receipt covering the property distrained and obligate himself to preserve the same

intact and unaltered and not to dispose of the same in any manner whatever without the express authority of the Commissioner of Internal Revenue. In case the taxpayer or the person having the possession and control of the property sought to be placed under constructive distraint refuses or fails to sign the receipt herein referred to, the revenue officer effecting the constructive distraint shall proceed to prepare a list of such property and in the presence of two witnesses leave a copy thereof in the premises where the property distrained is located, after which the said property shall be deemed to have been placed under constructive distraint.. Although the warrant of distraint in this case had been issued earlier (January 23,1985) than the levy on execution in the labor case on July 20, 1985, the Labor Arbiter nevertheless held that there was no valid distraint of personal property on the ground that the receipt of property distrained had not been signed by the taxpayer as required above. In her order, which the NLRC affirmed in toto, the Labor Arbiter said: It is claimed by the Commissioner of the Internal Revenue that on January 23, 1984, he issued a warrant of distraint of personal property on respondent to satisfy the collection of the deficiency taxes in the aggregate sum of P17,284,882.45 and a copy of said warrant was served upon Maritime Company on January 28, 1985 and pursuant to the warrant, the Commissioner, through Revenue Seizure Agent Roland L. Bombay, issued on April 16, 1985, to Maritime Company a receipt for goods, articles and things seized pursuant to authority granted to him under the National Internal Revenue Code. Such personal properties seized includes, among others, "Six (6) units of barges MCI-6 . . . " However, his own receipts for goods attached to his motions does not show that it was received by Maritime; neither does it show any signature of any of Maritime's Officers.
Apart from the foregoing, in his affidavit of 11 September 1985, Sheriff Cachero stated that before he sold the subject four barges at public auction, he conducted an investigation on the ownership of the said four barges. In brief, he found out that the said four barges were purchased by respondent through Makati Leasing and that the whole purchase price has been paid by respondent. In fact, the corresponding deed of sale has already been signed. He did not find any lien or encumbrance on any of the said four barges. Thus it cannot be true that the Commissioner effected a valid warrant of distraint of personal property on the four barges in 7 question.

However, this case arose out of the same facts involved in Republic v. Enriquez, 8 in which we sustained the validity of the distraint of the six barges, which included the four involved in this case, against the levy on execution made by another deputy sheriff of Manila in another case filed against Maritime Company. Two barges (MCP-1 and MCP-4) were the subject of a levy in the case. There we found that the "Receipt for Goods, Articles and Things Seized under Authority of the National Internal Revenue Code" covering the six barges had been duly executed, with the Headquarters, First Coast Guard District, Farola Compound Binondo, Manila acknowledging receipt of several barges, vehicles and two (2) bodegas of spare parts belonging to Maritime Company of the Philippines.

Apparently, what had been attached to the petitioner's motion filed by the government with the Labor Arbiter in this case was a copy, not the original one showing the rubber stamp of the Coast Guard and duly signed by its representative. A xerox copy of this signed receipt was submitted in the prior case. 9 This could be due to the fact that, except for Solicitor Erlinda B. Masakayan, the government lawyers who prepared the petition in the prior case were different from those who filed the present petition. They admitted that the receipt of property distrained had not been signed by the taxpayer or person in possession of the taxpayer's property allegedly because they had refused to do so. What apparently they did not know is that the receipt had been acknowledged by the Coast Guard which obviously had the barges in its possession. In addition to the receipt duly acknowledged by the Coast Guard, the record of the prior case also shows that on October 4, 1985, the Commissioner of the Internal Revenue issued a "Notice of Seizure of Personal Property" stating that the goods and chattels listed on its reverse side, among which were the four barges (MCP-2, MCP-3, MCP-5, and MCP-6), had been distrained by the Commissioner of Internal Revenue. 10 The "Notice of Seizure of Personal Property," a copy of which was received by Atty. Redentor R. Melo in behalf of Maritime Company of the Philippines, together with the receipt of the Coast Guard, belies the claim of respondent deputy sheriff that when he levied upon the four barges there was no indication that the barges had previously been placed under distraint by the Commissioner of Internal Revenue. Accordingly, what we said in the prior case 11 in upholding the validity of distraint of two of the six barges (MCP Nos. 1 and 4), fully applies in this case: It is settled that the claim of the government predicated on a tax lien is superior to the claim of a private litigant predicated on a judgment. The tax lien attaches not only from the service of the warrant of distraint of personal property but from the time the tax became due and payable. Besides, the distraint on the subject properties of the Maritime Company of the Philippines as well as the notice of their seizure were made by petitioner, through the Commissioner of the Internal Revenue, long before the writ of the execution was issued by the Regional Trial Court of Manila, Branch 31. There is no question then that at the time the writ of execution was issued, the two (2) barges, MPC-1 and MCP-4, were no longer properties of the Maritime Company of the Philippines. The power of the court in execution of judgments extends only to properties unquestionably belonging to the judgment debtor. Execution sales affect the rights of the judgment debtor only, and the purchaser in an auction sale acquires only such right as the judgment debtor had at the time of sale. It is also well-settled that the sheriff is not authorized to attach or levy on property not belonging to the judgment debtor. Nor is there any merit in the contention of the NLRC that taxes are absolutely preferred claims only with respect to movable or immovable properties on which they are due and that since the taxes sought to be collected in this case are not due on the barges in question the government's claim cannot prevail over the claims of employees of the Maritime Company of the Philippines which, pursuant to Art. 110 of the Labor Code, "enjoy first preference."

In Republic v. Peralta 12 this Court rejected a similar contention. Through Mr. Justice Feliciano we held: . . . [T]he claim of the Bureau of Internal Revenue for unpaid tobacco inspection fees constitutes a claim for unpaid internal revenue taxes which gives rise to a tax lien upon all the properties and assets, movable or immovable, of the insolvent as taxpayer. Clearly, under Articles 2241 No. 1, 2242 No. 1, and 2246-2249 of the Civil Code, this tax claim must be given preference over any other claim of any other creditor, in respect of any and all properties of the insolvent. xxx xxx xxx Article 110 of the Labor Code does not purport to create a lien in favor of workers or employees for unpaid wages either upon all of the properties or upon any particular property owned by their employer. Claims for unpaid wages do not therefore fall at all within the category of specially preferred claims established under Articles 2241 and 2242 of the Civil Code, except to the extent that such claims for unpaid wages are already covered by Article 2241, number 6: "claims for laborer's wages, on the goods manufactured or the work done," or by Article 2242, number 3: "claims of laborers and other workers engaged in the construction, reconstruction or repair of buildings, canals and other works, upon said buildings, canals or other works." To the extent that claims for unpaid wages fall outside the scope of Article 2241, number 6 and 2242, number 3, they would come with the ambit of the category of ordinary preferred credits under Article 2244. Applying Article 2241, number 6 to the instant case, the claims of the Unions for separation pay of their members constitute liens attaching to the processed leaf tobacco, cigars and cigarettes and other products produced or manufactured by the Insolvent, but not to other assets owned by the Insolvent. And even in respect of such tobacco and tobacco products produced by the Insolvent, the claims of the Unions may be given effect only after the Bureau of Internal Revenue's claim for unpaid tobacco inspection fees shall have been satisfied out of the products so manufactured by the Insolvent. Article 2242, number 3, also creates a lien or encumbrance upon a building or other real property of the Insolvent in favor of workmen who constructed or repaired such building or other real property. Article 2242, number 3, does not however appear relevant in the instant case, since the members of the Unions to whom separation pay is due rendered services to the Insolvent not (so far as the record of this case would show) in the construction or repair of buildings or other real property, but rather, in the regular course of the manufacturing operations of the Insolvent. The Unions' claims do not therefore constitute a lien or encumbrance upon any immovable property owned by the insolvent, but rather, as already indicated, upon the Insolvent's existing inventory (if any) of processed tobacco and tobacco products.

In addition, we have held 13 that Art. 110 of the Labor Code applies only in case of bankruptcy or judicial liquidation of the employer. This is clear from the text of the law. Art. 110. Worker preference in case of bankruptcy. In the event of bankruptcy or liquidation of an employer's business, his workers shall enjoy first preference as regards wages due them for services rendered during the period prior to the bankruptcy or liquidation, any provision of law to the contrary notwithstanding. Unpaid wages shall be paid in full before other creditors may establish any claims to a share in the assets of the employer. This case does not involve the liquidation of the employer's business. WHEREFORE, the petition for certiorari is GRANTED and the resolution dated April 4, 1986 of respondent NLRC in NLRC Case No. NCR-12-4233-84 is SET ASIDE insofar as it denies the government's claim for taxes, and respondent deputy sheriff Carmelo V. Cachero or his successor is ORDERED to remit the proceeds of the auction sale to the Bureau of Internal Revenue to be applied as part payment of respondent Maritime Company's tax liabilities. SO ORDERED. Narvasa, C.J., Regalado and Puno, JJ., concur. G.R. No. L-13188 November 15, 1918

THE HONGKONG & SHANGHAI BANKING CORPORATION, plaintiff-appellant, vs. JAMES J. RAFFERTY, as Collector of Internal Revenue of the Philippine Islands, defendantappellant. Cohn & Fisher for plaintiff-appellant. Acting Attorney-General Paredes for defendant-appellant.

MALCOLM, J.: The important subject of tax liens is to be discussed on this appeal. FACTS During the years 1912-1915 inclusive, Pujalte & Co., a general mercantile partnership, was engaged in the business of lumbering in Mindanao. The company removed from the forest and milled at its say mills during this period, a total of 6,087.54 cubic meters of timber. The forest charges amounted to P8,328.93. Upon the execution of bonds in the aggregate sum of P2,000 to secure the payment of the forest charges due the government, the Collector of Internal Revenue permitted Pujalte & Co. to remove this timber from the public forests for shipment by sea on saw

mill invoices without prior payment of the forest charges. From the timber so removed by Pujalte & Co., railroad ties were manufactured in its saw mills at Manila for the Manila Railroad Co. Six thousand three hundred and five railroad ties so manufactured were rejected by the Manila Railroad Co. In February, 1915, the firm of Pujalte & Co. was indebted to the Hongkong and Shanghai Banking Corporation in a large sum of money. Being unable to pay its debt in specie, the company assigned to the bank, among other things, a large quantity of the railroad ties manufactured at its mills. The bank sold and disposed of these ties at various times until in May, 1916, there remained with it some 2,000 railroads ties of the lot acquired. The internal revenue charges on the forest products removed from the public forests of Mindanao by Pujalte & Co. not having been paid, on May 2, 1916, the Collector of Internal Revenue caused delinquency proceedings to be commenced and had issued a distress warrant. Later, on May 15, 1916, the Collector of Internal Revenue caused an additional distress levy to be made upon the 6,305 ties, which it will be remembered, had been assigned by Pujalte & Co. to the Hongkong & Shanghai Banking Corporation. Proceeding in accordance with this action, the Collector of Internal Revenue seized the 2,000 ties in the possession of the bank. Until the date last mentioned, the bank had no notice of the tax. Payment under protest, institution of complaint to recover back the sum paid, answer by the Government, trial, and judgment followed in due course. In this judgment, handed down by the Honorable James A. Ostrand, it was declared that a lien for taxes existed on the 2,000 railroad ties levied upon by the Collector of Internal Revenue and claimed as its property by the Hongkong & Shanghai Banking Corporation, not for the full sum of P8,328.93 due as forest charges on the timber removed from the forests of Mindanao by Pujalte & Co., but only for the sum of P316.43, which is the tax upon the timber used for the manufacture of the ties. The court ordered the Collector of Internal Revenue to refund to the Hongkong and Shanghai Banking Corporation the sum of P8,012.50, with interest at 6 per cent per annum from February 1, 1917. No costs were allowed. Following timely motions for a new trial, denial, and exceptions thereto, both parties have appealed. This brings us to a statement of the L A W. Among the sources of taxes, fees; and charges, in the nature of internal revenue taxes, the Internal Revenue Law enumerates charges for forest products. (Sec. 21 ( f ), Act 2339, now sec. 1438 ( f ), Administrative Code of 1917.) The Internal Revenue Law of 1914 also contains the following provisions relative to the nature and extent of tax liens: Every internal-revenue tax on property or on any business or occupation and every tax on resources and receipts, and any increment to any of them incident to delinquency, shall constitute a lien superior to all other charges or liens not only on the property itself upon which such tax may be imposed but also upon the property used in any business or occupation upon which the tax is imposed and upon all property rights therein.

The lien of the tax on inheritances, legacies and other acquisitions mortis causa shall have preference over any real right created thereon subsequent to the death of the predecessor, but this preference will be extinguished at the end of five years from the date when the tax becomes payable upon real property, and three years upon any other kind of property. (Sec. 149, Act No. 2339, now section 1588, Administrative Code of 1917.) The succeeding section of the same law authorizes two civil remedies for the collection of internal revenue taxes: (a) by distraint of personal property and upon exhaustion thereof by levy upon real property, and (b) by legal action. (Sec. 150, Act No. 2339, now section 1589, Administrative Code of 1917.) Relative to the first remedy by distraint of personal property, the same law in section 151 provides: The remedy by distraint shall proceed as follows: Upon the failure of the person owing any delinquent tax or delinquent revenue to pay the same, at the time required, the Collector of Internal Revenue or his deputy may seize and distrain any personal property belonging to such person or any property subject to the tax lien, in sufficient quantity to satisfy the tax, or charge, together with any increment thereto incident to delinquency, and the expenses of the distraint. (Now section 1590, Administrative Code of 1917.) One fact stands out prominently on examination of these provisions of the Internal Revenue Law the internal revenue tax constitutes a paramount lien either on the property upon which the tax is imposed or on any other property used in any business or occupation upon which the tax is imposed. The government has here chosen to levy on the property itself in the hands of a purchaser for value.
lawphil.net

This brings us to a statement of the I S S U E S. Does the lien follow the property subject to the tax into the hands of a third party when at the time of transfer, no demand for payment had been made and when the purchaser had no notice of the existence of the lien? Counsel for plaintiff argues that it does not. Or, does the lien follow the property subject to the tax even though transferred to a third party who had no notice of the existence of the lien so as to make this property respond for the specific unpaid internal revenue taxes due on it? The trial court so found. Or, does the lien follow the property subject to the tax even though transferred to a third party who had no notice of the existence of the lien so as to make this property respondent for all the unpaid internal revenue taxes due from the vendor? The government so opines. This brings us to a statement of the following O P I N I O N. 1. Major Issue; Tax Liens. Taxation is an attribute of sovereignty. The power to tax is the strongest of all the powers of government. If approximate equality in taxation is to be attained, all property subject to a tax must respond, or there is resultant inequality. Under the most favorable

circumstances, an enormous amount of property escapes taxation altogether. To prevent such a lamentable situation, the law ordains that the claim of the State upon the property of the tax debtor shall be superior to that of any other creditor. A lien in its modern-acceptation is understood to denote a legal claim or charge on property, either real or personal, as security for the payment of some debt or obligation. Its meaning is more extensive than the jus retentionis (derecho de retencion) of the civil law. (2 Giorgi, Teoria de las Obligaciones, 419; Ames vs. Dyer, 41 Me., 397.) Unless the statute is otherwise, the rule is that a valid lien created on real or personal estate is enforceable against property in the hands of any person, other than a bona fide purchaser for value without notice, who subsequently acquires the estate. (25 Cyc., 680, citing cases.) The general rule of the Civil Law may be different. Possession of movables is not necessary to the validity of a lien, whether created by contract or by act of law. Such lien will attach upon movable property, even in the hands of a bona fide purchaser without notice. (Tatham vs. Andree [1863], 1 Moore, P.C. [N. S.], 386; The Bold Buccleugh [1850], 7 Moore, P.C., 267.) The law of taxation establishes principles which generally, although not exactly, conform to the law of liens. The tax lien does not establish itself upon property which has been transferred to an innocent purchaser prior to demand. In a decision relating to the United States Internal Revenue Law, Mr. Justice Miller held that a demand is necessary to create and bring the lien into operation. (U. S. vs. Pacific Railroad Co. [1877], Fed. Cas. No. 15,984; U. S. vs. Pacific Railroad Co. [1880], 1 Fed., 97.) Where a statute makes taxes on personal property a lien thereon, a purchaser of such property takes the same free from any lien for taxes if the title passes before such a lien attaches by levy, distraint, or otherwise. (Shelby vs. Tiddy [1896], 118 N. C., 792.) In order that the lien may follow the property into the hands of a third party, it is further essential that the latter should have notice, either actual or constructive. The reason is the benevolence of our Constitution which prohibits the taking of property without due process of law. In the case of real estate or special assessment taxation a man cannot get rid of his liability to a tax by buying without notice. (City of Seattle vs. Kelleher [1904], 195 U. S., 351.) The rule, however, is different where the vendee has no knowledge of the taxes on personality existing at the time, or had no means of knowing from the public records that such taxes had accrued. The authorities relied upon by the Government will be found on examination to concern real estate taxation. Internal revenue laws are to be construed fairly for the government and justly for the citizen. They should receive a liberal construction to carry out the purposes of their enactment; they should not receive so loose a construction as to permit evasions on merely fanciful and insubstantial distinctions. "The internal revenue laws cannot be so construed as to extend their meaning beyond the clear import of the words used." (U. S. vs. Watts [1865], Fed. Cas. No. 16653. See also U. S. vs. Hodson [1870], 10 Wall., 395; U. S. vs. Kallstrom [1887], 30 Fed., 184; Hubbard vs. Brainard [1869], Conn., 563, and Muoz & Co. vs. Hord [1909], 12 Phil., 624.)

With such general principles in mind, we should first ascertain the legislative intention. One detail indicative of such intent is noted in the more limited scope of the law pertaining to liens for internal revenue taxes as contrasted with the law pertaining to liens for real estate taxes. The municipal law in part provides that liens for real property taxes "shall be enforceable against the property whether in the possession of the delinquent or any subsequent owner." (Now section 364, Administrative Code of 1917.) No mention of the subsequent owner is found in the Internal Revenue Law. Nor does this law provide that the lien shall not be divested by alienation. Again, we can very well look to the policy of the law in respect to liens. Liens, it has well been said, are of too sacred character to be impaired by vague and uncertain implications. The lien which the law favors is the specific or particular lien and not the general lien. However, the policy of the law is against upholding secret liens and charges against the property of innocent purchasers or encumbrances for value. (See Palmer vs. Howard [1887], 72 Cal., 293; 17 R. C. L., 599.) Keeping the foregoing statement of facts, issues, and law before us, the present case offers no serious difficulty. The plaintiff was not of course personally liable for any part of the internal revenue taxes due the Government from Pujalte & Co. On the date the railroad ties were transferred from Pujalte & Co. to the Hongkong & Shanghai Banking Corporation no demand for payment of the tax had been made. The bonds in favor of the Government were still presumably subsisting. No demand in fact was made until over a year later when distraint proceedings were initiated. When the Hongkong & Shanghai Banking Corporation purchased and acquired these 2,000 ties in February, 1915, there was nothing to show that Pujalte & Co. were delinquent tax payers. No public record could be consulted to protect the purchaser from loss by reason of the existence of a secret lien. A businessman of ordinary prudence could not be expected to foresee that the personal property which he had taken in satisfaction of a debt was burdened by a tax. On this date, because no demand had been made and because the plaintiff had no notice of the tax, there was no valid subsisting lien upon the ties. 2. Minor Issue; Interest upon Judgments to Recover Taxes. Plaintiff-appellant in assignment of error No. 4 also claims interest upon the amount of the judgment from the 3d day of June, 1916, in place and instead of allowing interest thereon from the first day of February, 1917. The first date is that of the illegal exaction; the second date is that of the commencement of the action. Interest should be allowed from the day when the taxpayer lost the income from the funds by payment under protest, or not at all. (Viuda e Hijos De Pedro P. Roxas vs.Rafferty [1918], 37 Phil., 957; H. E. Heacock Co. vs. Collector of Customs [1918], 37 Phil., 970.) On the other hand, the second assignment of error of the defendant-appellant is to the effect that no interest at all should have been allowed by the trial court because of section 1579 of the present Administrative Code. Plaintiff-appellant in answer challenges the validity of this section. Section 1579 of the Administrative Code of 1917 in part authorizes the taxpayer who has paid an internal revenue tax under protest, at any time within two years after the payment of the tax, "to bring an action against the Collector of Internal Revenue for the recovery without interest of the sum alleged to have been illegally collected." As this provision was enacted by the Philippine Legislature subsequent to the institution of the present action in the lower court, and subsequent to the judgment therein rendered, we do not feel that the law should be given a retroactive effect.

Whether section 1579 of the Administrative Code is valid or not is left for decision when a case arises after the Code became effective. In this instance, we allow interest at the legal rate from the date of payment. 3. Minor Issue; Costs against the Government. Plaintiff-appellant further claims that the trial court erred in declining to allow the recovery of costs. The right to recover costs is governed by statute. In the United States, the rule is that unless expressly authorized by statute, a judgment for costs, either in a civil or criminal case, cannot be rendered against the United States or a State. The principle is that the sovereign power is not amenable to judgments for damages or costs without its consent. (U. S. vs. Barker [1817], 2 Wheat., 395; Stanley vs. Schwalby [1896], 162 U. S., 255; State vs.Williams [1905], 101 Md., 529; 4 A. & E. Ann. Cas., 970; Deneen vs. Unverzagt [1907], 225 Ill., 378; 8 A. & E. Ann. Cas., 396 and note; Townsend's Succession [1888], 40 La. Ann., 66.) The Code of Civil Procedure of the Philippine Islands provides that costs shall ordinarily follow the result of the suit. They are to be recovered by "the prevailing party." (Code of Civil Procedure, chapter 21.) In the ordinary case between private individuals or entities, or where the government is successful, no particular difficulty is experienced applying the Code provisions. The practice has, however, been not to allow costs in cases in which the Government of the Philippine Islands or a nominal representative of the Government is the unsuccessful party. And this is right for the Government of the Philippine Islands is sovereign in the sense that a State of the American Union or Porto Rico is sovereign, and this paramount power has not by statute permitted itself to be taxed with costs. No costs should be allowed plaintiff in either instance. This brings us to a statement of the J U D G M E N T. Judgment is reversed and the plaintiff shall have and recover from defendant the full amount sued for, P8,328.93, with interest at the legal rate from June 3, 1916, until paid, and without costs in either instance. So ordered. Torres, Johnson, Carson and Araullo, JJ., concur.

Separate Opinions

STREET, J., dissenting and concurring: The lien created by law for the enforcement of the tax on land is expressly declared to be enforcible against the property in the hands of any person, whether the delinquent or any subsequent owner. (See sec. 364, Administrative Code, 1917; section 2497, id., for city of Manila.) On the other hand, that section of the Internal Revenue Law which declared a lien for internalrevenue taxes merely says that such lien shall be superior to all other charges or liens. (Sec. 1588, Administrative Code, 1917.) From this it can be fairly, though not, I think, conclusively argued that the lien for the enforcement of internal revenue taxes was not intended to be effective against subsequent owners. Acceding to the force of this argument, I should perhaps have yielded my own views and expressed my conformity with the decision upon this as upon other points involved in the case. Nevertheless I cannot refrain from expressing my regret that the court should have reached the conclusion it has announced with respect to the lien declared in section 1588 of the Code, and it is my opinion that the lien created in this section has the same effect and range as the lien which is created in support of the land tax. The obvious effect of the decision on the point in question is to destroy the practical utility of the lien created by section 1588; because so long as the property subject to the tax is in the hands of the person primarily liable for the tax, it can be seized by the Collector of Internal Revenue under process of distraint and thus subjected to the payment of the tax (section 1690, Administrative Code, 1916). No lien is therefore necessary to enable the government to take the property and enforce its rights as against him. It is only when the property passes into the hands of some other person than the one primarily liable that the existence of a lien becomes of any importance. It is inherent in the nature of a lien, as a real obligation fixed on the property, that it should remain as a burden thereon regardless of mutations in the ownership; and a lien, like this, created by express provision of law and made superior to all other charges and liens, necessarily continues to subsist regardless of whether the subsequent owner or purchaser of the property has notice of the lien or not. I am not convinced by the citation of the American authorities, referred to in the opinion of the Court, and I think that the deductions drawn by the Court from those cases is unwarranted. It is well known that mere equitable liens, as recognized in American jurisprudence, are not enforcible against purchasers without notice; but this doctrine I consider to be inapplicable to a statutory lien, such as is involved in this case. The possibility of the existence of some hidden lien like this was recognized by the Hongkong & Shanghai Bank at the time it bought these rails, for the very contract of transfer, or assignment, by which it acquired the property contains a provision whereby Pujalte & Company warranted that, at the date of the transfer, the rails were the absolute property of that company and were "free and clear of any liens, charges, and encumbrances," and warranted the title against all lawful claims of all persons whomsoever. It is obvious that Pujalte & Company would be liable upon this

warranty, if the lien should be enforced; and I think this the simplest solution that can be made of the case. I am, therefore, constrained to express my disagreement with the conclusion of the court with respect to the liability of the rails in question for the tax upon them; and I think that the trial court committed no error in refusing a refund of the amount thereof (P316.43). Upon other points I concur.

Judicial Remedies

[G.R. No. 130430. December 13, 1999]

REPUBLIC OF THE PHILIPPINES, represented by the Commissioner of the Bureau of Internal Revenue (BIR),petitioner, vs. SALUD V. HIZON, respondent. DECISION
MENDOZA, J.:

This is a petition for review of the decision[1] of the Regional Trial Court, Branch 44, San Fernando, Pampanga, dismissing the suit filed by the Bureau of Internal Revenue for collection of tax. The facts are as follows: On July 18, 1986, the BIR issued to respondent Salud V. Hizon a deficiency income tax assessment of P1,113,359.68 covering the fiscal year 19811982. Respondent not having contested the assessment, petitioner, on January 12, 1989, served warrants of distraint and levy to collect the tax deficiency. However, for reasons not known, it did not proceed to dispose of the attached properties. More than three years later, or on November 3, 1992, respondent wrote the BIR requesting a reconsideration of her tax deficiency assessment. The BIR, in a letter dated August 11, 1994, denied the request. On January 1, 1997, it filed a case with the Regional Trial Court, Branch 44, San Fernando, Pampanga to collect the tax deficiency. The complaint was signed by Norberto Salud, Chief of the Legal Division, BIR Region 4, and verified by Amancio Saga, the Bureaus Regional Director in Pampanga.

Respondent moved to dismiss the case on two grounds: (1) that the complaint was not filed upon authority of the BIR Commissioner as required by 221[2] of the National Internal Revenue Code, and (2) that the action had already prescribed. Over petitioners objection, the trial court, on August 28, 1997, granted the motion and dismissed the complaint. Hence, this petition. Petitioner raises the following issues:[3] I. WHETHER OR NOT THE INSTITUTION OF THE CIVIL CASE FOR COLLECTION OF TAXES WAS WITHOUT THE APPROVAL OF THE COMMISSIONER IN VIOLATION OF SECTION 221 OF THE NATIONAL INTERNAL REVENUE CODE. II. WHETHER OR NOT THE ACTION FOR COLLECTION OF TAXES FILED AGAINST RESPONDENT HAD ALREADY BEEN BARRED BY THE STATUTE OF LIMITATIONS. First. In sustaining respondents contention that petitioners complaint was filed without the authority of the BIR Commissioner, the trial court stated:[4] There is no question that the National Internal Revenue Code explicitly provides that in the matter of filing cases in Court, civil or criminal, for the collection of taxes, etc., the approval of the commissioner must first be secured. . . . [A]n action will not prosper in the absence of the commissioners approval. Thus, in the instant case, the absence of the approval of the commissioner in the institution of the action is fatal to the cause of the plaintiff . . . . The trial court arrived at this conclusion because the complaint filed by the BIR was not signed by then Commissioner Liwayway Chato. Sec. 221 of the NIRC provides: Form and mode of proceeding in actions arising under this Code. Civil and criminal actions and proceedings instituted in behalf of the Government under the authority of this Code or other law enforced by the Bureau of Internal Revenue shall be brought in the name of the Government of the Philippines and shall be conducted by the provincial or city fiscal, or the Solicitor General, or by the legal officers of the Bureau of Internal Revenue deputized by the Secretary of Justice, but no civil and criminal actions for the recovery of taxes or the enforcement of any fine, penalty or forfeiture under this Code shall be begun without the approval of the Commissioner. (Emphasis supplied) To implement this provision Revenue Administrative Order No. 5-83 of the BIR provides in pertinent portions:

The following civil and criminal cases are to be handled by Special Attorneys and Special Counsels assigned in the Legal Branches of Revenue Regions: .... II. Civil Cases 1. Complaints for collection on cases falling within the jurisdiction of the Region . . . . In all the abovementioned cases, the Regional Director is authorized to sign all pleadings filed in connection therewith which, otherwise, requires the signature of the Commissioner. .... Revenue Administrative Order No. 10-95 specifically authorizes the Litigation and Prosecution Section of the Legal Division of regional district offices to institute the necessary civil and criminal actions for tax collection. As the complaint filed in this case was signed by the BIRs Chief of Legal Division for Region 4 and verified by the Regional Director, there was, therefore, compliance with the law. However, the lower court refused to recognize RAO No. 10-95 and, by implication, RAO No. 5-83. It held:
[M]emorand[a], circulars and orders emanating from bureaus and agencies whether in the purely public or quasi-public corporations are mere guidelines for the internal functioning of the said offices. They are not laws which courts can take judicial notice of. As such, they have no binding effect upon the courts for such memorand[a] and circulars are not the official acts of the legislative, executive and judicial departments of the Philippines . . . .[5]

This is erroneous. The rule is that as long as administrative issuances relate solely to carrying into effect the provisions of the law, they are valid and have the force of law.[6] The governing statutory provision in this case is 4(d) of the NIRC which provides: Specific provisions to be contained in regulations. - The regulations of the Bureau of Internal Revenue shall, among other things, contain provisions specifying, prescribing, or defining: ....

(d) The conditions to be observed by revenue officers, provincial fiscals and other officials respecting the institution and conduct of legal actions and proceedings. RAO Nos. 5-83 and 10-95 are in harmony with this statutory mandate. As amended by R.A. No. 8424, the NIRC is now even more categorical. Sec. 7 of the present Code authorizes the BIR Commissioner to delegate the powers vested in him under the pertinent provisions of the Code to any subordinate official with the rank equivalent to a division chief or higher, except the following: (a) The power to recommend the promulgation of rules and regulations by the Secretary of Finance; (b) The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau; (c) The power to compromise or abate under 204(A) and (B) of this Code, any tax deficiency: Provided, however, that assessments issued by the Regional Offices involving basic deficiency taxes of five hundred thousand pesos (P500,000.00) or less, and minor criminal violations as may be determined by rules and regulations to be promulgated by the Secretary of Finance, upon the recommendation of the Commissioner, discovered by regional and district officials, may be compromised by a regional evaluation board which shall be composed of the Regional Director as Chairman, the Assistant Regional Director, heads of the Legal, Assessment and Collection Divisions and the Revenue District Officer having jurisdiction over the taxpayer, as members; and (d) The power to assign or reassign internal revenue officers to establishments where articles subject to excise tax are produced or kept. None of the exceptions relates to the Commissioners power to approve the filing of tax collection cases. Second. With regard to the issue that the case filed by petitioner for the collection of respondents tax deficiency is barred by prescription, 223(c) of the NIRC provides: Any internal revenue tax which has been assessed within the period of limitation above-prescribed may be collected by distraint or levy or by a proceeding in court within three years[7]following the assessment of the tax.

The running of the three-year prescriptive period is suspended[8] for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty days thereafter; when the taxpayer requests for a reinvestigation which is granted by the Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon which the tax is being assessed or collected; provided, that, if the taxpayer informs the Commissioner of any change in address, the running of the statute of limitations will not be suspended; when the warrant of distraint or levy is duly served upon the taxpayer, his authorized representative or a member of his household with sufficient discretion, and no property could be located; and when the taxpayer is out of the Philippines. Petitioner argues that, in accordance with this provision, respondents request for reinvestigation of her tax deficiency assessment on November 3, 1992 effectively suspended the running of the period of prescription such that the government could still file a case for tax collection.[9] The contention has no merit. Sec. 229[10] of the Code mandates that a request for reconsideration must be made within 30 days from the taxpayers receipt of the tax deficiency assessment, otherwise the assessment becomes final, unappealable and, therefore, demandable.[11] The notice of assessment for respondents tax deficiency was issued by petitioner on July 18, 1986. On the other hand, respondent made her request for reconsideration thereof only on November 3, 1992, without stating when she received the notice of tax assessment. She explained that she was constrained to ask for a reconsideration in order to avoid the harassment of BIR collectors.[12] In all likelihood, she must have been referring to the distraint and levy of her properties by petitioners agents which took place on January 12, 1989. Even assuming that she first learned of the deficiency assessment on this date, her request for reconsideration was nonetheless filed late since she made it more than 30 days thereafter. Hence, her request for reconsideration did not suspend the running of the prescriptive period provided under 223(c). Although the Commissioner acted on her request by eventually denying it on August 11, 1994, this is of no moment and does not detract from the fact that the assessment had long become demandable. Nonetheless, it is contended that the running of the prescriptive period under 223(c) was suspended when the BIR timely served the warrants of distraint and levy on respondent on January 12, 1989.[13] Petitioner cites for this purpose our ruling

in Advertising Associates Inc. v. Court of Appeals.[14] Because of the suspension, it is argued that the BIR could still avail of the other remedy under 223(c) of filing a case in court for collection of the tax deficiency, as the BIR in fact did on January 1, 1997. Petitioners reliance on the Courts ruling in Advertising Associates Inc. v. Court of Appeals is misplaced. What the Court stated in that case and, indeed, in the earlier case of Palanca v. Commissioner of Internal Revenue,[15] is that the timely service of a warrant of distraint or levy suspends the running of the period to collect the tax deficiency in the sense that the disposition of the attached properties might well take time to accomplish, extending even after the lapse of the statutory period for collection. In those cases, the BIR did not file any collection case but merely relied on the summary remedy of distraint and levy to collect the tax deficiency. The importance of this fact was not lost on the Court. Thus, in Advertising Associates, it was held:[16] It should be noted that the Commissioner did not institute any judicial proceeding to collect the tax. He relied on the warrants of distraint and levy to interrupt the running of the statute of limitations. Moreover, if, as petitioner in effect says, the prescriptive period was suspended twice, i.e., when the warrants of distraint and levy were served on respondent on January 12, 1989 and then when respondent made her request for reinvestigation of the tax deficiency assessment on November 3, 1992, the three-year prescriptive period must have commenced running again sometime after the service of the warrants of distraint and levy. Petitioner, however, does not state when or why this took place and, indeed, there appears to be no reason for such. It is noteworthy that petitioner raised this point before the lower court apparently as an alternative theory, which, however, is untenable. For the foregoing reasons, we hold that petitioners contention that the action in this case had not prescribed when filed has no merit. Our holding, however, is without prejudice to the disposition of the properties covered by the warrants of distraint and levy which petitioner served on respondent, as such would be a mere continuation of the summary remedy it had timely begun. Although considerable time has passed since then, as held in Advertising Associates Inc. v. Court of Appeals[17] and Palanca v. Commissioner of Internal Revenue,[18] the enforcement of tax collection through summary proceedings may be carried out beyond the statutory period considering that such remedy was seasonably availed of. WHEREFORE, the petition is DENIED. Bellosillo, (Chairman), Quisumbing, Buena, and De Leon, Jr., JJ., concur.
G.R. No. L-17725 February 28, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. MAMBULAO LUMBER COMPANY, ET AL., defendants-appellants. Office of the Solicitor General for plaintiff-appellee. Arthur Tordesillas for defendants-appellants. BARRERA, J.: From the decision of the Court of First Instance of Manila (in Civil Case No. 34100) ordering it to pay to plaintiff Republic of the Philippines the sum of P4,802.37 with 6% interest thereon from the date of the filing of the complaint until fully paid, plus costs, defendant Mambulao Lumber Company interposed the present appeal.1 The facts of the case are briefly stated in the decision of the trial court, to wit: . The facts of this case are not contested and may be briefly summarized as follows: (a) under the first cause of action, for forest charges covering the period from September 10, 1952 to May 24, 1953, defendants admitted that they have a liability of P587.37, which liability is covered by a bond executed by defendant General Insurance & Surety Corporation for Mambulao Lumber Company, jointly and severally in character, on July 29, 1953, in favor of herein plaintiff; (b) under the second cause of action, both defendants admitted a joint and several liability in favor of plaintiff in the sum of P296.70, also covered by a bond dated November 27, 1953; and (c) under the third cause of action, both defendants admitted a joint and several liability in favor of plaintiff for P3,928.30, also covered by a bond dated July 20, 1954. These three liabilities aggregate to P4,802.37. If the liability of defendants in favor of plaintiff in the amount already mentioned is admitted, then what is the defense interposed by the defendants? The defense presented by the defendants is quite unusual in more ways than one. It appears from Exh. 3 that from July 31, 1948 to December 29, 1956, defendant Mambulao Lumber Company paid to the Republic of the Philippines P8,200.52 for 'reforestation charges' and for the period commencing from April 30, 1947 to June 24, 1948, said defendant paid P927.08 to the Republic of the Philippines for 'reforestation charges'. These reforestation were paid to the plaintiff in pursuance of Section 1 of Republic Act 115 which provides that there shall be collected, in addition to the regular forest charges provided under Section 264 of Commonwealth Act 466 known as the National Internal Revenue Code, the amount of P0.50 on each cubic meter of timber... cut out and removed from any public forest for commercial purposes. The amount collected shall be expended by the director of forestry, with the approval of the secretary of agriculture and commerce, for reforestation and afforestation of watersheds, denuded areas ... and other public forest lands, which upon investigation, are found needing reforestation or afforestation .... The total amount of the reforestation charges paid by Mambulao Lumber Company is P9,127.50, and it is the contention of the defendant Mambulao Lumber Company that since the Republic of the Philippines has not made use of those reforestation charges collected from it for reforesting the denuded area of the land covered by its license, the Republic of the Philippines should refund said amount, or, if it cannot be refunded, at least it should be compensated with what Mambulao Lumber Company owed the Republic

of the Philippines for reforestation charges. In line with this thought, defendant Mambulao Lumber Company wrote the director of forestry, on February 21, 1957 letter Exh. 1, in paragraph 4 of which said defendant requested "that our account with your bureau be credited with all the reforestation charges that you have imposed on us from July 1, 1947 to June 14, 1956, amounting to around P2,988.62 ...". This letter of defendant Mambulao Lumber Company was answered by the director of forestry on March 12, 1957, marked Exh. 2, in which the director of forestry quoted an opinion of the secretary of justice, to the effect that he has no discretion to extend the time for paying the reforestation charges and also explained why not all denuded areas are being reforested. The only issue to be resolved in this appeal is whether the sum of P9,127.50 paid by defendantappellant company to plaintiff-appellee as reforestation charges from 1947 to 1956 may be set off or applied to the payment of the sum of P4,802.37 as forest charges due and owing from appellant to appellee. It is appellant's contention that said sum of P9,127.50, not having been used in the reforestation of the area covered by its license, the same is refundable to it or may be applied in compensation of said sum of P4,802.37 due from it as forest charges.
1wph1.t

We find appellant's claim devoid of any merit. Section 1 of Republic Act No. 115, provides: SECTION 1. There shall be collected, in addition to the regular forest charges provided for under Section two hundred and sixty-four of Commonwealth Act Numbered Four Hundred Sixty-six, known as the National Internal Revenue Code, the amount of fifty centavos on each cubic meter of timber for the first and second groups and forty centavos for the third and fourth groups cut out and removed from any public forest for commercial purposes. The amount collected shall be expended by the Director of Forestry, with the approval of the Secretary of Agriculture and Natural Resources (commerce), for reforestation and afforestation of watersheds, denuded areas and cogon and open lands within forest reserves, communal forest, national parks, timber lands, sand dunes, and other public forest lands, which upon investigation, are found needing reforestation or afforestation, or needing to be under forest cover for the growing of economic trees for timber, tanning, oils, gums, and other minor forest products or medicinal plants, or for watersheds protection, or for prevention of erosion and floods and preparation of necessary plans and estimate of costs and for reconnaisance survey of public forest lands and for such other expenses as may be deemed necessary for the proper carrying out of the purposes of this Act. All revenues collected by virtue of, and pursuant to, the provisions of the preceding paragraph and from the sale of barks, medical plants and other products derived from plantations as herein provided shall constitute a fund to be known as Reforestation Fund, to be expended exclusively in carrying out the purposes provided for under this Act. All provincial or city treasurers and their deputies shall act as agents of the Director of Forestry for the collection of the revenues or incomes derived from the provisions of this Act. (Emphasis supplied.) Under this provision, it seems quite clear that the amount collected as reforestation charges from a timber licenses or concessionaire shall constitute a fund to be known as the Reforestation Fund,

and that the same shall be expended by the Director of Forestry, with the approval of the Secretary of Agriculture and Natural Resources for the reforestation or afforestation, among others, of denuded areas which, upon investigation, are found to be needing reforestation or afforestation. Note that there is nothing in the law which requires that the amount collected as reforestation charges should be used exclusively for the reforestation of the area covered by the license of a licensee or concessionaire, and that if not so used, the same should be refunded to him. Observe too, that the licensee's area may or may not be reforested at all, depending on whether the investigation thereof by the Director of Forestry shows that said area needs reforestation. The conclusion seems to be that the amount paid by a licensee as reforestation charges is in the nature of a tax which forms a part of the Reforestation Fund, payable by him irrespective of whether the area covered by his license is reforested or not. Said fund, as the law expressly provides, shall be expended in carrying out the purposes provided for thereunder, namely, the reforestation or afforestation, among others, of denuded areas needing reforestation or afforestation. Appellant maintains that the principle of a compensation in Article 1278 of the new Civil Code2 is applicable, such that the sum of P9,127.50 paid by it as reforestation charges may compensate its indebtedness to appellee in the sum of P4,802.37 as forest charges. But in the view we take of this case, appellant and appellee are not mutually creditors and debtors of each other. Consequently, the law on compensation is inapplicable. On this point, the trial court correctly observed: . Under Article 1278, NCC, compensation should take place when two persons in their own right are creditors and debtors of each other. With respect to the forest charges which the defendant Mambulao Lumber Company has paid to the government, they are in the coffers of the government as taxes collected, and the government does not owe anything, crystal clear that the Republic of the Philippines and the Mambulao Lumber Company are not creditors and debtors of each other, because compensation refers to mutual debts. .. And the weight of authority is to the effect that internal revenue taxes, such as the forest charges in question, can be the subject of set-off or compensation. A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be setoff under the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract or transaction sued on. ... (80 C.J.S. 73-74. ) . The general rule, based on grounds of public policy is well-settled that no set-off is admissible against demands for taxes levied for general or local governmental purposes. The reason on which the general rule is based, is that taxes are not in the nature of contracts between the party and party but grow out of a duty to, and are the positive acts of the government, to the making and enforcing of which, the personal consent of individual taxpayers is not required. ... If the taxpayer can properly refuse to pay his tax when called upon by the Collector, because he has a claim against the governmental body which is not included in the tax levy, it is plain that some legitimate and necessary expenditure must be curtailed. If the taxpayer's claim is disputed, the collection of the tax

must await and abide the result of a lawsuit, and meanwhile the financial affairs of the government will be thrown into great confusion. (47 Am. Jur. 766-767.) WHEREFORE, the judgment of the trial court appealed from is hereby affirmed in all respects, with costs against the defendant-appellant. So ordered. Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon and De Leon, JJ., concur. G.R. No. L-21551 September 30, 1969

FERNANDEZ HERMANOS, INC., petitioner, vs. COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents. ----------------------------G.R. No. L-21557 September 30, 1969

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. FERNANDEZ HERMANOS, INC., and COURT OF TAX APPEALS, respondents. ----------------------------G.R. No. L-24972 September 30, 1969

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. FERNANDEZ HERMANOS INC., and the COURT OF TAX APPEALS, respondents. ----------------------------G.R. No. L-24978 September 30, 1969

FERNANDEZ HERMANOS, INC., petitioner, vs. THE COMMISSIONER OF INTERNAL REVENUE, and HON. ROMAN A. UMALI, COURT OF TAX APPEALS,respondents. L-21551: Rafael Dinglasan for petitioner. Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong and Special Attorney Virgilio G. Saldajeno for respondent.

L-21557: Office of the Solicitor General for petitioner. Rafael Dinglasan for respondent Fernandez Hermanos, Inc. L-24972: Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete and Special Attorney Virgilio G. Saldajeno for petitioner. Rafael Dinglasan for respondent Fernandez Hermanos, Inc. L-24978: Rafael Dinglasan for petitioner. Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Antonio G. Ibarra and Special Attorney Virgilio G. Saldajeno for respondent.

TEEHANKEE, J.: These four appears involve two decisions of the Court of Tax Appeals determining the taxpayer's income tax liability for the years 1950 to 1954 and for the year 1957. Both the taxpayer and the Commissioner of Internal Revenue, as petitioner and respondent in the cases a quo respectively, appealed from the Tax Court's decisions, insofar as their respective contentions on particular tax items were therein resolved against them. Since the issues raised are interrelated, the Court resolves the four appeals in this joint decision. Cases L-21551 and L-21557 The taxpayer, Fernandez Hermanos, Inc., is a domestic corporation organized for the principal purpose of engaging in business as an "investment company" with main office at Manila. Upon verification of the taxpayer's income tax returns for the period in question, the Commissioner of Internal Revenue assessed against the taxpayer the sums of P13,414.00, P119,613.00, P11,698.00, P6,887.00 and P14,451.00 as alleged deficiency income taxes for the years 1950, 1951, 1952, 1953 and 1954, respectively. Said assessments were the result of alleged discrepancies found upon the examination and verification of the taxpayer's income tax returns for the said years, summarized by the Tax Court in its decision of June 10, 1963 in CTA Case No. 787, as follows: 1. Losses a. Losses in Mati Lumber Co. (1950) P 8,050.00 353,134.25

b. Losses in or bad debts of Palawan Manganese Mines, Inc. (1951) c. Losses in Balamban Coal Mines

1950 1951

8,989.76 27,732.66

d. Losses in Hacienda Dalupiri 1950 1951 1952 1953 1954 17,418.95 29,125.82 26,744.81 21,932.62 42,938.56

e. Losses in Hacienda Samal 1951 1952 8,380.25 7,621.73

2. Excessive depreciation of Houses 1950 1951 1952 1953 1954 P 8,180.40 8,768.11 18,002.16 13,655.25 29,314.98

3. Taxable increase in net worth 1950 1951 P 30,050.00 1,382.85 P 11,147.2611

4. Gain realized from sale of real property in 1950

The Tax Court sustained the Commissioner's disallowances of Item 1, sub-items (b) and (e) and Item 2 of the above summary, but overruled the Commissioner's disallowances of all the remaining items. It therefore modified the deficiency assessments accordingly, found the total deficiency income taxes due from the taxpayer for the years under review to amount to P123,436.00 instead of P166,063.00 as originally assessed by the Commissioner, and rendered the following judgment: RESUME 1950 P2,748.00

1951 1952 1953 1954 Total

108,724.00 3,600.00 2,501.00 5,863.00 P123,436.00

WHEREFORE, the decision appealed from is hereby modified, and petitioner is ordered to pay the sum of P123,436.00 within 30 days from the date this decision becomes final. If the said amount, or any part thereof, is not paid within said period, there shall be added to the unpaid amount as surcharge of 5%, plus interest as provided in Section 51 of the National Internal Revenue Code, as amended. With costs against petitioner. (Pp. 75, 76, Taxpayer's Brief as appellant) Both parties have appealed from the respective adverse rulings against them in the Tax Court's decision. Two main issues are raised by the parties: first, the correctness of the Tax Court's rulings with respect to the disputed items of disallowances enumerated in the Tax Court's summary reproduced above, and second, whether or not the government's right to collect the deficiency income taxes in question has already prescribed. On the first issue, we will discuss the disputed items of disallowances seriatim. 1. Re allowances/disallowances of losses. (a) Allowance of losses in Mati Lumber Co. (1950). The Commissioner of Internal Revenue questions the Tax Court's allowance of the taxpayer's writing off as worthless securities in its 1950 return the sum of P8,050.00 representing the cost of shares of stock of Mati Lumber Co. acquired by the taxpayer on January 1, 1948, on the ground that the worthlessness of said stock in the year 1950 had not been clearly established. The Commissioner contends that although the said Company was no longer in operation in 1950, it still had its sawmill and equipment which must be of considerable value. The Court, however, found that "the company ceased operations in 1949 when its Manager and owner, a certain Mr. Rocamora, left for Spain ,where he subsequently died. When the company eased to operate, it had no assets, in other words, completely insolvent. This information as to the insolvency of the Company reached (the taxpayer) in 1950," when it properly claimed the loss as a deduction in its 1950 tax return, pursuant to Section 30(d) (4) (b) or Section 30 (e) (3) of the National Internal Revenue Code. 2 We find no reason to disturb this finding of the Tax Court. There was adequate basis for the writing off of the stock as worthless securities. Assuming that the Company would later somehow realize some proceeds from its sawmill and equipment, which were still existing as claimed by the Commissioner, and that such proceeds would later be distributed to its stockholders such as the taxpayer, the amount so received by the taxpayer would then properly be reportable as income of the taxpayer in the year it is received.

(b) Disallowance of losses in or bad debts of Palawan Manganese Mines, Inc. (1951). The taxpayer appeals from the Tax Court's disallowance of its writing off in 1951 as a loss or bad debt the sum of P353,134.25, which it had advanced or loaned to Palawan Manganese Mines, Inc. The Tax Court's findings on this item follow: Sometime in 1945, Palawan Manganese Mines, Inc., the controlling stockholders of which are also the controlling stockholders of petitioner corporation, requested financial help from petitioner to enable it to resume it mining operations in Coron, Palawan. The request for financial assistance was readily and unanimously approved by the Board of Directors of petitioner, and thereafter a memorandum agreement was executed on August 12, 1945, embodying the terms and conditions under which the financial assistance was to be extended, the pertinent provisions of which are as follows: "WHEREAS, the FIRST PARTY, by virtue of its resolution adopted on August 10, 1945, has agreed to extend to the SECOND PARTY the requested financial help by way of accommodation advances and for this purpose has authorized its President, Mr. Ramon J. Fernandez to cause the release of funds to the SECOND PARTY. "WHEREAS, to compensate the FIRST PARTY for the advances that it has agreed to extend to the SECOND PARTY, the latter has agreed to pay to the former fifteen per centum (15%) of its net profits. "NOW THEREFORE, for and in consideration of the above premises, the parties hereto have agreed and covenanted that in consideration of the financial help to be extended by the FIRST PARTY to the SECOND PARTY to enable the latter to resume its mining operations in Coron, Palawan, the SECOND PARTY has agreed and undertaken as it hereby agrees and undertakes to pay to the FIRST PARTY fifteen per centum (15%) of its net profits." (Exh. H-2) Pursuant to the agreement mentioned above, petitioner gave to Palawan Manganese Mines, Inc. yearly advances starting from 1945, which advances amounted to P587,308.07 by the end of 1951. Despite these advances and the resumption of operations by Palawan Manganese Mines, Inc., it continued to suffer losses. By 1951, petitioner became convinced that those advances could no longer be recovered. While it continued to give advances, it decided to write off as worthless the sum of P353,134.25. This amount "was arrived at on the basis of the total of advances made from 1945 to 1949 in the sum of P438,981.39, from which amount the sum of P85,647.14 had to be deducted, the latter sum representing its pre-war assets. (t.s.n., pp. 136-139, Id)." (Page 4, Memorandum for Petitioner.) Petitioner decided to maintain the advances given in 1950 and 1951 in the hope that it might be able to recover the same, as in fact it continued to give advances up to 1952. From these facts, and as admitted by petitioner itself, Palawan Manganese Mines, Inc., was still in operation when the advances corresponding to the years 1945 to 1949 were written off the books of petitioner. Under the circumstances, was the sum of P353,134.25 properly claimed by petitioner as deduction in its income tax return for 1951, either as losses or bad debts? It will be noted that in giving advances to Palawan Manganese Mine Inc., petitioner did not expect to be repaid. It is true that some testimonial evidence was presented to show that there

was some agreement that the advances would be repaid, but no documentary evidence was presented to this effect. The memorandum agreement signed by the parties appears to be very clear that the consideration for the advances made by petitioner was 15% of the net profits of Palawan Manganese Mines, Inc. In other words, if there were no earnings or profits, there was no obligation to repay those advances. It has been held that the voluntary advances made without expectation of repayment do not result in deductible losses. 1955 PH Fed. Taxes, Par. 13, 329, citing W. F. Young, Inc. v. Comm., 120 F 2d. 159, 27 AFTR 395; George B. Markle, 17 TC. 1593. Is the said amount deductible as a bad debt? As already stated, petitioner gave advances to Palawan Manganese Mines, Inc., without expectation of repayment. Petitioner could not sue for recovery under the memorandum agreement because the obligation of Palawan Manganese Mines, Inc. was to pay petitioner 15% of its net profits, not the advances. No bad debt could arise where there is no valid and subsisting debt. Again, assuming that in this case there was a valid and subsisting debt and that the debtor was incapable of paying the debt in 1951, when petitioner wrote off the advances and deducted the amount in its return for said year, yet the debt is not deductible in 1951 as a worthless debt. It appears that the debtor was still in operation in 1951 and 1952, as petitioner continued to give advances in those years. It has been held that if the debtor corporation, although losing money or insolvent, was still operating at the end of the taxable year, the debt is not considered worthless and therefore not deductible. 3 The Tax Court's disallowance of the write-off was proper. The Solicitor General has rightly pointed out that the taxpayer has taken an "ambiguous position " and "has not definitely taken a stand on whether the amount involved is claimed as losses or as bad debts but insists that it is either a loss or a bad debt." 4 We sustain the government's position that the advances made by the taxpayer to its 100% subsidiary, Palawan Manganese Mines, Inc. amounting to P587,308,07 as of 1951 were investments and not loans. 5 The evidence on record shows that the board of directors of the two companies since August, 1945, were identical and that the only capital of Palawan Manganese Mines, Inc. is the amount of P100,000.00 entered in the taxpayer's balance sheet as its investment in its subsidiary company. 6 This fact explains the liberality with which the taxpayer made such large advances to the subsidiary, despite the latter's admittedly poor financial condition. The taxpayer's contention that its advances were loans to its subsidiary as against the Tax Court's finding that under their memorandum agreement, the taxpayer did not expect to be repaid, since if the subsidiary had no earnings, there was no obligation to repay those advances, becomes immaterial, in the light of our resolution of the question. The Tax Court correctly held that the subsidiary company was still in operation in 1951 and 1952 and the taxpayer continued to give it advances in those years, and, therefore, the alleged debt or investment could not properly be considered worthless and deductible in 1951, as claimed by the taxpayer. Furthermore, neither under Section 30 (d) (2) of our Tax Code providing for deduction by corporations of losses actually sustained and charged off during the taxable year nor under Section 30 (e) (1) thereof providing for deduction of bad debts actually ascertained to be worthless and charged off within the taxable year, can there be a partial writing off of a loss or bad debt, as was sought to be done here by the taxpayer. For such losses or bad debts must be ascertained to be so and written off during the

taxable year, are therefore deductible in full or not at all, in the absence of any express provision in the Tax Code authorizing partial deductions. The Tax Court held that the taxpayer's loss of its investment in its subsidiary could not be deducted for the year 1951, as the subsidiary was still in operation in 1951 and 1952. The taxpayer, on the other hand, claims that its advances were irretrievably lost because of the staggering losses suffered by its subsidiary in 1951 and that its advances after 1949 were "only limited to the purpose of salvaging whatever ore was already available, and for the purpose of paying the wages of the laborers who needed help." 7 The correctness of the Tax Court's ruling in sustaining the disallowance of the write-off in 1951 of the taxpayer's claimed losses is borne out by subsequent events shown in Cases L-24972 and L-24978 involving the taxpayer's 1957 income tax liability. (Infra, paragraph 6.) It will there be seen that by 1956, the obligation of the taxpayer's subsidiary to it had been reduced from P587,398.97 in 1951 to P442,885.23 in 1956, and that it was only on January 1, 1956 that the subsidiary decided to cease operations. 8 (c) Disallowance of losses in Balamban Coal Mines (1950 and 1951). The Court sustains the Tax Court's disallowance of the sums of P8,989.76 and P27,732.66 spent by the taxpayer for the operation of its Balamban coal mines in Cebu in 1950 and 1951, respectively, and claimed as losses in the taxpayer's returns for said years. The Tax Court correctly held that the losses "are deductible in 1952, when the mines were abandoned, and not in 1950 and 1951, when they were still in operation." 9 The taxpayer's claim that these expeditions should be allowed as losses for the corresponding years that they were incurred, because it made no sales of coal during said years, since the promised road or outlet through which the coal could be transported from the mines to the provincial road was not constructed, cannot be sustained. Some definite event must fix the time when the loss is sustained, and here it was the event of actual abandonment of the mines in 1952. The Tax Court held that the losses, totalling P36,722.42 were properly deductible in 1952, but the appealed judgment does not show that the taxpayer was credited therefor in the determination of its tax liability for said year. This additional deduction of P36,722.42 from the taxpayer's taxable income in 1952 would result in the elimination of the deficiency tax liability for said year in the sum of P3,600.00 as determined by the Tax Court in the appealed judgment. (d) and (e) Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal (19511952). The Tax Court overruled the Commissioner's disallowance of these items of losses thus: Petitioner deducted losses in the operation of its Hacienda Dalupiri the sums of P17,418.95 in 1950, P29,125.82 in 1951, P26,744.81 in 1952, P21,932.62 in 1953, and P42,938.56 in 1954. These deductions were disallowed by respondent on the ground that the farm was operated solely for pleasure or as a hobby and not for profit. This conclusion is based on the fact that the farm was operated continuously at a loss.
1awphl.nt

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

Section 100 of Revenue Regulations No. 2, otherwise known as the Income Tax Regulations, authorizes farmers to determine their gross income on the basis of inventories. Said regulations provide: "If gross income is ascertained by inventories, no deduction can be made for livestock or products lost during the year, whether purchased for resale, produced on the farm, as such losses will be reflected in the inventory by reducing the amount of livestock or products on hand at the close of the year." Evidently, petitioner determined its income or losses in the operation of said farm on the basis of inventories. We quote from the memorandum of counsel for petitioner: "The Taxpayer deducted from its income tax returns for the years from 1950 to 1954 inclusive, the corresponding yearly losses sustained in the operation of Hacienda Dalupiri, which losses represent the excess of its yearly expenditures over the receipts; that is, the losses represent the difference between the sales of livestock and the actual cash disbursements or expenses." (Pages 21-22, Memorandum for Petitioner.) As the Hacienda Dalupiri was operated by petitioner for business and since it sustained losses in its operation, which losses were determined by means of inventories authorized under Section 100 of Revenue Regulations No. 2, it was error for respondent to have disallowed the deduction of said losses. The same is true with respect to loss sustained in the operation of the Hacienda Samal for the years 1951 and 1952. 10 The Commissioner questions that the losses sustained by the taxpayer were properly based on the inventory method of accounting. He concedes, however, "that the regulations referred to does not specify how the inventories are to be made. The Tax Court, however, felt satisfied with the evidence presented by the taxpayer ... which merely consisted of an alleged physical count of the number of the livestock in Hacienda Dalupiri for the years involved." 11 The Tax Court was satisfied with the method adopted by the taxpayer as a farmer breeding livestock, reporting on the basis of receipts and disbursements. We find no Compelling reason to disturb its findings. 2. Disallowance of excessive depreciation of buildings (1950-1954). During the years 1950 to 1954, the taxpayer claimed a depreciation allowance for its buildings at the annual rate of 10%. The Commissioner claimed that the reasonable depreciation rate is only 3% per annum, and, hence, disallowed as excessive the amount claimed as depreciation allowance in excess of 3% annually. We sustain the Tax Court's finding that the taxpayer did not submit adequate proof of the correctness of the taxpayer's claim that the depreciable assets or buildings in question had a useful life only of 10 years so as to justify its 10% depreciation per annum claim, such finding being supported by the record. The taxpayer's contention that it has many zero or one-peso assets, 12 representing very old and fully depreciated assets serves but to support the Commissioner's position that a 10% annual depreciation rate was excessive. 3. Taxable increase in net worth (1950-1951). The Tax Court set aside the Commissioner's treatment as taxable income of certain increases in the taxpayer's net worth. It found that:

For the year 1950, respondent determined that petitioner had an increase in net worth in the sum of P30,050.00, and for the year 1951, the sum of P1,382.85. These amounts were treated by respondent as taxable income of petitioner for said years. It appears that petitioner had an account with the Manila Insurance Company, the records bearing on which were lost. When its records were reconstituted the amount of P349,800.00 was set up as its liability to the Manila Insurance Company. It was discovered later that the correct liability was only 319,750.00, or a difference of P30,050.00, so that the records were adjusted so as to show the correct liability. The correction or adjustment was made in 1950. Respondent contends that the reduction of petitioner's liability to Manila Insurance Company resulted in the increase of petitioner's net worth to the extent of P30,050.00 which is taxable. This is erroneous. The principle underlying the taxability of an increase in the net worth of a taxpayer rests on the theory that such an increase in net worth, if unreported and not explained by the taxpayer, comes from income derived from a taxable source. (See Perez v. Araneta, G.R. No. L-9193, May 29, 1957; Coll. vs. Reyes, G.R. Nos. L- 11534 & L-11558, Nov. 25, 1958.) In this case, the increase in the net worth of petitioner for 1950 to the extent of P30,050.00 was not the result of the receipt by it of taxable income. It was merely the outcome of the correction of an error in the entry in its books relating to its indebtedness to the Manila Insurance Company. The Income Tax Law imposes a tax on income; it does not tax any or every increase in net worth whether or not derived from income. Surely, the said sum of P30,050.00 was not income to petitioner, and it was error for respondent to assess a deficiency income tax on said amount. The same holds true in the case of the alleged increase in net worth of petitioner for the year 1951 in the sum of P1,382.85. It appears that certain items (all amounting to P1,382.85) remained in petitioner's books as outstanding liabilities of trade creditors. These accounts were discovered in 1951 as having been paid in prior years, so that the necessary adjustments were made to correct the errors. If there was an increase in net worth of the petitioner, the increase in net worth was not the result of receipt by petitioner of taxable income." 13 The Commissioner advances no valid grounds in his brief for contesting the Tax Court's findings. Certainly, these increases in the taxpayer's net worth were not taxable increases in net worth, as they were not the result of the receipt by it of unreported or unexplained taxable income, but were shown to be merely the result of the correction of errors in its entries in its books relating to its indebtednesses to certain creditors, which had been erroneously overstated or listed as outstanding when they had in fact been duly paid. The Tax Court's action must be affirmed. 4. Gain realized from sale of real property (1950). We likewise sustain as being in accordance with the evidence the Tax Court's reversal of the Commissioner's assessment on all alleged unreported gain in the sum of P11,147.26 in the sale of a certain real property of the taxpayer in 1950. As found by the Tax Court, the evidence shows that this property was acquired in 1926 for P11,852.74, and was sold in 1950 for P60,000.00, apparently, resulting in a gain of P48,147.26. 14 The taxpayer reported in its return a gain of P37,000.00, or a discrepancy of P11,147.26. 15 It was sufficiently proved from the taxpayer's books that after acquiring the property, the taxpayer had made improvements totalling P11,147.26, 16 accounting for the apparent discrepancy in the reported gain. In other words, this figure added to the original

acquisition cost of P11,852.74 results in a total cost of P23,000.00, and the gain derived from the sale of the property for P60,000.00 was correctly reported by the taxpayer at P37,000.00. On the second issue of prescription, the taxpayer's contention that the Commissioner's action to recover its tax liability should be deemed to have prescribed for failure on the part of the Commissioner to file a complaint for collection against it in an appropriate civil action, as contradistinguished from the answer filed by the Commissioner to its petition for review of the questioned assessments in the case a quo has long been rejected by this Court. This Court has consistently held that "a judicial action for the collection of a tax is begun by the filing of a complaint with the proper court of first instance, or where the assessment is appealed to the Court of Tax Appeals, by filing an answer to the taxpayer's petition for review wherein payment of the tax is prayed for." 17 This is but logical for where the taxpayer avails of the right to appeal the tax assessment to the Court of Tax Appeals, the said Court is vested with the authority to pronounce judgment as to the taxpayer's liability to the exclusion of any other court. In the present case, regardless of whether the assessments were made on February 24 and 27, 1956, as claimed by the Commissioner, or on December 27, 1955 as claimed by the taxpayer, the government's right to collect the taxes due has clearly not prescribed, as the taxpayer's appeal or petition for review was filed with the Tax Court on May 4, 1960, with the Commissioner filing on May 20, 1960 his Answer with a prayer for payment of the taxes due, long before the expiration of the five-year period to effect collection by judicial action counted from the date of assessment. Cases L-24972 and L-24978 These cases refer to the taxpayer's income tax liability for the year 1957. Upon examination of its corresponding income tax return, the Commissioner assessed it for deficiency income tax in the amount of P38,918.76, computed as follows: Net income per return Add: Unallowable deductions: (1) Net loss claimed on Ha. Dalupiri (2) Amortization of Contractual right claimed as an expense under Mines Operations Net income per investigation Tax due thereon P29,178.70 89,547.33 48,481.62 P167,297.65 38,818.00

Less: Amount already assessed 5,836.00 Balance P32,982.00 Add: 1/2% monthly interest from 6-20-59 to 6-20-62 5,936.76 TOTAL AMOUNT DUE AND COLLECTIBLE P38,918.76
18

The Tax Court overruled the Commissioner's disallowance of the taxpayer's losses in the operation of its Hacienda Dalupiri in the sum of P89,547.33 but sustained the disallowance of the sum of P48,481.62, which allegedly represented 1/5 of the cost of the "contractual right" over the mines of its subsidiary, Palawan Manganese Mines, Inc. which the taxpayer had acquired. It found the taxpayer liable for deficiency income tax for the year 1957 in the amount of P9,696.00, instead of P32,982.00 as originally assessed, and rendered the following judgment: WHEREFORE, the assessment appealed from is hereby modified. Petitioner is hereby ordered to pay to respondent the amount of P9,696.00 as deficiency income tax for the year 1957, plus the corresponding interest provided in Section 51 of the Revenue Code. If the deficiency tax is not paid in full within thirty (30) days from the date this decision becomes final and executory, petitioner shall pay a surcharge of five per cent (5%) of the unpaid amount, plus interest at the rate of one per cent (1%) a month, computed from the date this decision becomes final until paid, provided that the maximum amount that may be collected as interest shall not exceed the amount corresponding to a period of three (3) years. Without pronouncement as to costs. 19 Both parties again appealed from the respective adverse rulings against them in the Tax Court's decision. 5. Allowance of losses in Hacienda Dalupiri (1957). The Tax Court cited its previous decision overruling the Commissioner's disallowance of losses suffered by the taxpayer in the operation of its Hacienda Dalupiri, since it was convinced that the hacienda was operated for business and not for pleasure. And in this appeal, the Commissioner cites his arguments in his appellant's brief in Case No. L-21557. The Tax Court, in setting aside the Commissioner's principal objections, which were directed to the accounting method used by the taxpayer found that: It is true that petitioner followed the cash basis method of reporting income and expenses in the operation of the Hacienda Dalupiri and used the accrual method with respect to its mine operations. This method of accounting, otherwise known as the hybrid method, followed by petitioner is not without justification. ... A taxpayer may not, ordinarily, combine the cash and accrual bases. The 1954 Code provisions permit, however, the use of a hybrid method of accounting, combining a cash and accrual method, under circumstances and requirements to be set out in Regulations to be issued. Also, if a taxpayer is engaged in more than one trade or business he may use a different method of accounting for each trade or business. And a taxpayer may report income from a business on accrual basis and his personal income on the cash basis.' (See Mertens, Law of Federal Income Taxation, Zimet & Stanley Revision, Vol. 2, Sec. 12.08, p. 26.) 20 The Tax Court, having satisfied itself with the adequacy of the taxpayer's accounting method and procedure as properly reflecting the taxpayer's income or losses, and the Commissioner having failed to show the contrary, we reiterate our ruling [supra, paragraph 1 (d) and (e)] that we find no compelling reason to disturb its findings.

6. Disallowance of amortization of alleged "contractual rights." The reasons for sustaining this disallowance are thus given by the Tax Court: It appears that the Palawan Manganese Mines, Inc., during a special meeting of its Board of Directors on January 19, 1956, approved a resolution, the pertinent portions of which read as follows: "RESOLVED, as it is hereby resolved, that the corporation's current assets composed of ores, fuel, and oil, materials and supplies, spare parts and canteen supplies appearing in the inventory and balance sheet of the Corporation as of December 31, 1955, with an aggregate value of P97,636.98, contractual rights for the operation of various mining claims in Palawan with a value of P100,000.00, its title on various mining claims in Palawan with a value of P142,408.10 or a total value of P340,045.02 be, as they are hereby ceded and transferred to Fernandez Hermanos, Inc., as partial settlement of the indebtedness of the corporation to said Fernandez Hermanos Inc. in the amount of P442,895.23." (Exh. E, p. 17, CTA rec.) On March 29, 1956, petitioner's corporation accepted the above offer of transfer, thus: "WHEREAS, the Palawan Manganese Mines, Inc., due to its yearly substantial losses has decided to cease operation on January 1, 1956 and in order to satisfy at least a part of its indebtedness to the Corporation, it has proposed to transfer its current assets in the amount of NINETY SEVEN THOUSAND SIX HUNDRED THIRTY SIX PESOS & 98/100 (P97,636.98) as per its balance sheet as of December 31, 1955, its contractual rights valued at ONE HUNDRED THOUSAND PESOS (P100,000.00) and its title over various mining claims valued at ONE HUNDRED FORTY TWO THOUSAND FOUR HUNDRED EIGHT PESOS & 10/100 (P142,408.10) or a total evaluation of THREE HUNDRED FORTY THOUSAND FORTY FIVE PESOS & 08/100 (P340,045.08) which shall be applied in partial settlement of its obligation to the Corporation in the amount of FOUR HUNDRED FORTY TWO THOUSAND EIGHT HUNDRED EIGHTY FIVE PESOS & 23/100 (P442,885.23)," (Exh. E-1, p. 18, CTA rec.) Petitioner determined the cost of the mines at P242,408.10 by adding the value of the contractual rights (P100,000.00) and the value of its mining claims (P142,408.10). Respondent disallowed the deduction on the following grounds: (1) that the Palawan Manganese Mines, Inc. could not transfer P242,408.10 worth of assets to petitioner because the balance sheet of the said corporation for 1955 shows that it had only current as worth P97,636.96; and (2) that the alleged amortization of "contractual rights" is not allowed by the Revenue Code. The law in point is Section 30(g) (1) (B) of the Revenue Code, before its amendment by Republic Act No. 2698, which provided in part: "(g) Depletion of oil and gas wells and mines.:

"(1) In general. ... (B) in the case of mines, a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof, which has been mined and sold during the year for which the return and computation are made. The allowances shall be made under rules and regulations to be prescribed by the Secretary of Finance: Provided, That when the allowances shall equal the capital invested, ... no further allowance shall be made." Assuming, arguendo, that the Palawan Manganese Mines, Inc. had assets worth P242,408.10 which it actually transferred to the petitioner in 1956, the latter cannot just deduct one-fifth (1/5) of said amount from its gross income for the year 1957 because such deduction in the form of depletion charge was not sanctioned by Section 30(g) (1) (B) of the Revenue Code, as above-quoted. xxx xxx xxx

The sole basis of petitioner in claiming the amount of P48,481.62 as a deduction was the memorandum of its mining engineer (Exh. 1, pp. 31-32, CTA rec.), who stated that the ore reserves of the Busuange Mines (Mines transferred by the Palawan Manganese Mines, Inc. to the petitioner) would be exhausted in five (5) years, hence, the claim for P48,481.62 or one-fifth (1/5) of the alleged cost of the mines corresponding to the year 1957 and every year thereafter for a period of 5 years. The said memorandum merely showed the estimated ore reserves of the mines and it probable selling price. No evidence whatsoever was presented to show the produced mine and for how much they were sold during the year for which the return and computation were made. This is necessary in order to determine the amount of depletion that can be legally deducted from petitioner's gross income. The method employed by petitioner in making an outright deduction of 1/5 of the cost of the mines is not authorized under Section 30(g) (1) (B) of the Revenue Code. Respondent's disallowance of the alleged "contractual rights" amounting to P48,481.62 must therefore be sustained. 21 The taxpayer insists in this appeal that it could use as a method for depletion under the pertinent provision of the Tax Code its "capital investment," representing the alleged value of its contractual rights and titles to mining claims in the sum of P242,408.10 and thus deduct outright one-fifth (1/5) of this "capital investment" every year. regardless of whether it had actually mined the product and sold the products. The very authorities cited in its brief give the correct concept of depletion charges that they "allow for the exhaustion of the capital value of the deposits by production"; thus, "as the cost of the raw materials must be deducted from the gross income before the net income can be determined, so the estimated cost of the reserve used up is allowed." 22 The alleged "capital investment" method invoked by the taxpayer is not a method of depletion, but the Tax Code provision, prior to its amendment by Section 1, of Republic Act No. 2698, which took effect on June 18, 1960, expressly provided that "when the allowances shall equal the capital invested ... no further allowances shall be made;" in other words, the "capital investment" was but the limitation of the amount of depletion that could be claimed. The outright deduction by the taxpayer of 1/5 of the cost of the mines, as if it were a "straight line" rate of depreciation, was correctly held by the Tax Court not to be authorized by the Tax Code.

ACCORDINGLY, the judgment of the Court of Tax Appeals, subject of the appeals in Cases Nos. L-21551 and L-21557, as modified by the crediting of the losses of P36,722.42 disallowed in 1951 and 1952 to the taxpayer for the year 1953 as directed in paragraph 1 (c) of this decision, is hereby affirmed. The judgment of the Court of Tax Appeals appealed from in Cases Nos. L-24972 and L24978 is affirmed in toto. No costs. So ordered. Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Fernando, Capistrano and Barredo, JJ., concur.

[G.R. No. 109976. April 26, 2005]

PHILIPPINE NATIONAL OIL COMPANY, petitioner, vs. THE HON. COURT OF APPEALS, THE COMMISSIONER OF INTERNAL REVENUE and TIRSO SAVELLANO, respondents.

[G.R. No. 112800. April 26, 2005]

PHILIPPINE NATIONAL BANK, petitioner, vs. THE HON. COURT OF APPEALS, COURT OF TAX APPEALS, TIRSO B. SAVELLANO and COMMISSIONER OF INTERNAL REVENUE, respondents. DECISION
CHICO-NAZARIO, J.:

This is a consolidation of two Petitions for Review on Certiorari filed by the Philippine National Oil Company (PNOC) and the Philippine National Bank (PNB), assailing the decisions of the Court of Appeals in CA-G.R. SP No. 29583 and CA-G.R. SP No. 29526, respectively, which both affirmed the decision of the Court of Tax Appeals (CTA) in CTA Case No. 4249.
[1] [2] [3] [4] [5]

The Petitions before this Court originated from a sworn statement submitted by private respondent Tirso B. Savellano (Savellano) to the Bureau of Internal Revenue (BIR) on 24 June 1986. Through his sworn statement, private respondent Savellano informed the BIR that PNB had failed to withhold the 15% final tax on interest earnings and/or yields from the money placements of PNOC with the said bank, in violation of Presidential Decree (P.D.) No. 1931. P.D. No. 1931, which took effect on

11 June 1984, withdrew all tax exemptions of government-owned and controlled corporations. In a letter, dated 08 August 1986, the BIR requested PNOC to settle its liability for taxes on the interests earned by its money placements with PNB and which PNB did not withhold. PNOC wrote the BIR on 25 September 1986, and made an offer to compromise its tax liability, which it estimated to be in the sum of P304,419,396.83, excluding interest and surcharges, as of 31 July 1986. PNOC proposed to set-off its tax liability against a claim for tax refund/credit of the National Power Corporation (NAPOCOR), then pending with the BIR, in the amount ofP335,259,450.21. The amount of the claim for tax refund/credit was supposedly a receivable account of PNOC from NAPOCOR.
[6] [7]

On 08 October 1986, the BIR sent a demand letter to PNB, as withholding agent, for the payment of the final tax on the interest earnings and/or yields from PNOCs money placements with the bank, from 15 October 1984 to 15 October 1986, in the total amount ofP376,301,133.33. On the same date, the BIR also mailed a letter to PNOC informing it of the demand letter sent to PNB.
[8] [9]

PNOC, in another letter, dated 14 October 1986, reiterated its proposal to settle its tax liability through the set-off of the said tax liability against NAPOCORS pending claim for tax refund/credit. The BIR replied on 11 November 1986 that the proposal for set-off was premature since NAPOCORs claim was still under process. Once more, BIR requested PNOC to settle its tax liability in the total amount ofP385,961,580.82, consisting of P303,343,765.32 final tax, plus P82,617,815.50 interest computed until 15 November 1986.
[10] [11]

On 09 June 1987, PNOC made another offer to the BIR to settle its tax liability. This time, however, PNOC proposed a compromise by paying P91,003,129.89, representing 30% of the P303,343,766.29 basic tax, in accordance with the provisions of Executive Order (E.O.) No. 44.
[12]

Then BIR Commissioner Bienvenido A. Tan, in a letter, dated 22 June 1987, accepted the compromise. The BIR received a total tax payment on the interest earnings and/or yields from PNOCs money placements with PNB in the amount of P93,955,479.12, broken down as follows:
Previous payment made by PNB Add: Payment made by PNOC pursuant to the compromise agreement of June 22, 1987 Total tax payment P P 2,952,349.23 91,003,129.89

93,955,479.12[13]

Private respondent Savellano, through four installments, was paid the informers reward in the total amount of P14,093,321.89, representing 15% of the P93,955,479.12 tax collected by the BIR from PNOC and PNB. He received the last installment on 01 December 1987.
[14]

On 07 January 1988, private respondent Savellano, through his legal counsel, wrote the BIR to demand payment of the balance of his informers reward, computed as follows:
BIR tax assessment Final tax rate Informers reward due (BIR deficiency tax assessment x Final tax rate) Less: Payment received by private respondent Savellano Outstanding balance P 385,961,580.82 0.15 P 57,894,237.12

14,093,321.89

P 43,800,915.25[15]

BIR Commissioner Tan replied through a letter, dated 08 March 1988, that private respondent Savellano was already fully paid the informers reward equivalent to 15% of the amount of tax actually collected by the BIR pursuant to its compromise agreement with PNOC. BIR Commissioner Tan further explained that the compromise was in accordance with the provisions of E.O. No. 44, Revenue Memorandum Order (RMO) No. 39-86, and RMO No. 4-87.
[16]

Private respondent Savellano submitted another letter, dated 24 March 1988, to BIR Commissioner Tan, seeking reconsideration of his decision to compromise the tax liability of PNOC. In the same letter, private respondent Savellano questioned the legality of the compromise agreement entered into by the BIR and PNOC and claimed that the tax liability should have been collected in full.
[17]

On 08 April 1988, while the aforesaid Motion for Reconsideration was still pending with the BIR, private respondent Savellano filed a Petition for Review ad cautelam with the CTA, docketed as CTA Case No. 4249. He claimed therein that BIR Commissioner Tan acted with grave abuse of discretion and/or whimsical exercise of jurisdiction in entering into a compromise agreement that resulted in a gross and unconscionable diminution of his reward. Private respondent Savellano prayed for the enforcement and collection of the total tax assessment against taxpayer PNOC and/or withholding agent PNB; and the payment to him by the BIR Commissioner of the 15% informers reward on the total tax collected. He would
[18]

later amend his Petition to implead PNOC and PNB as necessary and indispensable parties since they were parties to the compromise agreement.
[19]

In his Answer filed with the CTA, BIR Commissioner Tan asserted that the Petition stated no cause of action against him, and that private respondent Savellano was already paid the informers reward due him. Alleging that the Petition was baseless and malicious, BIR Commissioner Tan filed a counterclaim for exemplary damages against private respondent Savellano.
[20]

PNOC and PNB filed separate Motions to Dismiss, both arguing that the CTA lacked jurisdiction to decide the case. In its Resolution, dated 28 November 1988, the CTA denied the Motions to Dismiss since the question of lack of jurisdiction and/or cause of action do not appear to be indubitable.
[21] [22]

After their Motions to Dismiss were denied by the CTA, PNOC and PNB filed their respective Answers to the amended Petition. PNOC averred, among other things, that (1) it had no privity with private respondent Savellano; (2) the BIR Commissioners discretionary act in entering into the compromise agreement had legal basis under E.O. No. 44 and RMO No. 39-86 and RMO No. 4-87; and (3) the CTA had no jurisdiction to resolve the case against it. On the other hand, PNB asserted that (1) the CTA lacked jurisdiction over the case; and (2) the BIR Commissioners decision to accept the compromise was discretionary on his part and, therefore, cannot be reviewed or interfered with by the courts. PNOC and PNB later filed their amended Answer invoking an opinion of the Commission on Audit (COA) disallowing the payment by the BIR of informers reward to private respondent Savellano.
[23] [24] [25]

The CTA, thereafter, ordered the parties to submit their evidence, to be followed by their respective Memoranda.
[26] [27]

On 23 November 1990, private respondent Savellano, filed a Manifestation with Motion for Suspension of Proceedings, claiming that his pending Motion for Reconsideration with the BIR Commissioner may soon be resolved. Both PNOC and PNB opposed the said Motion.
[28] [29]

Subsequently, the new BIR Commissioner, Jose U. Ong, in a letter to PNB, dated 16 January 1991, demanded that PNB pay deficiency withholding tax on the interest earnings and/or yields from PNOCs money placements, in the amount of P294,958,450.73, computed as follows:
Withholding tax, plus interest under the letter of demand dated November 11, 1986 Less: Amount paid under E.O. No. 44 Amount still due and collectible P P P 385,961,580.82 91,003,129.89 294,958,450.73[30]

This BIR letter was received by PNB on 06 February 1991, and was protested by it through a letter, dated 11 April 1991. The BIR denied PNBs protest on the ground that it was filed out of time and, thus, the assessment had already become final.
[31] [32] [33]

Private respondent Savellano, on 22 February 1991, filed an Omnibus Motion moving to withdraw his previous Motion for Suspension of Proceeding since BIR Commissioner Ong had finally resolved his Motion for Reconsideration, and submitting by way of supplemental offer of evidence (1) the letter of BIR Commissioner Ong, dated 13 February 1991, informing private respondent Savellano of the action on his Motion for Reconsideration; and (2) the demand-letter of BIR Commissioner Ong to PNB, dated 16 January 1991.
[34]

Despite the oppositions of PNOC and PNB, the CTA, in a Resolution, dated 02 May 1991, resolved to allow private respondent Savellano to withdraw his previous Motion for Suspension of Proceeding and to admit the supplementary evidence being offered by the same party.
[35]

In its Order, dated 03 June 1991, the CTA considered the case submitted for decision as of the following day, 04 June 1991.
[36]

On 11 June 1991, PNB appealed to the Department of Justice (DOJ) the BIR assessment, dated 16 January 1991, for deficiency withholding tax in the sum of P294,958,450.73. PNB alleged that its appeal to the DOJ was sanctioned under P.D. No. 242, which provided for the administrative settlement of disputes between government offices, agencies, and instrumentalities, including government-owned and controlled corporations.
[37]

Three days later, on 14 June 1991, PNB filed a Motion to Suspend Proceedings before the CTA since it had a pending appeal before the DOJ. On 04 July 1991, PNB filed with the CTA a Motion for Reconsideration of its Order, dated 03 June 1991, submitting the case for decision as of 04 June 1991, and prayed that the CTA hold its resolution of the case in view of PNBs appeal pending before the DOJ.
[38] [39]

On 17 July 1991, PNB filed a Motion to Suspend the Collection of Tax by the BIR. It alleged that despite its request for reconsideration of the deficiency withholding tax assessment, dated 16 January 1991, BIR Commissioner Ong sent another letter, dated 23 April 1991, demanding payment of the P294,958,450.73 deficiency withholding tax on the interest earnings and/or yields from PNOCs money placements. The same letter informed PNB that this was the BIR Commissioners final decision on the matter and that the BIR Commissioner was set to issue a warrant of distraint and/or levy against PNBs deposits with the Central Bank of the

Philippines. PNB further alleged that the levy and distraint of PNBs deposits, unless restrained by the CTA, would cause great and irreparable prejudice not only to PNB, a government-owned and controlled corporation, but also to the Government itself.
[40]

Pursuant to the Order of the CTA, during the hearing on 19 July 1991, the parties submitted their respective Memoranda on PNBs Motion to Suspend Proceedings.
[41] [42]

On 20 September 1991, private respondent Savellano filed another Omnibus Motion calling the attention of the CTA to the fact that the BIR already issued, on 12 August 1991, a warrant of garnishment addressed to the Central Bank Governor and against PNB. In compliance with the said warrant, the Central Bank issued, on 23 August 1991, a debit advice against the demand deposit account of PNB with the Central Bank for the amount of P294,958,450.73, with a corresponding transfer of the same amount to the demand deposit-in-trust of BIR with the Central Bank. Since the assessment had already been enforced, PNBs Motion to Suspend Proceedings became moot and academic. Private respondent Savellano, thus, moved for the denial of PNBs Motion to Suspend Proceedings and for an order requiring BIR to deposit with the CTA the amount of P44,243,767.00 as his informers reward, representing 15% of the deficiency withholding tax collected.
[43]

Both PNOC and PNB opposed private respondent Savellanos Omnibus Motion, dated 20 September 1991, arguing that the DOJ already ordered the suspension of the collection of the tax deficiency. There was therefore no basis for private respondent Savellanos Motion as the same was premised on the erroneous assumption that the tax deficiency had been collected. When the DOJ denied the BIR Commissioners Motion to Dismiss and required him to file his answer, the DOJ assumed jurisdiction over PNBs appeal, and the CTA should first suspend its proceedings to give the DOJ the opportunity to decide the validity and propriety of the tax assessment against PNB.
[44]

The CTA, on 28 May 1992, rendered its decision, wherein it upheld its jurisdiction and disposed of the case as follows: WHEREFORE, judgment is rendered declaring the COMPROMISE AGREEMENT between the Bureau of Internal Revenue, on the one hand, and the Philippine National Oil Company and Philippine National Bank, on the other, as WITHOUT FORCE AND EFFECT; The Commissioner of Internal Revenue is hereby ordered to ENFORCE the ASSESSMENT of January 16, 1991 against Philippine National Bank which has

become final and unappealable by collecting from Philippine National Bank the deficiency withholding tax, plus interest totalling (sic) P294,958,450.73; Petitioner may be paid, upon collection of the deficiency withholding tax, the balance of his entitlement to informers reward based on fifteen percent (15%) of the deficiency withholding total tax collected in this case or P44,243.767.00 subject to existing rules and regulations governing payment of reward to informers.
[45]

In a Resolution, dated 16 November 1992, the CTA denied the Motions for Reconsideration filed by PNOC and PNB since they substantially raised the same issues in their previous pleadings and which had already been passed upon and resolved adversely against them.
[46]

PNOC and PNB filed separate appeals with the Court of Appeals seeking the reversal of the CTA decision in CTA Case No. 4249, dated 28 May 1992, and the CTA Resolution in the same case, dated 16 November 1992. PNOCs appeal was docketed as CA-G.R. SP No. 29583, while PNBs appeal was CA-G.R. SP No. 29526. In both cases, the Court of Appeals affirmed the decision of the CTA. In the meantime, the Central Bank again issued on 02 September 1992 a debit advice against the demand deposit account of PNB with the Central Bank for the amount of P294,958,450.73, and on 15 September 1992, credited the same amount to the demand deposit account of the Treasurer of the Republic of the Philippines. On 04 November 1992, the Treasurer of the Republic issued a journal voucher transferringP294,958,450.73 to the account of the BIR. PNB, in turn, debited P294,958,450.73 from the deposit account of PNOC with PNB.
[47] [48] [49] [50]

PNOC and PNB then filed separate Petitions for Review on Certiorari with this Court, praying that the decisions of the Court of Appeals in CA-G.R. SP No. 29583 and CA-G.R. SP No. 29526, respectively, both affirming the decision of the CTA in CTA Case No. 4249, be reversed and set aside. These two Petitions were consolidated since they involved identical parties and factual background, and the resolution of related, if not exactly, the same issues. In its Petition for Review, PNOC alleged the following errors committed by the Court of Appeals in CA-G.R. SP No. 29583:
1. The Court of Appeals erred in holding that the deficiency taxes of PNOC could not be the subject of a compromise under Executive Order No. 44; and 2. The Court of Appeals erred in holding that Savellano is entitled to additional informers reward.[51]

PNB, in its own Petition for Review, assailed the decision of the Court of Appeals in CA-G.R. SP No. 29526, assigning the following errors:
1. Respondent Court erred in not finding that the Court of Tax Appeals lacks jurisdiction on the controversy involving BIR and PNB (both government instrumentalities) regarding the new assessment of BIR against PNB; 2. The respondent Court erred in not finding that the Court of Tax Appeals has no jurisdiction to question the compromise agreement entered into by the Commissioner of Internal Revenue; and 3. The respondent Court erred in not ruling that the Commissioner of Internal Revenue cannot unilaterally annul tax compromises validly entered into by his predecessor.[52]

The decisions of the Court of Appeals in CA-GR SP No. 29583 and CA-G.R. SP No. 29526, affirmed the decision of the CTA in CTA Case No. 4249. The resolution, therefore, of the assigned errors in the Court of Appeals decisions essentially requires a review of the CTA decision itself. In consolidating the present Petitions, this Court finds that PNOC and PNB are basically questioning the (1) Jurisdiction of the CTA in CTA Case No. 4249; (2) Declaration by the CTA that the compromise agreement was without force and effect; (3) Finding of the CTA that the deficiency withholding tax assessment against PNB had already become final and unappealable and, thus, enforceable; and (4) Order of the CTA directing payment of additional informers reward to private respondent Savellano.
I

Jurisdiction of the CTA A. The demand letter, dated 16 January 1991 did not constitute a new assessment against PNB. The main argument of PNB in assailing the jurisdiction of the CTA in CTA Case No. 4249 is that the BIR demand letter, dated 16 January 1991, should be considered as a new assessment against PNB. As a new assessment, it gave rise to a new dispute and controversy solely between the BIR and PNB that should be administratively settled or adjudicated, as provided in P.D. No. 242.
[53]

This argument is without merit. The issuance by the BIR of the demand letter, dated 16 January 1991, was merely a development in the continuing effort of the BIR to collect the tax assessed against PNOC and PNB way back in 1986. BIRs first letter, dated 08 August 1986, was addressed to PNOC, requesting it to settle its tax liability. The BIR subsequently sent another letter, dated 08 October 1986, to PNB, as withholding agent, demanding payment of the tax it had failed to

withhold on the interest earnings and/or yields from PNOCs money placements. PNOC wrote the BIR three succeeding letters offering to compromise its tax liability; PNB, on the other hand, did not act on the demand letter it received, dated 08 October 1986. The BIR and PNOC eventually reached a compromise agreement on 22 June 1987. Private respondent Savellano questioned the validity of the compromise agreement because the reduced amount of tax collected from PNOC, by virtue of the compromise agreement, also proportionately reduced his informers reward. Private respondent Savellano then requested the BIR Commissioner to review and reconsider the compromise agreement. Acting on the request of private respondent Savellano, the new BIR Commissioner declared the compromise agreement to be without basis and issued the demand letter, dated 16 January 1991, against PNB, as the withholding agent for PNOC. It is clear from the foregoing that the BIR demand letter, dated 16 January 1991, could not stand alone as a new assessment. It should always be considered in the factual context summarized above. In fact, the demand letter, dated 16 January 1991, actually referred to the withholding tax assessment first issued in 1986 and its eventual settlement through a compromise agreement. In addition, the computation of the deficiency withholding tax was based on the figures from the 1986 assessments against PNOC and PNB, and BIR no longer conducted a new audit or investigation of either PNOC and PNB before it issued the demand letter on 16 January 1991. These constant references to past events and circumstances demonstrate that the demand letter, dated 16 January 1991, was not a new assessment, but rather, the latest action taken by the BIR to collect on the tax assessments issued against PNOC and PNB in 1986. PNB argues that the demand letter, dated 16 January 1991, introduced a new controversy. We see it differently as the said demand letter presented the resolution by BIR Commissioner Ong of the previous controversy involving the compromise of the 1986 tax assessments. BIR Commissioner Ong explicitly declared therein that the compromise agreement was without legal basis, and requested PNB, as the withholding agent, to pay the amount of withholding tax still due. B. The CTA correctly retained jurisdiction over CTA Case No. 4249 by virtue of Republic Act No. 1125. Having established that the BIR demand letter, dated 16 January 1991, did not constitute a new assessment, then, there could be no basis for PNBs claim that any dispute arising from the new assessment should only be between BIR and PNB.

Still proceeding from the argument that there was a new dispute between PNB and BIR, PNB sought the suspension of the proceedings in CTA Case No. 4249, after it contested the deficiency withholding tax assessment against it and the demand for payment thereof before the DOJ, pursuant to P.D. No. 242. The CTA, however, correctly sustained its jurisdiction and continued the proceedings in CTA Case No. 4249; and, in effect, rejected DOJs claim of jurisdiction to administratively settle or adjudicate BIRs assessment against PNB. The CTA assumed jurisdiction over the Petition for Review filed by private respondent Savellano based on the following provision of Rep. Act No. 1125, the Act creating the Court of Tax Appeals: SECTION 7. Jurisdiction. The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by appeal, as herein provided (1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code or other law or part of law administered by the Bureau of Internal Revenue; . . . (Underscoring ours.)

In his Petition before the CTA, private respondent Savellano requested a review of the decisions of then BIR Commissioner Tan to enter into a compromise agreement with PNOC and to reject his claim for additional informers reward. He submitted before the CTA questions of law involving the interpretation and application of (1) E.O. No. 44, and its implementing rules and regulations, which authorized the BIR Commissioner to compromise delinquent accounts and disputed assessments pending as of 31 December 1985; and (2) Section 316(1) of the National Internal Revenue Code of 1977 (NIRC of 1977), as amended, which granted to the informer a reward equivalent to 15% of the actual amount recovered or collected by the BIR. These should undoubtedly be considered as matters arising from the NIRC and other laws being administered by the BIR, thus, appealable to the CTA under Section 7(1) of Rep. Act No. 1125.
[54]

PNB, however, insists on the jurisdiction of the DOJ over its appeal of the deficiency withholding tax assessment by virtue of P.D. No. 242. Provisions on jurisdiction of P.D. No. 242 read: SECTION 1. Provisions of law to the contrary notwithstanding, all disputes, claims and controversies solely between or among the departments, bureaus, offices, agencies, and instrumentalities of the National Government, including governmentowned or controlled corporations, but excluding constitutional offices or agencies, arising from the interpretation and application of statutes, contracts or agreements,

shall henceforth be administratively settled or adjudicated as provided hereinafter; Provided, That this shall not apply to cases already pending in court at the time of the effectivity of this decree. SECTION 2. In all cases involving only questions of law, the same shall be submitted to and settled or adjudicated by the Secretary of Justice, as Attorney General and ex officio legal adviser of all government-owned or controlled corporations and entities, in consonance with Section 83 of the Revised Administrative Code. His ruling or determination of the question in each case shall be conclusive and binding upon all the parties concerned. SECTION 3. Cases involving mixed questions of law and of fact or only factual issues shall be submitted to and settled or adjudicated by:
(a) The Solicitor General, with respect to disputes or claims controversies between or among the departments, bureaus, offices and other agencies of the National Government; (b) The Government Corporate Counsel, with respect to disputes or claims or controversies between or among government-owned or controlled corporations or entities being served by the Office of the Government Corporate Counsel; and (c) The Secretary of Justice, with respect to all other disputes or claims or controversies which do not fall under the categories mentioned in paragraphs (a) and (b).

The PNB and DOJ are of the same position that P.D. No. 242, the more recent law, repealed Section 7(1) of Rep. Act No. 1125, based on the pronouncement of this Court in Development Bank of the Philippines v. Court of Appeals, et al., [56] quoted below:
[55]

The Court expresses its entire agreement with the conclusion of the Court of Appeals and the basic premises thereof that there is an "irreconcilable repugnancybetween Section 7(2) of R.A. No. 1125 and P.D. No. 242," and hence, that the later enactment (P.D. No. 242), being the latest expression of the legislative will, should prevail over the earlier. In the said case, it was expressly declared that P.D. No. 242 repealed Section 7(2) of Rep. Act No. 1125, which provides for the exclusive appellate jurisdiction of the CTA over decisions of the Commissioner of Customs. PNB contends that P.D. No. 242 should be deemed to have likewise repealed Section 7(1) of Rep. Act No. 1125, which provide for the exclusive appellate jurisdiction of the CTA over decisions of the BIR Commissioner.
[57]

After re-examining the provisions on jurisdiction of Rep. Act No. 1125 and P.D. No. 242, this Court finds itself in disagreement with the pronouncement made in Development Bank of the Philippines v. Court of Appeals, et al., and refers to the earlier case of Lichauco & Company, Inc. v. Apostol, et al., for the guidelines in determining the relation between the two statutes in question, to wit:
[58] [59]

The cases relating to the subject of repeal by implication all proceed on the assumption that if the act of later date clearly reveals an intention on the part of the law making power to abrogate the prior law, this intention must be given effect; but there must always be a sufficient revelation of this intention, and it has become an unbending rule of statutory construction that the intention to repeal a former law will not be imputed to the Legislature when it appears that the two statutes, or provisions, with reference to which the question arises bear to each other the relation of general to special. (Underscoring ours.) When there appears to be an inconsistency or conflict between two statutes and one of the statutes is a general law, while the other is a special law, then repeal by implication is not the primary rule applicable. The following rule should principally govern instead: Specific legislation upon a particular subject is not affected by a general law upon the same subject unless it clearly appears that the provisions of the two laws are so repugnant that the legislators must have intended by the later to modify or repeal the earlier legislation. The special act and the general law must stand together, the one as the law of the particular subject and the other as the general law of the land. (Ex Parte United States, 226 U. S., 420; 57 L. ed., 281; Ex Parte Crow Dog, 109 U. S., 556; 27 L. ed., 1030; Partee vs. St. Louis & S. F. R. Co., 204 Fed. Rep., 970.) Where there are two acts or provisions, one of which is special and particular, and certainly includes the matter in question, and the other general, which, if standing alone, would include the same matter and thus conflict with the special act or provision, the special must be taken as intended to constitute an exception to the general act or provision, especially when such general and special acts or provisions are contemporaneous, as the Legislature is not to be presumed to have intended a conflict. (Crane v. Reeder and Reeder, 22 Mich., 322, 334; University of Utah vs. Richards, 77 Am. St. Rep., 928.)
[60]

It has, thus, become an established rule of statutory construction that between a general law and a special law, the special law prevails Generalia specialibus non derogant.
[61]

Sustained herein is the contention of private respondent Savellano that P.D. No. 242 is a general law that deals with administrative settlement or adjudication of disputes, claims and controversies between or among government offices, agencies and instrumentalities, including government-owned or controlled corporations. Its coverage is broad and sweeping, encompassing all disputes, claims and controversies. It has been incorporated as Chapter 14, Book IV of E.O. No. 292, otherwise known as the Revised Administrative Code of the Philippines. On the other hand, Rep. Act No. 1125 is a special law dealing with a specific subject matter the creation of the CTA, which shall exercise exclusive appellate jurisdiction over the tax disputes and controversies enumerated therein.
[62] [63]

Following the rule on statutory construction involving a general and a special law previously discussed, then P.D. No. 242 should not affect Rep. Act No. 1125. Rep. Act No. 1125, specifically Section 7 thereof on the jurisdiction of the CTA, constitutes an exception to P.D. No. 242. Disputes, claims and controversies, falling under Section 7 of Rep. Act No. 1125, even though solely among government offices, agencies, and instrumentalities, including government-owned and controlled corporations, remain in the exclusive appellate jurisdiction of the CTA. Such a construction resolves the alleged inconsistency or conflict between the two statutes, and the fact that P.D. No. 242 is the more recent law is no longer significant. Even if, for the sake of argument, that P.D. No. 242 should prevail over Rep. Act No. 1125, the present dispute would still not be covered by P.D. No. 242. Section 1 of P.D. No. 242 explicitly provides that only disputes, claims and controversies solely between or among departments, bureaus, offices, agencies, and instrumentalities of the National Government, including constitutional offices or agencies, as well as government-owned and controlled corporations, shall be administratively settled or adjudicated. While the BIR is obviously a government bureau, and both PNOC and PNB are government-owned and controlled corporations, respondent Savellano is a private citizen. His standing in the controversy could not be lightly brushed aside. It was private respondent Savellano who gave the BIR the information that resulted in the investigation of PNOC and PNB; who requested the BIR Commissioner to reconsider the compromise agreement in question; and who initiated CTA Case No. 4249 by filing a Petition for Review. In Bay View Hotel, Inc. v. Manila Hotel Workers Union-PTGWO, et al.,[64] this Court upheld the jurisdiction of the Court of Industrial Relations over the ordinary courts and justified its decision in the following manner:

We are unprepared to break away from the teaching in the cases just adverted to. To draw a tenuous jurisdictional line is to undermine stability in labor litigations. A piecemeal resort to one court and another gives rise to multiplicity of suits. To force the employees to shuttle from one court to another to secure full redress is a situation gravely prejudicial. The time to be lost, effort wasted, anxiety augmented, additional expense incurred these are considerations which weigh heavily against split jurisdiction. Indeed, it is more in keeping with orderly administration of justice that all the causes of action here be cognizable and heard by only one court: the Court of Industrial Relations. The same justification is used in the present case to reject DOJs jurisdiction over the BIR and PNB, to the exclusion of the other parties. The rights of all four parties in CTA Case No. 4249, namely the BIR, as the tax collector; PNOC, the taxpayer; PNB, the withholding agent; and private respondent Savellano, the informer claiming his reward; arose from the same factual background and were so closely interrelated, that a pronouncement as to one would definitely have repercussions on the others. The ends of justice were best served when the CTA continued to exercise its jurisdiction over CTA Case No. 4249. The CTA, which had assumed jurisdiction over all the parties to the controversy, could render a comprehensive resolution of the issues raised and grant complete relief to the parties.
II

Validity of the Compromise Agreement A. PNOC could not apply for a compromise under E.O. No. 44 because its tax liability was not a delinquent account or a disputed assessment as of 31 December 1985. PNOC and PNB, on different grounds, dispute the decision of the CTA in CTA Case No. 4249 declaring the compromise agreement between BIR and PNOC without force and effect. PNOC asserts that the compromise agreement was in accordance with E.O. No. 44, and its implementing rules and regulations, and should be binding upon the parties thereto. E.O. No. 44 granted the BIR Commissioner or his duly authorized representatives the power to compromise any disputed assessment or delinquent account pending as of 31 December 1985, upon the payment of an amount equal to 30% of the basic tax assessed; in which case, the corresponding interests and penalties shall be condoned. E.O. No. 44 took effect on 04 September 1986 and remained effective until 31 March 1987.

The disputed assessments or delinquent accounts that the BIR Commissioner could compromise under E.O. No. 44 are defined under Revenue Regulation (RR) No. 17-86, as follows: a) Delinquent account Refers to the amount of tax due on or before December 31, 1985 from a taxpayer who failed to pay the same within the time prescribed for its payment arising from (1) a self assessed tax, whether or not a tax return was filed, or (2) a deficiency assessment issued by the BIR which has become final and executory. Where no return was filed, the taxpayer shall be considered delinquent as of the time the tax on such return was due, and in availing of the compromise, a tax return shall be filed as a basis for computing the amount of compromise to be paid. b) Disputed assessment refers to a tax assessment disputed or protested on or before December 31, 1985 under any of the following categories: 1) if the same is administratively protested within thirty (30) days from the date the taxpayer received the assessment, or 2.) if the decision of the BIR on the taxpayers administrative protest is appealed by the taxpayer before an appropriate court. PNOCs tax liability could not be considered a delinquent account since (1) it was not self-assessed, because the BIR conducted an investigation and assessment of PNOC and PNB after obtaining information regarding the non-withholding of tax from private respondent Savellano; and (2) the demand letter, issued against it on 08 August 1986, could not have been a deficiency assessment that became final and executory by 31 December 1985. The dissenting opinion contends, however, that the tax liability of PNOC constitutes a self-assessed tax, and is, therefore, a delinquent account as of 31 December 1985, qualifying for a compromise under E.O. No. 44. It anchors its argument on the declaration made by this Court in Tupaz v. Ulep, that internal revenue taxes are self-assessing.
[65]

It is not denied herein that the self-assessing system governs Philippine internal revenue taxes. The dissenting opinion itself defines self-assessed tax as, a tax that the taxpayer himself assesses or computes and pays to the taxing authority. Clearly, such a system imposes upon the taxpayer the obligation to conduct an

assessment of himself so he could determine and declare the amount to be used as tax basis, any deductions therefrom, and finally, the tax due. E.O. No. 44 covers self-assessed tax, whether or not a tax return was filed. The phrase whether or not a tax return was filed only refers to the compliance by the taxpayer with the obligation to file a return on the dates specified by law, but it does not do away with the requisite that the tax must be self-assessed in order for the taxpayer to avail of the compromise. The second paragraph of Section 2(a) of RR No. 17-86 expressly commands, and still imposes upon the taxpayer, who is availing of the compromise under E.O. No. 44, and who has not previously filed any return, the duty to conduct self-assessment by filing a tax return that would be used as the basis for computing the amount of compromise to be paid. Section 2(a)(1) of RR No. 17-86 thus involves a situation wherein a taxpayer, after conducting a self-assessment, discovers or becomes aware that he had failed to pay a tax due on or before 31 December 1985, regardless of whether he had previously filed a return to reflect such tax; voluntarily comes forward and admits to the BIR his tax liability; and applies for a compromise thereof. In case the taxpayer has not previously filed any return, he must fill out such a return reflecting therein his own declaration of the taxable amount and computation of the tax due. The compromise payment shall be computed based on the amount reflected in the tax return submitted by the taxpayer himself. Neither PNOC nor PNB, the taxpayer and the withholding agent, respectively, conducted self-assessment in this case. There is no showing that in the absence of the tax assessment issued by the BIR against them, that PNOC and/or PNB would have voluntarily admitted their tax liabilities, already amounting to P385,961,580.82, as of 15 November 1986, and would have offered to compromise the same. In fact, both PNOC and PNB were conspicuously silent about their tax liabilities until they were assessed thereon. Any attempt by PNOC and PNB to assess and declare by themselves their tax liabilities had already been overtaken by the BIRs conduct of its audit and investigation and subsequent issuance of the assessments, dated 08 August 1986 and 08 October 1986, against PNOC and PNB, respectively. The said tax assessments, uncontested and undisputed, presented the results of the BIR audit and investigation and the computation of the total amount of tax liabilities of PNOC and PNB. They should be controlling in this case, and should not be so easily and conveniently ignored and set aside. It would be a contradiction to claim that the tax liabilities of PNOC and PNB are self-assessed and, at the same time, BIR-assessed;

when it is clear and simple that it had been the BIR that conducted the assessment and determined the tax liabilities of PNOC and PNB. That the BIR-assessed tax liability should be differentiated from a self-assessed one, is supported by the provisions of RR No. 17-86 on the basis for computing the amount of compromise payment. Note that where tax liabilities are self-assessed, the compromise payment shall be computed based on the tax return filed by the taxpayer. On the other hand, where the BIR already issued an assessment, the compromise payment shall be computed based on the tax due on the assessment notice.
[66] [67]

For instances where the BIR had already issued an assessment against the taxpayer, the tax liability could still be compromised under E.O. No. 44 only if: (1) the assessment had been final and executory on or before 31 December 1985 and, therefore, considered a delinquent account as of said date; or (2) the assessment had been disputed or protested on or before 31 December 1985.
[68] [69]

RMO No. 39-86, which provides the guidelines for the implementation of E.O. No. 44, does mention different types of assessments that may be compromised under said statute (i.e., jeopardy assessments, arbitrary assessments, and tax assessments of doubtful validity). RMO No. 39-86 may not have expressly stated any qualification for these particular types of assessments; nonetheless, E.O. No. 44 specifically refers only to assessments that were delinquent or disputed as of 31 December 1985. E.O. No. 44 and all BIR issuances to implement said statute should be interpreted so that they are harmonized and consistent with each other. Accordingly, this Court finds that the different types of assessments mentioned in RMO No. 39-86 would still have to qualify as delinquent accounts or disputed assessments as of 31 Dcember 1985, so that they could be compromised under E.O. No. 44. The BIR had first written to PNOC on 08 August 1986, demanding payment of the income tax on the interest earnings and/or yields from PNOCs money placements with PNB from 15 October 1984 to 15 October 1986. This demand letter could be regarded as the first assessment notice against PNOC. Such an assessment, issued only on 08 August 1986, could not have been final and executory as of 31 December 1985 so as to constitute a delinquent account. Neither was the assessment against PNOC an assessment that could have been disputed or protested on or before 31 December 1985, having been issued on a later date.

Given that PNOCs tax liability did not constitute a delinquent account or a disputed assessment as of 31 December 1985, then it could not be compromised under E.O. No. 44. The assessment against PNOC, instead, was more appropriately covered by Revenue Memorandum Circular (RMC) No. 31-86. RMC No. 31-86 clarifies the scope of availment of the tax amnesty under E.O. No. 41 and compromise payments on delinquent accounts and disputed assessments under E.O. No. 44. The third paragraph of RMC No. 31-86 reads:
[70]

[T]axpayers against whom assessments had been issued from January 1 to August 21, 1986 may settle their tax liabilities by way of compromise under Section 246 of the Tax Code as amended by paying 30% of the basic assessment excluding surcharge, interest, penalties and other increments thereto. The above-quoted paragraph supports the position that only assessments that were disputed or that were final and executory by 31 December 1985 could be the subject of a compromise under E.O. No. 44. Assessments issued between 01 January to 21 August 1986 could still be compromised by payment of 30% of the basic tax assessed, not anymore pursuant to E.O. No. 44, but pursuant to Section 246 of the NIRC of 1977, as amended. Section 246 of the NIRC of 1977, as amended, granted the BIR Commissioner the authority to compromise the payment of any internal revenue tax under the following circumstances: (1) there exists a reasonable doubt as to the validity of the claim against the taxpayer; or (2) the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.
[71]

There are substantial differences in circumstances under which compromises may be granted under Section 246 of the NIRC of 1977, as amended, and E.O. No. 44. Although PNOC and PNB have extensively argued their entitlement to compromise under E.O. No. 44, neither of them has alleged, much less, has presented any evidence to prove that it may compromise its tax liability under Section 246 of the NIRC of 1977, as amended. B. The tax liability of PNB as withholding agent also did not qualify for compromise under E.O. No. 44. Before proceeding any further, this Court reconsiders the conclusion made by BIR Commissioner Ong in his demand letter, dated 16 January 1991, that the compromise settlement executed between the BIR and PNOC was without legal basis because withholding taxes were not actually taxes that could be compromised,

but a penalty for PNBs failure to withhold and for which it was made personally liable. E.O. No. 44 covers disputed or delinquency cases where the person assessed was himself the taxpayer rather than a mere agent. RMO No. 39-86 expressly allows a withholding agent, who failed to withhold the required tax because of neglect, ignorance of the law, or his belief that he was not required by law to withhold tax, to apply for a compromise settlement of his withholding tax liability under E.O. No. 44. A withholding agent, in such a situation, may compromise the withholding tax assessment against him precisely because he is being held directly accountable for the tax.
[72] [73]

RMO No. 39-86 distinguishes between the withholding agent in the foregoing situation from the withholding agent who withheld the tax but failed to remit the amount to the Government. A withholding agent in the latter situation is the one disqualified from applying for a compromise settlement because he is being made accountable as an agent, who held funds in trust for the Government.
[74]

Both situations, however, involve withholding agents. The right to compromise under these provisions should have been claimed by PNB, the withholding agent for PNOC. The BIR held PNB personally accountable for its failure to withhold the tax on the interest earnings and/or yields from PNOCs money placements with PNB. The BIR sent a demand letter, dated 08 October 1986, addressed directly to PNB, for payment of the withholding tax assessed against it, but PNB failed to take any action on the said demand letter. Yet, all the offers to compromise the withholding tax assessment came from PNOC and PNOC did not claim that it made the offers to compromise on behalf of PNB. Moreover, the general requirement of E.O. No. 44 still applies to withholding agents that the withholding tax liability must either be a delinquent account or a disputed assessment as of 31 December 1985 to qualify for compromise settlement. The demand letter against PNB, which also served as its assessment notice, had been issued on 08 October 1986 or two months later than PNOCs. PNBs withholding tax liability could not be considered a delinquent account or a disputed assessment, as defined under RR No. 17-86, for the same reasons that PNOCs tax liability did not constitute as such. The tax liability of PNB, therefore, was also not eligible for compromise settlement under E.O. No. 44. C. Even assuming arguendo that PNOC and/or PNB qualified under E.O. No. 44, their application for compromise was filed beyond the deadline.

Despite already ruling that the tax liabilities of PNOC and PNB could not be compromised under E.O. No. 44, this Court still deems it necessary to discuss the finding of the CTA that the compromise agreement had been filed beyond the effectivity of E.O. No. 44, since the CTA made a declaration in relation thereto that paragraph 2 of RMO No. 39-86 was null and void for unduly extending the effectivity of E.O. No. 44. Paragraph 2 of RMO No. 39-86 provides that: 2. Period for availment. Filing of application for compromise settlement under the said law shall be effective only until March 31, 1987. Applications filed on or before this date shall be valid even if the payment or payments of the compromise amount shall be made after the said date, subject, however, to the provisions of Executive Order No. 44 and its implementing Revenue Regulations No. 17-86. It is well-settled in this jurisdiction that administrative authorities are vested with the power to make rules and regulations because it is impracticable for the lawmakers to provide general regulations for various and varying details of management. The interpretation given to a rule or regulation by those charged with its execution is entitled to the greatest weight by the court construing such rule or regulation, and such interpretation will be followed unless it appears to be clearly unreasonable or arbitrary.
[75]

RMO No. 39-86, particularly paragraph 2 thereof, does not appear to be unreasonable or arbitrary. It does not unduly expand the coverage of E.O. No. 44 by merely providing that applications for compromise filed until 31 March 1987 are still valid, even if payment of the compromised amount is made on a later date. It cannot be expected that the compromise allowed under E.O. No. 44 can be automatically granted upon mere filing of the application by the taxpayer. Irrefutably, the applications would still have to be processed by the BIR to determine compliance with the requirements of E.O. No. 44. As it is uncontested that a taxpayer could still file an application for compromise on 31 March 1987, the very last day of effectivity of E.O. No. 44, it would be unreasonable to expect the BIR to process and approve the taxpayers application within the same date considering the volume of applications filed and pending approval, plus the other matters the BIR personnel would also have to attend to. Thus, RMO No. 39-86 merely assures the taxpayers that their applications would still be processed and could be approved on a later date. Payment, of course, shall be made by the taxpayer only after his application had been approved and the compromised amount had been determined.

Given that paragraph 2 of RMO No. 39-86 is valid, the next question that needs to be addressed is whether PNOC had been able to submit an application for compromise on or before 31 March 1987 in compliance thereof. Although the compromise agreement was executed only on 22 June 1987, PNOC is claiming that it had already written a letter to the BIR, as early as 25 September 1986, offering to compromise its tax liability, and that the said letter should be considered as PNOCs application for compromise settlement. A perusal of PNOCs letter, dated 25 September 1986, would reveal, however, that the terms of its proposed compromise did not conform to those authorized by E.O. No. 44. PNOC did not offer to pay outright 30% of the basic tax assessed against it as required by E.O. No. 44; and instead, made the following offer: (2) That PNOC be permitted to set-off its foregoing mentioned tax liability of P304,419,396.83 against the tax refund/credit claims of the National Power Corporation (NPC) for specific taxes on fuel oil sold to NPC totaling P335,259,450.21, which tax refunds/credits are actually receivable accounts of our Company from NPC.
[76]

PNOC reiterated the offer in its letter to the BIR, dated 14 October 1986. The BIR, in its letters to PNOC, dated 8 October 1986 and 11 November 1986, consistently denied PNOCs offer because the claim for tax refund/credit of NAPOCOR was still under process, so that the offer to set-off such claim against PNOCs tax liability was premature.
[77] [78] [79]

Furthermore, E.O. No. 44 does not contemplate compromise payment by set-off of a tax liability against a claim for tax refund/credit. Compromise under E.O. No. 44 may be availed of only in the following circumstances: SEC. 3. Who may avail. Any person, natural or juridical, may settle thru a compromise any delinquent account or disputed assessment which has been due as of December 31, 1985, by paying an amount equal to thirty percent (30%) of the basic tax assessed. SEC. 6. Mode of Payment. Upon acceptance of the proposed compromise, the amount offered as compromise in complete settlement of the delinquent account shall be paid immediately in cash or managers certified check.

Deferred or staggered payments of compromise amounts over P50,000 may be considered on a case to case basis in accordance with the extant regulations of the Bureau upon approval of the Commissioner of Internal Revenue, his Deputy or Assistant as delineated in their respective jurisdictions. If the Compromise amount is not paid as required herein, the compromise agreement is automatically nullified and the delinquent account reverted to the original amount plus the statutory increments, which shall be collected thru the summary and/or judicial processes provided by law. E.O. No. 44 is not for the benefit of the taxpayer alone, who can extinguish his tax liability by paying the compromise amount equivalent to 30% of the basic tax. It also benefits the Government by making collection of delinquent accounts and disputed assessments simpler, easier, and faster. Payment of the compromise amount must be made immediately, in cash or in managers check. Although deferred or staggered payments may be allowed on a case-to-case basis, the mode of payment remains unchanged, and must still be made either in cash or in managers check. PNOCs offer to set-off was obviously made to avoid actual cash-out by the company. The offer defeated the purpose of E.O. No. 44 because it would not only delay collection, but more importantly, it would not guarantee collection. First of all, BIRs collection was contingent on whether the claim for tax refund/credit of NAPOCOR would be subsequently granted. Second, collection could not be made immediately and would have to wait until the resolution of the claim for tax refund/credit of NAPOCOR. Third, there is no proof, other than the bare allegation of PNOC, that NAPOCORs claim for tax refund/credit is an account receivable of PNOC. A possible dispute between NAPOCOR and PNOC as to the proceeds of the tax refund/credit would only delay collection by the BIR even further. It was only in its letter, dated 09 June 1987, that PNOC actually offered to compromise its tax liability in accordance with the terms and circumstances prescribed by E.O. No. 44 and its implementing rules and regulations, by stating that: Consequently, we reiterate our previous request for compromise under E.O. No. 44, and convey our preparedness to settle the subject tax assessment liability by payment of the compromise amount of P91,003,129.89, representing thirty percent (30%) of the basic tax assessment of P303,343,766.29, in accordance with E.O. No. 44 and its implementing BIR Revenue Memorandum Order No. 39-86.
[80]

PNOC claimed in the same letter that it had previously requested for a compromise under the terms of E.O. No. 44, but this Court could not find evidence of such previous request. There are stark and substantial differences in the terms of PNOCs offer to compromise in its earlier letters, dated 25 September 1986 and 14 October 1986 (set-off of the entire amount of its tax liability against the claim for tax refund/credit of NAPOCOR), to those in its letter, dated 09 June 1987 (payment of the compromise amount representing 30% of the basic tax assessed against it), making it difficult for this Court to accept that the letter of 09 June 1987 merely reiterated PNOCs offer to compromise in its earlier letters. This Court likewise cannot give credence to PNOCs allegation that beginning 25 September 1986, the date of its first letter to the BIR, there were continuing negotiations between PNOC and BIR that culminated in the compromise agreement on 22 June 1987. Aside from the exchange of letters recounted in the preceding paragraphs, both PNOC and PNB failed to present any other proof of the supposed negotiations. After the BIR denied the second offer of PNOC to set-off its tax liability against the claim for tax refund/credit of NAPOCOR in a letter, dated 11 November 1986, there is no other evidence of subsequent communication between PNOC and the BIR. It was only after almost seven months, or on 09 June 1987, that PNOC again wrote a letter to the BIR, this time offering to pay the compromise amount of 30% of the basic tax assessed against. This letter was already filed beyond 31 March 1987, after the lapse of the effectivity of E.O. No. 44 and the deadline for filing applications for compromise under the said statute. Evidence of meetings between PNOC and the BIR, or any other form of communication, wherein the parties presented their offer and counter-offer to the other, would have been very valuable in explaining and supporting BIR Commissioner Tans decision to accept PNOCs third offer to compromise after denying the previous two. The absence of such evidence herein negates PNOCs claim of actual negotiations with the BIR. Therefore, even assuming arguendo that the tax liabilities of PNOC and PNB qualify as delinquent accounts or disputed assessments as of 31 December 1985, the application for compromise filed by PNOC on 09 June 1987, and accepted by then BIR Commissioner Tan on 22 June 1987, was still filed way beyond 31 March 1987, the expiration date of the effectivity of E.O. No. 44 and the deadline for filing of applications for compromise under RMO No. 39-86.

D. The BIR Commissioners discretionary authority to enter into a compromise agreement is not absolute and the CTA may inquire into allegations of abuse thereof. The foregoing discussion supports the CTAs conclusion that the compromise agreement between PNOC and the BIR was indeed without legal basis. Despite this lack of legal support for the execution of the said compromise agreement, PNB argues that the CTA still had no jurisdiction to review and set aside the compromise agreement. It contends that the authority to compromise is purely discretionary on the BIR Commissioner and the courts cannot interfere with his exercise thereof. It is generally true that purely administrative and discretionary functions may not be interfered with by the courts; but when the exercise of such functions by the administrative officer is tainted by a failure to abide by the command of the law, then it is incumbent on the courts to set matters right, with this Court having the last say on the matter.
[81]

The manner by which BIR Commissioner Tan exercised his discretionary power to enter into a compromise was brought under the scrutiny of the CTA amidst allegations of grave abuse of discretion and/or whimsical exercise of jurisdiction. The discretionary power of the BIR Commissioner to enter into compromises cannot be superior over the power of judicial review by the courts.
[82]

The discretionary authority to compromise granted to the BIR Commissioner is never meant to be absolute, uncontrolled and unrestrained. No such unlimited power may be validly granted to any officer of the government, except perhaps in cases of national emergency. In this case, the BIR Commissioners authority to compromise, whether under E.O. No. 44 or Section 246 of the NIRC of 1977, as amended, can only be exercised under certain circumstances specifically identified in said statutes. The BIR Commissioner would have to exercise his discretion within the parameters set by the law, and in case he abuses his discretion, the CTA may correct such abuse if the matter is appealed to them.
[83] [84]

Petitioners PNOC and PNB both contend that BIR Commissioner Tan merely exercised his authority to enter into a compromise specially granted by E.O. No. 44. Since this Court has already made a determination that the compromise agreement did not qualify under E.O. No. 44, BIR Commissioner Tans decision to agree to the compromise should have been reviewed in the light of the general authority granted to the BIR Commissioner to compromise taxes under Section 246 of the NIRC of 1977, as amended. Then again, petitioners PNOC and PNB failed to allege, much less present evidence, that BIR Commissioner Tan acted in accordance with Section 246

of the NIRC of 1977, as amended, when he entered into the compromise agreement with PNOC. E. The CTA may set aside a compromise agreement that is contrary to law and public policy. PNB also asserts that the CTA had no jurisdiction to set aside a compromise agreement entered into in good faith. It relies on the decision of this Court in Republic v. Sandiganbayan that a compromise agreement cannot be set aside merely because it is too one-sided. A compromise agreement should be respected by the courts as the res judicata between the parties thereto.
[85]

This Court, though, finds that there are substantial differences in the factual background of Republic v. Sandiganbayan and the present case. The compromise agreement executed between the Presidential Commission on Good Government (PCGG) and Roberto S. Benedicto inRepublic v. Sandiganbayan was judicially approved by the Sandiganbayan. The Sandiganbayan had ample opportunity to examine the validity of the compromise agreement since two years elapsed from the time the agreement was executed up to the time it was judicially approved. This Court even stated in the said case that, We are not dealing with the usual compromise agreement perfunctorily submitted to a court and approved as a matter of course. The PCGG-Benedicto agreement was thoroughly and, at times, disputatiously discussed before the respondent court. There could be no deception or misrepresentation foisted on either the PCGG or the Sandiganbayan.
[86]

In addition, the new PCGG Chairman originally prayed for the re-negotiation of the compromise agreement so that it could be more just, fair, and equitable, an action considered by this Court as an implied admission that the agreement was not contrary to law, public policy or morals nor was there any circumstance which had vitiated consent.
[87]

The above-mentioned circumstances strongly supported the validity of the compromise agreement in Republic v. Sandiganbayan, which was why this Court refused to set it aside. Unfortunately for the petitioners in the present case, the same cannot be said herein. The Court of Appeals, in upholding the jurisdiction of the CTA to set aside the compromise agreement, ruled that: We are unable to accept petitioners submissions. Its formulation of the issues on CIR and CTAs lack of jurisdiction to disturb a compromise agreement presupposes a

compromise agreement validly entered into by the CIR and not, when as in this case, it was indubitably shown that the supposed compromise agreement is without legal support. In case of arbitrary or capricious exercise by the Commissioner or if the proceedings were fatally defective, the compromise can be attacked and reversed through the judicial process (Meralco Securities Corporation v. Savellano, 117 SCRA 805, 812 [1982]; Sarah E. Ramsay, et. al. v. U.S. 21 Ct. C1 443, affd 120 U.S. 214, 30 L. Ed. 582; Tyson v. U.S., 39 F. Supp. 135 cited in page 18 of decision) .
[88]

Although the general rule is that compromises are to be favored, and that compromises entered into in good faith cannot be set aside, this rule is not without qualification. A court may still reject a compromise or settlement when it is repugnant to law, morals, good customs, public order, or public policy.
[89] [90]

The compromise agreement between the BIR and PNOC was contrary to law having been entered into by BIR Commissioner Tan in excess or in abuse of the authority granted to him by legislation. E.O. No. 44 and the NIRC of 1977, as amended, had identified the situations wherein the BIR Commissioner may compromise tax liabilities, and none of these situations existed in this case. The compromise, moreover, was contrary to public policy. The primary duty of the BIR is to collect taxes, since taxes are the lifeblood of the Government and their prompt and certain availability are imperious needs. In the present case, however, BIR Commissioner Tan, by entering into the compromise agreement that was bereft of any legal basis, would have caused the Government to lose almost P300 million in tax revenues and would have deprived the Government of much needed monetary resources.
[91]

Allegations of good faith and previous execution of the terms of the compromise agreement on the part of PNOC would not be enough for this Court to disregard the demands of law and public policy. Compromise may be the favored method to settle disputes, but when it involves taxes, it may be subject to closer scrutiny by the courts. A compromise agreement involving taxes would affect not just the taxpayer and the BIR, but also the whole nation, the ultimate beneficiary of the tax revenues collected. F. The Government cannot be estopped from collecting taxes by the mistake, negligence, or omission of its agents. The new BIR Commissioner, Commissioner Ong, had acted well within his powers when he set aside the compromise agreement, dated 22 June 1987, after finding that the said compromise agreement was without legal basis. When he took over from his predecessor, there was still a pending motion for reconsideration of

the said compromise agreement, filed by private respondent Savellano on 24 March 1988. To resolve the said motion, he reviewed the compromise agreement and, thereafter, came upon the conclusion that it did not comply with E.O. No. 44 and its implementing rules and regulations. It had been declared by this Court in Hilado v. Collector of Internal Revenue, et al., that an administrative officer, such as the BIR Commissioner, may revoke, repeal or abrogate the acts or previous rulings of his predecessor in office. The construction of a statute by those administering it is not binding on their successors if, thereafter, the latter becomes satisfied that a different construction should be given.
[92]

It is evident in this case that the new BIR Commissioner, Commissioner Ong, construed E.O. No. 44 and its implementing rules and regulations differently from that of his predecessor, former Commissioner Tan, which led to Commissioner Ongs revocation of the BIR approval of the compromise agreement, dated 22 June 1987. Such a revocation was only proper considering that the former BIR Commissioners decision to approve the said compromise agreement was based on the erroneous construction of the law (i.e., E.O. No. 44 and its implementing rules and regulations) and should not give rise to any vested right on PNOC.
[93]

Furthermore, approval of the compromise agreement and acceptance of the compromise payment by his predecessor cannot estop BIR Commissioner Ong from setting aside the compromise agreement, dated 22 June 1987, for lack of legal basis; and from demanding payment of the deficiency withholding tax from PNB. As a general rule, the Government cannot be estopped from collecting taxes by the mistake, negligence, or omission of its agents because:
[94]

. . . Upon taxation depends the Government ability to serve the people for whose benefit taxes are collected. To safeguard such interest, neglect or omission of government officials entrusted with the collection of taxes should not be allowed to bring harm or detriment to the people, in the same manner as private persons may be made to suffer individually on account of his own negligence, the presumption being that they take good care of their personal affairs. This should not hold true to government officials with respect to matters not of their own personal concern. This is the philosophy behind the government's exception, as a general rule, from the operation of the principle of estoppel. (Republic vs. Caballero, L-27437, September 30, 1977, 79 SCRA 177; Manila Lodge No. 761, Benevolent and Protective Order of the Elks, Inc. vs. Court of Appeals, L-41001, September 30, 1976, 73 SCRA 162; Sy vs. Central Bank of the Philippines, L-41480, April 30, 1976, 70 SCRA 571; Balmaceda vs. Corominas & Co., Inc., 66 SCRA 553; Auyong Hian vs. Court of Tax Appeals, 59 SCRA

110; Republic vs. Philippine Rabbit Bus Lines, Inc., 66 SCRA 553; Republic vs. Philippine Long Distance Telephone Company, L-18841, January 27, 1969, 26 SCRA 620; Zamora vs. Court of Tax Appeals, L-23272, November 26, 1970, 36 SCRA 77; E. Rodriguez, Inc. vs. Collector of Internal Revenue, L-23041, July 31, 1969, 28 SCRA 119).
[95]

III

Finality of the Tax Assessment A. The issue on whether the BIR complied with the notice requirements under RR No. 12-85 is raised for the first time on appeal and should not be given due course. PNB, in another effort to block the collection of the deficiency withholding tax, this time raises doubts as to the validity of the deficiency withholding tax assessment issued against it on 16 January 1991. It submits that the BIR failed to comply with the notice requirements set forth in RR No. 12-85.
[96]

Whether or not the BIR complied with the notice requirements of RR No. 12-85 is a new issue raised by PNB only before this Court. Such a question has not been ventilated before the lower courts. For an appellate tribunal to consider a legal question, it should have been raised in the court below. If raised earlier, the matter would have been seriously delved into by the CTA and the Court of Appeals.
[97] [98]

B. The assessment against PNB had become final and unappealable, and therefore, enforceable. The CTA and the Court of Appeals declared as final and unappealable, and thus, enforceable, the assessment against PNB, dated 16 January 1991, since PNB failed to protest said assessment within the 30-day prescribed period. This Court, though, finds that the significant BIR assessment, as far as this case is concerned, should be the one issued by the BIR against PNB on 08 October 1986. The BIR issued on 08 October 1986 an assessment against PNB for its withholding tax liability on the interest earnings and/or yields from PNOCs money placements with the bank. It had 30 days from receipt to protest the BIRs assessment. PNB, however, did not take any action as to the said assessment so that upon the lapse of the period to protest, the withholding tax assessment against it, dated 8 October 1986, became final and unappealable, and could no longer be disputed. The courts may therefore order the enforcement of this assessment.
[99] [100]

It is the enforcement of this BIR assessment against PNB, dated 08 October 1986, that is in issue in the instant case. If the compromise agreement is valid, it would effectively bar the BIR from enforcing the assessment and collecting the

assessed tax; on the other hand, if the compromise agreement is void, then the courts can order the BIR to enforce the assessment and collect the assessed tax. As has been previously discussed by this Court, the BIR demand letter, dated 16 January 1991, is not a new assessment against PNB. It only demanded from PNB the payment of the balance of the withholding tax assessed against it on 08 October 1986. The same demand letter also has no substantial effect or impact on the resolution of the present case. It is already unnecessary and superfluous, having been issued by the BIR when CTA Case No. 4249 was already pending before the CTA. At best, the demand letter, dated 16 January 1991, constitute a useful reference for the courts in computing the balance of PNBs tax liability, after applying as partial payment thereon the amount previously received by the BIR from PNOC pursuant to the compromise agreement.
IV

Prescription A. The defense of prescription was never raised by petitioners PNOC and PNB, and should be considered waived. The dissenting opinion takes the position that the right of the BIR to assess and collect income tax on the interest earnings and/or yields from PNOCs money placements with PNB, particularly for taxable year 1985, had already prescribed, based on Section 268 of the NIRC of 1977, as amended. Section 268 of the NIRC of 1977, as amended, provides a three-year period of limitation for the assessment and collection of internal revenue taxes, which begins to run after the last day prescribed for filing of the return.
[101]

The dissenting opinion points out that more than four years have elapsed from 25 January 1986 (the last day prescribed by law for PNB to file its withholding tax return for the fourth quarter of 1985) to 16 January 1991 (the date when the alleged final assessment of PNBs tax liability was issued). The issue of prescription, however, was brought up only in the dissenting opinion and was never raised by PNOC and PNB in the proceedings before the BIR nor in any of their pleadings submitted to the CTA and the Court of Appeals. Section 1, Rule 9 of the Rules of Civil Procedure lays down the rule on defenses and objections not pleaded, and reads: SECTION 1. Defenses and objections not pleaded. Defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived.

However, when it appears from the pleadings or the evidence on record that the court has no jurisdiction over the subject matter, that there is another action pending between the parties for the same cause, or that the action is barred by prior judgment or by the statute of limitations, the court shall dismiss the claim. The general rule enunciated in the above-quoted provision governs the present case, that is, the defense of prescription, not pleaded in a motion to dismiss or in the answer, is deemed waived. The exception in same provision cannot be applied herein because the pleadings and the evidence on record do not sufficiently show that the action is barred by prescription. It has been consistently held in earlier tax cases that the defense of prescription of the period for the assessment and collection of tax liabilities shall be deemed waived when such defense was not properly pleaded and the facts alleged and evidences submitted by the parties were not sufficient to support a finding by this Court on the matter. In Querol v. Collector of Internal Revenue, this Court pronounced that prescription, being a matter of defense, imposes the burden on the taxpayer to prove that the full period of the limitation has expired; and this requires him to positively establish the date when the period started running and when the same was fully accomplished.
[102] [103]

In making its conclusion that the assessment and collection in this case had prescribed, the dissenting opinion took liberties to assume the following facts even in the absence of allegations and evidences to the effect that: (1) PNB filed returns for its withholding tax obligations for taxable year 1985; (2) PNB reported in the said returns the interest earnings of PNOCs money placements with the bank; and (3) that the returns were filed on or before the prescribed date, which was 25 January 1986. It is not safe to adopt the first and second assumptions in this case considering that Section 269 of the NIRC of 1977, as amended, provides for a different period of limitation for assessment and collection of taxes in case of false or fraudulent return or for failure to file a return. In such cases, the BIR is given 10 years after discovery of the falsity, fraud, or omission within which to make an assessment.
[104]

It is also not safe to accept the third assumption since there can be a possibility that PNB filed the withholding tax return later than the prescribed date, in which case, following the dictates of Section 268 of the NIRC of 1977, as amended, the three-year prescriptive period shall be counted from the date the return was actually filed.
[105]

PNBs withholding tax returns for taxable year 1985, duly received by the BIR, would have been the best evidence to prove actual filing, the date of filing and the contents thereof. These facts are relevant in determining which prescriptive period should apply, and when such prescriptive period should begin to run and when it had lapsed. Yet, the pleadings did not refer to any return, and no return was made part of the records of the present case. This Court could not make a proper ruling on the matter of prescription on the mere basis of assumptions; such an issue should have been properly raised, argued, and supported by evidences submitted by the parties themselves before the BIR and the courts below. B. Granting that this Court can take cognizance of the defense of prescription, this Court finds that the assessment of the withholding tax liability against PNOC and collection of the tax assessed were done within the prescriptive period. Assuming, for the sake of argument, that this Court can give due course to the defense of prescription, it finds that the assessment against PNB for its withholding tax liability for taxable year 1985 and the collection of the tax assessed therein were accomplished within the prescribed periods for assessment and collection under the NIRC of 1977, as amended. If this Court adopts the assumption made by the dissenting opinion that PNB filed its withholding tax return for the last quarter of 1985 on 25 January 1986, then the BIR had until 24 January 1989 to assess PNB. The original assessment against PNB was issued as early as 08 October 1986, well-within the three-year prescriptive period for making the assessment as prescribed by the following provisions of the NIRC of 1977, as amended: SEC. 268. Period of limitation upon assessment and collection. Except as provided in the succeeding section, internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period SEC. 269. Exceptions as to period of limitation of assessment and collection of taxes.

(c) Any internal revenue tax which has been assessed within the period of limitation above-prescribed may be collected by distraint or levy or by a proceeding in court within three years following the assessment of the tax. Sections 268 and 269(c) of the NIRC of 1977, as amended, should be read in conjunction with one another. Section 268 requires that assessment be made within three years from the last day prescribed by law for the filing of the return. Section 269(c), on the other hand, provides that when an assessment is issued within the prescribed period provided in Section 268, the BIR has three years, counted from the date of the assessment, to collect the tax assessed either by distraint, levy or court action. Therefore, when an assessment is timely issued in accordance with Section 268, the BIR is given another three-year period, under Section 269(c), within which to collect the tax assessed, reckoned from the date of the assessment. In the case of PNB, an assessment was issued against it by the BIR on 08 October 1986, so that the BIR had until 07 October 1989 to enforce it and to collect the tax assessed. The filing, however, by private respondent Savellano of his Amended Petition for Review before the CTA on 02 July 1988 already constituted a judicial action for collection of the tax assessed which stops the running of the three-year prescriptive period for collection thereof. A judicial action for the collection of a tax may be initiated by the filing of a complaint with the proper regular trial court; or where the assessment is appealed to the CTA, by filing an answer to the taxpayers petition for review wherein payment of the tax is prayed for.
[106]

The present case is unique, however, because the Petition for Review was filed by private respondent Savellano, the informer, against the BIR, PNOC, and PNB. The BIR, the collecting government agency; PNOC, the taxpayer; and PNB, the withholding agent, initially found themselves on the same side. The prayer in the Amended Petition for Review of private respondent Savellano reads: WHEREFORE, in view of the foregoing, petitioner respectfully prays that the compromise agreement of June 22, 1987 be reviewed and declared null and void, and that this Court directs: a) respondent Commissioner to enforce and collect and respondents PNB and/or PNOC to pay in a joint and several capacity, the total tax liability ofP387,987,785.73, plus interests from 31 October 1986; and

b) respondent Commissioner to pay unto petitioner, as informers reward, 15% of the tax liability collected under clause (a) hereof. Other equitable reliefs under the premises are likewise prayed for. ours.)
[107]

(Underscoring

Private respondent Savellano, in his Amended Petition for Review in CTA Case No. 4249, prayed for (1) the CTA to direct the BIR Commissioner to enforce and collect the tax, and (2) PNB and/or PNOC to pay the tax making CTA Case No. 4249 a collection case. That the Amended Petition for Review was filed by the informer and not the taxpayer; and that the prayer for the enforcement of the tax assessment and payment of the tax was also made by the informer, not the BIR, should not affect the nature of the case as a judicial action for collection. In case the CTA grants the Petition and the prayer therein, as what has happened in the present case, the ultimate result would be the collection of the tax assessed. Consequently, upon the filing of the Amended Petition for Review by private respondent Savellano, judicial action for collection of the tax had been initiated and the running of the prescriptive period for collection of the said tax was terminated. Supposing that CTA Case No. 4249 is not a collection case which stops the running of the prescriptive period for the collection of the tax, CTA Case No. 4249, at the very least, suspends the running of the said prescriptive period. Under Section 271 of the NIRC of 1977, as amended, the running of the prescriptive period to collect deficiency taxes shall be suspended for the period during which the BIR Commissioner is prohibited from beginning a distraint or levy or instituting a proceeding in court, and for 60 days thereafter. Just as in the cases of Republic v. Ker & Co., Ltd. and Protectors Services, Inc. v. Court of Appeals, this Court declares herein that the pendency of the present case before the CTA, the Court of Appeals and this Court, legally prevents the BIR Commissioner from instituting an action for collection of the same tax liabilities assessed against PNOC and PNB in the CTA or the regular trial courts. To rule otherwise would be to violate the judicial policy of avoiding multiplicity of suits and the rule on lis pendens.
[108] [109] [110]

Once again, that CTA Case No. 4249 was initiated by private respondent Savellano, the informer, instead of PNOC, the taxpayer, or PNB, the withholding agent, would not prevent the suspension of the running of the prescriptive period for collection of the tax. What is controlling herein is the fact that the BIR Commissioner cannot file a judicial action in any other court for the collection of the tax because such a case would necessarily involve the same parties and involve the same issues already being litigated before the CTA in CTA Case No. 4249. The three-

year prescriptive period for collection of the tax shall commence to run only after the promulgation of the decision of this Court in which the issues of the present case are resolved with finality. Whether the filing of the Amended Petition for Review by private respondent Savellano entirely stops or merely suspends the running of the prescriptive period for collection of the tax, it had been premature for the BIR Commissioner to issue a writ of garnishment against PNB on 12 August 1991 and for the Central Bank of the Philippines to debit the account of PNB on 02 September 1992 pursuant to the said writ, because the case was by then, pending review by the Court of Appeals. However, since this Court already finds that the compromise agreement is without force and effect and hereby orders the enforcement of the assessment against PNB, then, any issue or controversy arising from the premature garnishment of PNBs account and collection of the tax by the BIR has become moot and academic at this point.
V

Additional Informers Reward Private respondent Savellano is entitled to additional informers reward since the BIR had already collected the full amount of the tax assessment against PNB. PNOC insists that private respondent Savellano is not entitled to additional informers reward because there was no voluntary payment of the withholding tax liability. PNOC, however, fails to state any legal basis for its argument. Section 316(1) of the NIRC of 1977, as amended, granted a reward to an informer equivalent to 15% of the revenues, surcharges, or fees recovered, plus, any fine or penalty imposed and collected. The provision was clear and uncomplicated an informer was entitled to a reward of 15% of the total amount actually recovered or collected by the BIR based on his information. The provision did not make any distinction as to the manner the tax liability was collected whether it was through voluntary payment by the taxpayer or through garnishment of the taxpayers property. Applicable herein is another well-known maxim in statutory construction Ubi lex non distinguit nec nos distinguere debemos when the law does not distinguish, we should not distinguish.
[111] [112]

Pursuant to the writ of garnishment issued by the BIR, the Central Bank issued a debit advice against the demand deposit account of PNB with the Central Bank for the amount of P294,958,450.73, and credited the same amount to the demand deposit account of the Treasurer of the Republic of the Philippines. The Treasurer of

the Republic, in turn, already issued a journal voucher transferring P294,958,450.73 to the account of the BIR. Since the BIR had already collected P294,958,450.73 from PNB through the execution of the writ of garnishment over PNBs deposit with the Central Bank, then private respondent Savellano should be awarded 15% thereof as reward since the said collection could still be traced to the information he had given. WHEREFORE, in view of the foregoing, the Petitions of PNOC and PNB in G.R. No. 109976 and G.R. No. 112800, respectively, are hereby DENIED. This Court AFFIRMS the assailed Decisions of the Court of Appeals in CA-G.R. SP No. 29583 and CA-G.R. SP No. 29526, which affirmed the decision of the CTA in CTA Case No. 4249, with modifications, to wit: (1) The compromise agreement between PNOC and the BIR, dated 22 June 1987, is declared void for being contrary to law and public policy, and is without force and effect; (2)Paragraph 2 of RMO No. 39-86 remains a valid provision of the regulation; (3)The withholding tax assessment against PNB, dated 08 October 1986, had become final and unappealable. The BIR Commissioner is ordered to enforce the said assessment and collect the amount of P294,958,450.73, the balance of tax assessed after crediting the previous payment made by PNOC pursuant to the compromise agreement, dated 22 June 1987; and (4) Private respondent Savellano shall be paid the remainder of his informers reward, equivalent to 15% of the deficiency withholding tax ordered collected herein, or P 44,243,767.61. SO ORDERED.