1

NIRC Remedies
CA Disposition
THIRD DIVISION

G.R. No. 163345

COMMISSIONER OF
INTERNAL REVENUE,
Petitioner, - versus PERF REALTY CORPORATION, Respondent.
Promulgated: July 4, 2008
DECISION
FOR
Our
review
on certiorari is
the
Decision[1] of the Court of Appeals (CA) granting the
claim for refund of respondent PERF Realty Corporation
(PERF) for creditable withholding tax for the year 1997.

In a Decision dated July 18, 2003, the CA ruled

in favor of PERF, disposing as follows:
WHEREFORE, the petition is hereby
GRANTED. The
assailed
Decision
dated November
20,
2001,
and
Resolution of March 26, 2002 of the
Court of Tax Appeals are SET
ASIDE. The Commissioner of Internal
Revenue is ordered to REFUND to the
petitioner the amount of P1,280,504.00
as creditable withholding tax for the
year 1997.
SO ORDERED.[3]

Facts
Petitioner Commissioner is the head of the
Bureau of Internal Revenue (BIR) whose principal duty
is
to
assess
and
collect
internal
revenue
taxes.Respondent PERF is a domestic corporation
engaged in the business of leasing properties to
various clients including the Philippine American Life
and General Insurance Company (Philamlife) and ReadRite Philippines (Read-Rite).
On April 14, 1998, PERF filed its Annual Income
Tax Return (ITR) for the year 1997 showing a net
taxable income in the amount of P6,430,345.00 and
income tax due of P2,250,621.00.
For the year 1997, its tenants, Philamlife and
Read-Rite, withheld and subsequently remitted
creditable withholding taxes in the total amount
ofP3,531,125.00.
After deducting creditable withholding taxes in
the total amount of P3,531,125.00 from its total
income tax due of P2,250,621.00, PERF showed in its
1997 ITR an overpayment of income taxes in the
amount of P1,280,504.00.
On November
3,
1999, PERF filed
an
administrative claim with the appellate division of the
BIR for refund of overpaid income taxes in the amount
ofP1,280,504.00.
On December 3, 1999, due to the inaction of
the BIR, PERF filed a petition for review with the Court
of Tax Appeals (CTA) seeking for the refund of the
overpaid income taxes in the amount of P1,280,504.00.
CTA Disposition
In a Decision dated November 20, 2001,
the CTA denied the petition of PERF on the ground of
insufficiency of evidence. The CTA noted that PERF did
not indicate in its 1997 ITR the option to either claim
the excess income tax as a refund or tax credit
pursuant to Section 69[2] (now 76) of the National
Internal Revenue Code (NIRC)

According to the appellate court, even if the

taxpayer has indicated its option for refund or tax
credit in its ITR, it does not mean that it will
automatically be entitled to either option since the
Commissioner of Internal Revenue (CIR) must be given
the opportunity to investigate and confirm the veracity
of the claim. Thus, there is still a need to file a claim
for refund.
As to the failure of PERF to present its 1998
ITR, the CA observed that there is no need to rule on its
admissibility since the CTA already held that PERFhad
complied with the requisites for applying for a tax
refund. The sole purpose of requiring the presentation
of PERFs 1998 ITR is to verify whether or notPERF had
carried over the 1997 excess income tax claimed for
refund to the year 1998. The verification process is not
incumbent upon PERF; rather, it is the duty of
the BIR to disprove the taxpayers claim.
The CIR filed a motion for reconsideration
which was subsequently denied by the CA. Thus, this
appeal to Us under Rule 45.
Issues
Petitioner submits the following assignment:
I
THE COURT OF APPEALS ERRED IN
GRANTING
RESPONDENTS
TAX
REFUND CONSIDERING THE LATTERS
FAILURE TO SUBSTANTIALLY ESTABLISH
ITS CLAIM FOR REFUND.
II
THE COURT OF APPEALS ERRED IN
CONSIDERING RESPONDENTS ANNUAL
CORPORATE INCOME TAX RETURN FOR
1998 NOTWITHSTANDING
THAT
IT
WAS NOT FORMALLY OFFERED IN
EVIDENCE.[4] (Underscoring supplied)
Our Ruling
We rule in favor of respondent.

Further, the CTA likewise found that PERF failed

to present in evidence its 1998 annual ITR. It held that
the failure of PERF to signify its option on whether to
claim for refund or opt for an automatic tax credit and
to present its 1998 ITR left the Court with no way to
determine with certainty whether or notPERF has
applied or credited the refundable amount sought for in
its administrative and judicial claims for refund.
PERF moved for reconsideration attaching to its motion
its 1998 ITR. The motion was, however, denied by
the CTA in its Resolution dated March 26, 2002.
Aggrieved
by
the
decision
of
the CTA, PERF filed a petition for review with the CA
under Rule 43 of the Rules of Court.

I. Respondent substantially complied with the

requisites for claim of refund.
The CTA,
citing Section
10
of
Revenue
Regulations 6-85 and Citibank, N.A. v. Court of Appeals,
[5]
determined the requisites for a claim for refund,
thus:
1) That the claim for refund was filed
within the two (2) year period as
prescribed under Section 230 of
the National Internal Revenue
Code;

2
2) That the income upon which the
taxes were withheld were included
in the return of the recipient;
3) That the fact of withholding is
established by a copy of a
statement (BIR Form 1743.1) duly
issued by the payor (withholding
agent) to the payee, showing the
amount paid and the amount of
tax withheld therefrom.[6]
We find that PERF filed its administrative and
judicial
claims
for
refund
on November
3,
1999 and December 3, 1999, respectively, which are
within the two-year prescriptive period under Section
230 (now 229) of the National Internal Tax Code.
The CTA noted
that
based
on
the
records, PERF presented certificates of creditable
withholding tax at source reflecting creditable
withholding taxes in the amount of P4,153,604.18
withheld from PERFs rental income of P83,072,076.81
(Exhibits B, C, D, E, and H). In addition, it submitted in
evidence the Monthly Remittance Returns of its
withholding agents to prove the fact of remittance of
said taxes to the BIR. Although the certificates of
creditable withholding tax at source for 1997 reflected
a total amount of P4,153,604.18 corresponding to the
rental income of P83,072,076.81, PERF is claiming only
the amount ofP3,531,125.00 pertaining to a rental
income
of P70,813,079.00. The
amount
of P3,531,125.00
less
the
income
tax
due
of PERF of P2,250,621.00
leaves
the
refundable
amount of P1,280,504.00.
It is settled that findings of fact of the CTA are entitled
to great weight and will not be disturbed on appeal
unless it is shown that the lower courts committed
gross error in the appreciation of facts. We see no
cogent reason not to apply the same principle here.
II. The failure of respondent to indicate its option
in its annual ITR to avail itself of either the tax
refund or tax credit is not fatal to its claim for
refund.
Respondent PERF did not indicate in its 1997
ITR the option whether to request a refund or claim the
excess withholding tax as tax credit for the succeeding
taxable year.
Citing Section 76 of the NIRC, the CIR opines
that such failure is fatal to PERFs claim for refund.
We do not agree.
In Philam
Asset
Management,
Inc.
v.
Commissioner of Internal Revenue,[7] the Court had
occasion to trace the history of the Final Adjustment
Return found in Section 69 (now 76) of the NIRC. Thus:
The provision on the final
adjustment return (FAR) was originally
found in Section 69 of Presidential
Decree (PD) No. 1158, otherwise known
as the National Internal Revenue Code
of 1977. On August 1, 1980, this
provision was restated as Section 86 in
PD 1705.
On November 5, 1985, all prior
amendments and those introduced by
PD 1994 were codified into the National
Internal Revenue Code (NIRC) of 1985,
as a result of which Section 86 was
renumbered as Section 79.
On July 31, 1986, Section 24 of
Executive Order (EO) No. 37 changed
all net income phrases appearing in
Title II of the NIRC of 1977 to taxable

income. Section 79 of the NIRC of

1985, however, was not amended.
On July 25, 1987, EO 273
renumbered Section 86 of the NIRC as
Section 76, which was also rearranged
to fall under Chapter of Title II of the
NIRC. Section 79, which had earlier
been renumbered by PD 1994,
remained unchanged.
Thus, Section 69 of the NIRC of
1977 was renumbered as Section 86
under PD 1705; later, as Section 79
under PD 1994; then, as Section 76
under EO 273. Finally, after being
renumbered and reduced to the chaf
of a grain, Section 69 was repealed by
EO 37.
Subsequently,
Section
69
reappeared in the NIRC (or Tax Code) of
1997 as Section 76, which reads:
Section
76. Final
Adjustment
Return.
Every
corporation liable to
tax under Section 24
shall
file
a
final
adjustment
return
covering the total net
income
for
the
preceding calendar or
fiscal year. If the sum
of the quarterly tax
payments made during
the said taxable year is
not equal to the total
tax due on the entire
taxable net income of
that
year
the
corporation shall either:
(a) Pay the excess
tax still due; or
(b) Be refunded the
excess amount
paid, as the case
may be.
In
case
the
corporation is entitled
to a refund of the
excess
estimated
quarterly income taxes
paid, the refundable
amount shown on its
final adjustment return
may
be
credited
against the estimated
quarterly income tax
liabilities
for
the
taxable quarters of the
succeeding
taxable
year.[8]
Section 76 ofers two options: (1) filing for tax
refund and (2) availing of tax credit. The two options
are alternative and the choice of one precludes the
other. However, in Philam Asset Management, Inc. v.
Commissioner of Internal Revenue,[9] the Court ruled
that failure to indicate a choice, however, will not bar a
valid request for a refund, should this option be chosen
by the taxpayer later on. The requirement is only for
the purpose of easing tax administration particularly
the self-assessment and collection aspects. Thus:
These two options under Section 76 are
alternative in nature. The choice of one
precludes
the
other. Indeed,

3
in Philippine Bank of Communications
v. Commissioner of Internal Revenue,
the Court ruled that a corporation must
signify its intention whether to request
a tax refund or claim a tax credit by
marking the corresponding option box
provided in the FAR. While a taxpayer is
required to mark its choice in the form
provided by the BIR, this requirement is
only for the purpose of facilitating tax
collection.

claims it in writing within two years

after payment of the taxes erroneously
received by the BIR.Despite the failure
of petitioner to make the appropriate
marking in the BIR form, the filing of its
written claim efectively serves as an
expression of its choice to request atax
refund, instead of a tax credit. To assert
that any future claim for a tax refund
will be instantly hindered by a failure to
signify ones intention in the FAR is to
render nugatory the clear provision
that allows for a two-year prescriptive
period.

One
cannot
get
a tax
refund and a tax credit at the same
time for the same excess income taxes
paid. Failure to signify ones intention in
the FAR does not mean outright barring
of a valid request for a refund, should
one still choose this option later on. A
tax credit should be construed merely
as an alternative remedy to a tax
refund under Section 76, subject to
prior verification and approval by
respondent.

In fact, in BPI-Family Savings

Bank v. CA, this Court even ordered the
refund of a taxpayers excess creditable
taxes, despite the express declaration
in the FAR to apply the excess to the
succeeding year. When circumstances
show that a choice of tax credit has
been made, it should be respected. But
when indubitable circumstances clearly
show that another choice a tax refund
is
in
order,
it
should
be
granted. Technicalities and legalisms,
however exalted, should not be
misused by the government to keep
money not belonging to it and thereby
enrich itself at the expense of its lawabiding citizens.
In the present case, although
petitioner did not mark the refund box
in its 1997 FAR, neither did it perform
any act indicating that it chose a tax
credit. On the contrary, it filed
on September
11,
1998,
an
administrative claim for the refund of
its excess taxes withheld in 1997. In
none of its quarterly returns for 1998
did it apply the excess creditable
taxes. Under
these
circumstances,
petitioner is entitled to a tax refund of
its 1997 excess tax credits in the
amount of P522,092.[10]

The reason for requiring that a

choice be made in the FAR upon its
filing is to ease tax administration,
particularly the self-assessment and
collection aspects. A taxpayer that
makes a choice expresses certainty or
preference and thus demonstrates
clear diligence. Conversely, a taxpayer
that makes no choice expresses
uncertainty or lack of preference and
hence shows simple negligence or plain
oversight.
xxxx
Third, there is no automatic
grant of a tax refund. As a matter of
procedure, the BIR should be given the
opportunity to investigate and confirm
the veracity of a taxpayers claim,
before it grants the refund. Exercising
the option for a tax refund or a tax
credit does not ipso facto confer upon a
taxpayer the right to an immediate
availment of the choice made. Neither
does it impose a duty on the
government to allow tax collection to
be at the sole control of a taxpayer.
Fourth, the BIR ought to have
on file its own copies of petitioners FAR
for the succeeding year, on the basis of
which it could rebut the assertion that
there was a subsequent credit of the
excess income tax payments for the
previous year. Its failure to present this
vital
document
to
support
its
contention against the grant of a tax
refundto petitioner is certainly fatal.
Fifth,
the CTA should
have
taken judicial notice of the fact of filing
and the pendency of petitioners
subsequent claim for a refund of
excess creditable taxes withheld for
1998. The existence of the claim ought
to be known by reason of its judicial
functions. Furthermore, it is decisive to
and will easily resolve the material
issue in this case.If only judicial notice
were taken earlier, the fact that there
was no carry-over of the excess
creditable taxes withheld for 1997
would have already been crystal clear.
Sixth, the Tax Code allows the
refund of taxes to a taxpayer that

In this case, PERF did not mark the refund box

in its 1997 FAR. Neither did it perform any act
indicating that it chose tax credit. In fact, in its 1998
ITR,PERF left blank the portion Less: Tax Credit/
Payments. That action coupled with the filing of a claim
for refund indicates that PERF opted to claim a
refund.Under these circumstances, PERF is entitled to a
refund of its 1997 excess tax credits in the amount
of P1,280,504.00.
III.

The failure of respondent to present in

evidence the 1998 ITR is not fatal to its claim
for refund.

The CIR takes the view that the CA erred in considering

the 1998 ITR of PERF. It was not formally ofered in
evidence. Section 34, Rule 132 of the Revised Rules of
Court states that the court shall consider no evidence
which has not been formally ofered.
The reasoning is specious.
PERF attached its 1998 ITR to its motion for
reconsideration. The 1998 ITR is a part of the records
of the case and clearly showed that income taxes in
the amount of P1,280,504.00 were not claimed as tax
credit in 1998.
In Filinvest Development Corporation v. Commissioner
of Internal Revenue,[11] the Court held that the 1997 ITR
attached to the motion for reconsideration is part of
the records of that case and cannot be simply ignored
by the CTA. Moreover, technicalities should not be used

4
to defeat substantive rights, especially those that have
been held as a matter of right. We quote:
In the proceedings before
the CTA,
petitioner
presented
in
evidence its letter of claim for refund
before the BIR to show that it was
made within the two-year reglementary
period; its Income Tax Returns for the
years 1995 and 1996 to prove its total
creditable withholding tax and the fact
that the amounts were declared as part
of its gross income; and several
certificates of income tax withheld at
source corresponding to the period of
claim to prove the total amount of the
taxes erroneously withheld. More
importantly, petitioner attached its
1997 Income Tax Return to its Motion
for Reconsideration, making the same
part
of
the
records
of
the
case. The CTA cannot simply ignore this
document.
Thus, we hold that petitioner
has complied with all the requirements
to prove its claim for tax refund. The
CA, therefore, erred in denying the
petition for review of the CTAs denial of
petitioners claim for tax refund on the
ground that it failed to present its 1997
Income Tax Return.

of taxation must be tempered with

evenhandedness. Hence, under the
principle
of solutio
indebiti,
the
Government has to restore to petitioner
the sums representing erroneous
payments of taxes.[12]
Further, We sustain the CA that there is no
need to rule on the issue of the admissibility of the
1998 ITR since the CTA ruled that PERF already
complied with the requisites of applying for a tax
refund. The verification process is not incumbent
on PERF; it is the duty of the CIR to verify whether or
not PERF had carried over the 1997 excess income
taxes.
WHEREFORE, the petition is DENIED for lack
of merit.
SO ORDERED.
THIRD DIVISION
COMMISSIONER
OF
G.R. No. 167560
INTERNAL
REVENUE,
Petitioner,
- versus DOMINADOR MENGUITO,
Promulgated:
Respondent.
September 17, 2008
x------------------------------------------x
DECISION

The CAs reliance on Rule

132, Section 34 26 of the Rules on
Evidence
is
misplaced.
This
provision must be taken in the
light of Republic Act No. 1125, as
amended,
the
law
creating
the CTA,
which
provides
that
proceedings therein shall not be
governed strictly by technical
rules of evidence. Moreover, this
Court has held time and again that
technicalities should not be used
to
defeat
substantive
rights,
especially those that have been
established as a matter of fact.
xxxx
We must also point out that,
simply by exercising the CIRs power to
examine and verify petitioners claim
for tax exemption as granted by law,
respondent CIR could
have
easily
verified petitioners claim by presenting
the latters 1997 Income Tax Return, the
original of which it has in its
files. However, records show that in the
proceedings
before
the CTA,
respondent CIR failed to comment on
petitioners formal ofer of evidence,
waived its right to present its own
evidence, and failed to file its
memorandum.Neither did it file an
opposition to petitioners motion to
reconsider the CTA decision to which
the 1997 Income Tax Return was
appended.
That no one shall unjustly
enrich oneself at the expense of
another is a long-standing principle
prevailing in our legal system. This
applies not only to individuals but to
the State as well. In the field of
taxation where the State exacts strict
compliance upon its citizens, the State
must likewise deal with taxpayers with
fairness and honesty.The harsh power

Before the Court is a Petition for Review on Certiorari under

Rule 45 of the Rules of Court, assailing the March 31, 2005
Decision[1] of the Court of Appeals (CA) which reversed and
set aside the Court of Tax Appeals (CTA) April 2, 2002
Decision[2] and October 10, 2002 Resolution[3] ordering
Dominador Menguito (respondent) to pay the Commissioner
of Internal Revenue (petitioner) deficiency income and
percentage taxes and delinquency interest.
Based on the Joint Stipulation of Facts and Admissions [4] of the
parties, the CTA summarized the factual and procedural
antecedents of the case, the relevant portions of which read:
Petitioner Dominador Menguito
[herein respondent] is a Filipino citizen, of
legal age, married to Jeanne Menguito and
is engaged in the restaurant and/or
cafeteria business. For the years 1991,
1992 and 1993, its principal place of
business was at Gloriamaris, CCP
Complex, Pasay City and later transferred
to Kalayaan Bar (Copper Kettle Cafeteria
Specialist
or
CKCS),
Departure
Area, Ninoy Aquino International Airport, Pa
say City. During the same years, he also
operated a branch at Club John
Hay, Baguio City carrying the business
name of Copper Kettle Cafeteria Specialist
(Joint Stipulation of Facts and Admissions, p.
133, CTA records).
xxxx
Subsequently,
BIR Baguio received
information that Petitioner [herein
respondent] has undeclared income
from Texas Instruments and Club John
Hay, prompting the BIR to conduct
another investigation. Through a
letter dated July 28, 1997, Spouses
Dominador Menguito and Jeanne
Menguito (Spouses Menguito) were
informed by the Assessment Division
of the said office that they have
underdeclared
sales
totaling P48,721,555.96 (Exhibit 11,
p. 83, BIR records). This was followed

5
by a Preliminary Ten (10) Day Letter
dated August 11, 1997, informing
Petitioner [herein respondent] that in
the investigation of his 1991, 1992
and 1993 income, business and
withholding tax case, it was found out
that there is still due from him the
total sum of P34,193,041.55 as
deficiency income and percentage tax.
On September
2,
1997,
the
assessment notices subject of the
instant petition were issued. These
were protested by Ms. Jeanne
Menguito,
through
a
letter
dated September 28, 1997 (Exhibit
14, p. 112, BIR Records), on the
ground that the 40% deduction
allowed on their computed gross
revenue, is unrealistic. Ms. Jeanne
Menguito requested for a period of
thirty (30) days within which to
coordinate with the BIR regarding the
contested assessment.
On October 10, 1997, BIR Baguio replied,
informing the Spouses Menguito that the
source of assessment was not through the
disallowance of claimed expenses but on
data received from Club John Hay and Texas
Instruments Phils., Inc. Said letter gave the
spouses ten (10) days to present evidence
(Exhibit 15, p. 110, BIR Records).
In an effort to clear an alleged
confusion regarding Copper Kettle
Cafeteria Specialist (CKCS) being a
sole proprietorship owned by the
Spouses, and Copper Kettle Catering
Services, Inc. (CKCS, Inc.) being a
corporation
with
whom
Texas
Instruments and Club John Hay
entered into a contract, Petitioner
[respondent] submitted to BIR Baguio
a photocopy of the SEC Registration of
Copper Kettle Catering Services, Inc.
on March 23, 1999 (pp. 134-141, BIR
Records).
On April 12, 1999, BIR Baguio wrote a letter
to Spouses Menguito, informing the latter
that a reinvestigation or reconsideration
cannot be given due course by the mere
submission of an uncertified photocopy of
the Certificate of Incorporation. Thus, it
avers that the amendment issued is still
valid and enforceable.
On May 26, 1999, Petitioner [respondent]
filed the present case, praying for the
cancellation and withdrawal of the
deficiency income tax and percentage tax
assessments on account of prescription,
whimsical factual findings, violation of
procedural due process on the issuance of
assessment notices, erroneous address of
notices and multiple credit/ investigation by
the Respondent [petitioner] of Petitioner's
[respondents] books of accounts and other
related records for the same tax year.
Instead of filing an Answer, Respondent
[herein petitioner] moved to dismiss the
instant petition on July 1, 1999, on the
ground of lack of jurisdiction. According to
Respondent [petitioner], the assessment
had long become final and executory when
Petitioner [respondent] failed to comply with
the letter dated October 10, 1997.

Petitioner opposed said motion on July 21,

1999, claiming that the final decision on
Petitioner's [respondents] protest is the April
12, 1999 letter of the Baguio Regional
Office; therefore, the filing of the action
within thirty (30) days from receipt of the
said letter was seasonably filed. Moreover,
Petitioner [respondent] asserted that
granting that the April 12, 1999 letter in
question could not be construed to mean as
a denial or final decision of the protest, still
Petitioner's [respondents] appeal was timely
filed since Respondent [petitioner] issued a
Warrant of Distraint and/or Levy against the
Petitioner [respondent] on May 3, 1999,
which warrant constituted a final decision of
the Respondent [petitioner] on the protest
of the taxpayer.
On September 3, 1999, this Court denied
Respondent's [petitioners] 'Motion to
Dismiss' for lack of merit.
Respondent [petitioner] filed his
Answer on September 24, 1999, raising the
following Special and Affirmative Defenses:
xxxx
5. Investigation disclosed
that for taxable years
1991, 1992 and 1993,
petitioner
[respondent]
filed false or fraudulent
income and percentage
tax returns with intent to
evade tax by under
declaring his sales.
6. The alleged duplication
of
investigation
of
petitioner [respondent] by
the BIR Regional Office in
Baguio City and by the
Revenue District Office in
Pasay City is justified by
the finding of fraud on the
part of the petitioner
[respondent], which is an
exception to the provision
in the Tax Code that the
examination
and
inspection of books and
records shall be made
only once in a taxable
year (Section 235, Tax
Code). At any rate,
petitioner [respondent], in
a letter dated July 18,
1994, waived his right to
the consolidation of said
investigation.
7. The aforementioned
falsity or fraud was
discovered on August
5,
1997.
The
assessments
were
issued on September
2, 1997, or within ten
(10) years from the
discovery
of
such
falsity
or
fraud
(Section
223,
Tax
Code).
Hence,
the
assessments have not
prescribed.
8. Petitioner's
[respondents]
allegation that

the

6
assessments were not
properly addressed is
rendered moot and
academic
by
his
acknowledgment in his
protest
letter
dated September 28,
1997that he received
the assessments.
9. Respondent
[petitioner] complied
with the provisions of
Revenue Regulations
No. 12-85 by informing
petitioner
[respondent] of the
findings
of
the
investigation in letters
dated July
28,
1997 and August 11,
1997 prior
to
the
issuance
of
the
assessments.
10. Petitioner
[respondent] did not
allege
in
his
administrative protest
that there was a
duplication
of
investigation, that the
assessments
have
prescribed, that they
were
not
properly
addressed, or that the
provisions of Revenue
Regulations No. 12-85
were not observed.
Not
having
raised
them
in
the
administrative
level,
petitioner
[respondent]
cannot
raise the same for the
first time on appeal
(Aguinaldo Industries
Corp.
vs.
Commissioner
of
Internal Revenue, 112
SCRA 136).
11. The
assessments
were issued in accordance
with law and regulations.
12. All presumptions are
in favor of the correctness
of tax assessments (CIR
vs.
Construction
Resources of Asia, Inc.,
145 SCRA 67), and the
burden to prove otherwise
is
upon
petitioner
[respondent].[5] (Emphasis
supplied)
On April 2, 2002, the CTA rendered a Decision, the
dispositive portion of which reads:
Accordingly, Petitioner [herein respondent]
is ORDERED to PAY the
Respondent
[herein
petitioner]
the
amount
of P11,333,233.94 and P2,573,655.82 as
deficiency income and percentage tax
liabilities, respectively for taxable years
1991, 1992 and 1993 plus 20% delinquency
interest from October 2, 1997 until full
payment thereof.
SO ORDERED.[6]

Respondent filed a motion for reconsideration but the CTA

denied the same in its Resolution of October 10, 2002.[7]
Through a Petition for Review[8] filed with the CA,
respondent questioned the CTA Decision and Resolution
mainly on the ground that Copper Kettle Catering Services,
Inc. (CKCS, Inc.) was a separate and distinct entity from
Copper Kettle Cafeteria Specialist (CKCS); the sales and
revenues of CKCS, Inc. could not be ascribed to CKCS; neither
may the taxes due from one, charged to the other; nor the
notices to be served on the former, coursed through the
latter.[9] Respondent cited the Joint Stipulation in which
petitioner acknowledged that its (respondents) business was
called Copper Kettle Cafeteria Specialist, not Copper Kettle
Catering Services, Inc.[10]
Based on the unrefuted[11] CTA summary, the CA
rendered the Decision assailed herein, the dispositive portion
of which reads:
WHEREFORE, the instant petition is
GRANTED. Reversing the assailed Decision
dated April 2, 2002 and Resolution dated
October 10, 2002, the deficiency income
tax
and
percentage
income
tax
assessments against petitioner in the
amounts
of P11,333,233.94
and P2,573,655.82 for taxable years 1991,
1992 and 1993 plus the 20% delinquency
interest thereon are annulled.
SO ORDERED.[12]
Petitioner filed a motion for reconsideration but the CA denied
the same in its October 10, 2002 Resolution.[13]
Hence, herein recourse to the Court for the reversal of the CA
decision and resolution on the following grounds:
I
The Court of Appeals erred in reversing the
decision of the Court of Tax Appeals and in
holding that Copper Kettle Cafeteria
Specialist owned by respondent and Copper
Kettle Catering Services, Inc. owned and
managed by respondent's wife are not one
and the same.
II
The Court of Appeals erred in holding that
respondent was denied due process for
failure of petitioner to validly serve
respondent with the post-reporting and preassessment notices as required by law.
On the first issue, the CTA has ruled that CKCS, Inc. and CKCS
are one and the same corporation because [t]he contract
between Texas Instruments and Copper Kettle was signed by
petitioners [respondents] wife, Jeanne Menguito as
proprietress.[14]
However, the CA reversed the CTA on these grounds:
Respondents [herein petitioners] allegation
that Copper Kettle Catering Services, Inc.
and Copper Kettle Cafeteria Specialists are
not distinct entities and that the underdeclared sales/revenues of Copper Kettle
Catering Services, Inc. pertain to Copper
Kettle Cafeteria Specialist are belied by the
evidence on record. In the Joint Stipulation
of Facts submitted before the tax court,
respondent [petitioner] admitted that
petitioners [herein respondents] business
name is Copper Kettle Cafeteria Specialist.
Also, the Certification of Club John Hay and
Letter dated July 9, 1997 of Texas
Instruments both addressed to respondent
indicate that these companies transacted
with Copper Kettle Catering Services, Inc.,

7
owned and managed by JEANNE G.
MENGUITO, NOT petitioner Dominador
Menguito. The alleged under-declared sales
income subject of the present assessments
were shown to have been earned
by Copper Kettle Catering Services, Inc. in
its commercial transaction with Texas
Instruments and Camp John Hay; NOT by
petitioners dealing with these companies. In
fact, there is nothing on record which shows
that Texas Instruments and Camp John Hay
conducted business relations with Copper
Kettle Cafeteria Specialist, owned by herein
petitioner Dominador Menguito. In the
absence, therefore, of clear and convincing
evidence showing that Copper Kettle
Cafeteria Specialist and Copper Kettle
Catering Services, Inc. are one and the
same, respondent can NOT validly impute
alleged underdeclared sales income earned
by Copper Kettle Catering Services, Inc. as
sales income of Copper Kettle Cafeteria
Specialist.[15](Emphasis supplied)
Respondent is adamant that the CA is correct. Many times in
the past, the BIR had treated CKCS separately from CKCS,
Inc.: from May 1994 to June 1995, the BIR sent audit teams to
examine the books of account and other accounting records
of CKCS, and based on said audits, respondent was held liable
for deficiency taxes, all of which he had paid.[16] Moreover, the
certifications[17] issued by Club John Hay and Texas
Instruments identify the concessionaire operating therein
as CKCS, Inc., owned and managed byhis spouse Jeanne M
enguito, and not
CKCS.[18]
Petitioner impugns the findings of the CA, claiming
that these are contradicted by evidence on record consisting
of a reply to the September 2, 1997 assessment notice of BIR
Baguio which Jeanne Menguito wrote on September 28,
1997, to wit:
We are in receipt of the assessment notice
you have sent us, dated September 2,
1997. Having taken hold of the same only
now following our travel overseas, we
were not able to respond immediately
and manifest our protest. Also, with the
impending termination of our businesses
at 19th Tee, Club John Hay and at Texas
Instruments, Loakan, Baguio City, we
have already started the transfer of
our records and books in Baguio City
to Manila that we will need more time to
review and sort the records that may have
to be presented relative to the assessment
x x x.[19] (Emphasis supplied)
Petitioner insists that said reply confirms that the assessment
notice is directed against the businesses which she and her
husband, respondent herein, own and operate at Club John
Hay and Texas Instruments, and establishes that she is
protesting said notice not just for herself but also for
respondent.[20]
Moreover, petitioner argues that if it were true that
CKCS, Inc. and CKCS are separate and distinct entities,
respondent could have easily produced the articles of
incorporation of CKCS, Inc.; instead, what respondent
presented was merely a photocopy of the incorporation
articles.[21] Worse, petitioner adds, said document was not
ofered in evidence before the CTA, but was presented only
before the CA.[22]
Petitioner further insists that CKCS, Inc. and CKCS are
merely employing the fiction of their separate corporate
existence to evade payment of proper taxes; that the CTA
saw through their ploy and rightly disregarded their corporate
individuality, treating them instead as one taxable entity with
the same tax base and liability;[23] and that the CA should
have sustained the CTA.[24]

In efect, petitioner would have the Court resolve a

purely factual issue[25] of whether or not there is substantial
evidence that CKCS, Inc. and CKCS are one and the same
taxable entity.
As a general rule, the Court does not venture into a
trial of facts in proceedings under Rule 45 of the Rules of
Courts, for its only function is to review errors of law. [26]The
Court declines to inquire into errors in the factual assessment
of the CA, for the latters findings are conclusive, especially
when these are synonymous to those of the CTA.[27] But when
the CA contradicts the factual findings of the CTA, the Court
deems it necessary to determine whether the CA was justified
in doing so, for one basic rule in taxation is that the factual
findings of the CTA, when supported by substantial evidence,
will not be disturbed on appeal unless it is shown that the CTA
committed gross error in its appreciation of facts.[28]
The Court finds that the CA gravely erred when it ignored the
substantial evidence on record and reversed the CTA.
In a number of cases, the Court has shredded the veil of
corporate identity and ruled that where a corporation is
merely an adjunct, business conduit or alter ego of another
corporation or when they practice fraud on our internal
revenue laws,[29] the fiction of their separate and distinct
corporate identities shall be disregarded, and both
entitiestreated as one taxable person, subject to assessment
for the same taxable transaction.
The Court considers the presence of the following
circumstances, to wit: when the owner of one directs and
controls the operations of the other, and the payments
efected or received by one are for the accounts due from or
payable to the other;[30] or when the properties or products of
one are all sold to the other, which in turn immediately sells
them to the public,[31] as substantial evidence in support of the
finding that the two are actually one juridical taxable
personality.
In the present case, overwhelming evidence supports the CTA
in disregarding the separate identity of CKCS, Inc. from CKCS
and in treating them as one taxable entity.
First, in respondents Petition for Review before the
CTA, he expressly admitted that he is engaged in restaurant
and/or cafeteria business and that [i]n 1991, 1992 and
1993, he also operated a branch at Club John Hay,
Baguio City with a business name of Copper Kettle
Cafeteria
Specialist.[32] Respondent
repeated
such
admission in the Joint Stipulation.[33] And then in Exhibit
1[34] for petitioner, a July 18, 1994 letter sent by Jeanne
Menguito to BIR, Baguio City, she stated thus:
in connection with the investigation
of Copper
Kettle
Cafeteria
Specialist which is located at 19th Tee Club
John Hay, Baguio City under letter of
authority nos. 0392897, 0392898, and
0392690
dated May
16,
1994,
investigating my income, business, and
withholding taxes for the years 1991, 1992,
and 1993.[35] (Emphasis supplied)
Jeanne Menguito signed the letter as proprietor of Copper
Kettle Cafeteria Specialist.[36]
Related to Exhibit 1 is petitioner's Exhibit 14, which is
another letter dated September 28, 1997, in which
Jeanne Menguito protested
the September
2,
1997 assessment notices directed at Copper Kettle Cafeteria
Specialist and referred to the latter as our business at 19th Tee
Club John Hay and at Texas Instruments. [37] Taken along with
the Joint Stipulation, Exhibits A through C and the August 3,
1993 Certification of Camp John Hay, Exhibits 1 and 14,
confirm that respondent, together with his spouse
JeanneMenguito, own, operate and manage a branch of
Copper Kettle Cafeteria Specialist, also called Copper Kettle
Catering Services at Camp John Hay.

8
Moreover, in Exhibits A to A-1,[38] Exhibits B to B1[39] and Exhibits C to C-1[40] which are lists of concessionaires
that operated in Club John Hay in 1992, 1993 and 1991,
respectively,[41] it appears that there is no outlet with the
name Copper Kettle Cafeteria Specialist as claimed by
respondent. The name that appears in the lists is 19th TEE
CAFETERIA (Copper Kettle, Inc.). However, in the light of the
express admission of respondent that in 1991, 1992 and
1993, he operated a branch called Copper Kettle Cafeteria
Specialist in Club John Hay, the entries in Exhibits A through C
could only mean that said branch refers to 19th Tee Cafeteria
(Copper Kettle, Inc.). There is no evidence presented by
respondent that contradicts this conclusion.
In addition, the August 9, 1993 Certification issued
by Club John Hay that COPPER KETTLE CATERING SERVICES
owned and managed by MS. JEANNE G. MENGUITO is a
concessionaire in John Hay since July 1991 up to the present
and is operating the outlet 19TH TEE CAFETERIA AND THE
TEE BAR[42] convincingly establishes that respondent's branch
which he refers to as Copper Kettle Cafeteria Specialist at
Club John Hay also appears in the latter's records as Copper
Kettle Catering Services with an outlet called 19 th Tee
Cafeteria and The Tee Bar.
Second, in Exhibit 8[43] and Exhibit E,[44] Texas Instruments
identified the concessionaire operating its canteen as Copper
Kettle Catering Services, Inc.[45] and/or COPPER KETTLE
CAFETERIA SPECIALIST SVCS.[46] It being settled that
respondent's Copper Kettle Cafeteria Specialist is also known
as Copper Kettle Catering Services, and that respondent and
Jeanne Menguito both own, manage and act as proprietors of
the business, Exhibit 8 and Exhibit E further establish that,
through said business, respondent also had taxable
transactions with Texas Instruments.
In view of the foregoing facts and circumstances, the Articles
of Incorporation of CKCS, Inc. -- a certified true copy of which
respondent attached only to his Reply filed with the CA [47] -cannot insulate it from scrutiny of its real identity in relation to
CKCS. It is noted that said Articles of Incorporation of CKCS,
Inc. was issued in 1989, but documentary evidence indicate
that after said date, CKCS, Inc. has also assumed the name
CKCS, and vice-versa. The most concrete indication of this
practice is the 1991 Quarterly Percentage Tax Returns
covering the business name/trade 19th Tee Camp John Hay. In
said returns, the taxpayer is identified as Copper Kettle
Cafeteria Specialist[48]or CKCS, not CKCS, Inc. Yet, in several
documents already cited, the purported owner of 19th Tee Bar
at Club John Hay is CKCS, Inc.
All these pieces of evidence buttress the finding of the CTA
that in 1991, 1992 and 1993, respondent, together with his
spouse Jeanne Menguito, owned and operated outlets in Club
John Hay and Texas Instruments under the names Copper
Kettle Cafeteria Specialist or CKCS and Copper Kettle Catering
Services or Copper Kettle Catering Services, Inc..
Turning now to the second issue.
In respondent's Petition for Review with the CTA, he
questioned the validity of the Assessment Notices,[49] all dated
September 2, 1997, issued by BIR, Baguio City against him
on the following grounds:
1.

2.

3.

The assessment notices, based on

income and percentage tax returns filed for
1991, 1992 and 1993, were issued beyond
the three-year prescriptive period under
Section 203 of the Tax Code;[50]
The
assessment
notices
were
addressed to Copper Kettle Specialist, Club
John Hay, Baguio City, despite notice to
petitioner that respondent's principal place
of
business
was
at
the
CCP
Complex, Pasay City.[51]
The assessment notices were issued
in violation of the requirement of Revenue
Regulations No. 12-85, dated November 27,
1985, that the taxpayer be issued a postreporting notice and pre-assessment

4.

notice before the preliminary findings of

deficiency may ripen into a formal
assessment;[52] and
The assessment notices did not give
respondent a 15-day period to reply to the
findings of deficiency.[53]

The Court notes that nowhere in his Petition for Review did
respondent deny that he received the September 2,
1997 assessment
notices. Instead,
during
the
trial, respondent's witness, Ma. Theresa Nalda (Nalda),
testified
that
she
informed
the
BIR, Baguio City that there was no Notice or letter, that we
did not receive,
perhaps, because they were
Mr. Menguito's head office.[54]

not

addressed

to

The CTA correctly upheld the validity of the assessment

notices. Citing Section 223 of the Tax Code which provides
that the prescriptive period for the issuance of assessment
notices based on fraud is 10 years, the CTA ruled that the
assessment notices issued against respondent on September
2, 1997 were timely because petitioner discovered the falsity
in respondent's tax returns for 1991, 1992 and 1993 only
on February 19, 1997.[55] Moreover, in accordance with
Section 2 of Revenue Regulation No. 12-85, which requires
that assessment notices be sent to the address indicated in
the taxpayer's return, unless the latter gives a notice of
change of address, the assessment notices in the present
case were sent by petitioner to Camp John Hay, for this was
the address respondent indicated in his tax returns. [56] As to
whether said assessment notices were actually received, the
CTA correctly held that since respondent did not testify that
he did not receive said notices, it can be presumed that the
same were actually sent to and received by the latter.The
Court agrees with the CTA in considering as hearsay the
testimony of Nalda that respondent did not receive the
notices, because Nalda was not competent to testify on the
matter, as she was employed by respondent only in June
1998, whereas the assessment notices were sent
on September 2, 1997.[57]
Anent compliance with the requirements of Revenue
Regulation No. 12-85, the CTA held:
BIR records show that on July 28, 1997, a
letter was issued by BIR Baguio to
Spouses Menguito, informing the latter of
their supposed underdeclaration of sales
totaling P48,721,555.96 and giving them 5
days to communicate any objection to the
results of the investigation (Exhibit 11, p. 83,
BIR Records). Records likewise reveal the
issuance of a Preliminary Ten (10) Day Letter
on August 11, 1997, informing Petitioner
[respondent herein] that the sum
of P34,193,041.55 is due from him as
deficiency income and percentage tax
(Exhibit 13, p. 173, BIR Records). Said letter
gave the Petitioner [respondent herein] a
period of ten (10) days to submit his
objection to the proposed assessment,
either personally or in writing, together with
any evidence he may want to present.
xxxx
As to Petitioner's allegation that he was
given only ten (10) days to reply to the
findings of deficiency instead of fifteen (15)
days granted to a taxpayer under Revenue
Regulations No. 12-85, this Court believes
that when Respondent [petitioner herein]
gave the Petitioner [respondent herein] on
October 10, 1997 an additional period of ten
(10) days to present documentary evidence
or a total of twenty (20) days, there was
compliance with Revenue Regulations No.
12-85 and the latter was amply given
opportunity to present his side x x x.[58]

9
The
CTA
further
held
that
respondent
was estopped from raising procedural issues against the
assessment notices, because these were not cited in
the September 28, 1997letter-protest which his spouse
Jeanne Menguito filed with petitioner.[59]
On appeal by respondent,[60] the CA resolved the issue, thus:
Moreover, if the taxpayer denies ever
having received an assessment from
the BIR, it is incumbent upon the
latter to prove by competent evidence
that such notice was indeed received
by the addressee. Here, respondent
[petitioner herein] merely alleged that it
forwarded the assessment notices to
petitioner
[respondent
herein].
The
respondent did not show any proof of
mailing, registry receipt or acknowledgment
receipt signed by the petitioner [respondent
herein]. Since respondent [petitioner
herein] has not adduced sufficient
evidence that petitioner [respondent
herein] had in fact received the preassessment notice and post-reporting
notice required by law, it cannot be
assumed that petitioner [respondent
herein] had been served said notices.
[61]

No other ground was cited by the CA for the reversal of the

finding of the CTA on the issue.
The CA is gravely mistaken.
In their Petition for Review with the CTA, respondent expressly
stated that [s]ometime in September 1997, petitioner
[respondent herein] received various assessment notices, all
dated 02 September 1997, issued by BIR-Baguio for alleged
deficiency income and percentage taxes for taxable years
ending 31 December 1991, 1992 and 1993 x x x.[62] In their
September 28, 1997 protest to the September 2, 1997
assessment notices, respondent, through his spouses
Jeanne Menguito,
acknowledged
that [they]
are in
receipt of the assessment notice you have sent us, dated
September 2, 1997 x x x.[63]
Respondent is therefore estopped from denying actual
receipt of the September 2, 1997 assessment notices,
notwithstanding the denial of his witness Nalda.
As to the address indicated on the assessment notices,
respondent cannot question the same for it is the said
address which appears in its percentage tax returns.[64] While
respondent claims that he had earlier notified petitioner of a
change in his business address, no evidence of such written
notice was presented. Under Section 11 of Revenue
Regulation No. 12-85, respondent's failure to give written
notice of change of address bound him to whatever
communications were sent to the address appearing in the
tax returns for the period involved in the investigation.[65]
Thus, what remain in question now are: whether petitioner
issued and mailed a post-reporting notice and a preassessment notice; and whether respondent actually received
them.
There is no doubt that petitioner failed to prove that it served
on respondent a post-reporting notice and a pre-assessment
notice. Exhibit 11[66] of petitioner is a mere photocopy of a July
28, 1997 letter it sent to respondent, informing him of the
initial outcome of the investigation into his sales, and the
release of a preliminary assessment upon completion of the
investigation, with notice for the latter to file any objection
within five days from receipt of the letter. Exhibit 13[67] of
petitioner is also a mere photocopy of an August 11, 1997
Preliminary Ten (10) Day Letter to respondent, informing him
that he had been found to be liable for deficiency income and
percentage tax and inviting him to submit a written objection
to the proposed assessment within 10 days from receipt of
notice. But nowhere on the face of said documents can be

found evidence that these were sent to and received by

respondent. Nor is there separate evidence, such as a registry
receipt of the notices or a certification from the Bureau of
Posts, that petitioner actually mailed said notices.
However, while the lack of a post-reporting notice and
pre-assessment notice is a deviation from the
requirements under Section 1[68] and Section 2[69] of
Revenue Regulation No. 12-85, the same cannot detract
from the fact that formal assessments were issued to and
actually received by respondents in accordance with Section
228 of the National Internal Revenue Code which was in
efect at the time of assessment.
It should be emphasized that the stringent requirement that
an assessment notice be satisfactorily proven to have been
issued and released or, if receipt thereof is denied, that said
assessment notice have been served on the taxpayer,
[70]
applies only to formal assessments prescribed under
Section 228 of the National Internal Revenue Code, but not to
post-reporting notices or pre-assessment notices. The
issuance of a valid formal assessment is a substantive
prerequisite to tax collection,[71] for it contains not only a
computation of tax liabilities but also a demand for payment
within a prescribed period, thereby signaling the time when
penalties and interests begin to accrue against the taxpayer
and
enabling
the
latter
to
determine
his
remedies therefor. Due process requires that it must be
served on and received by the taxpayer.[72]
A post-reporting notice and pre-assessment notice do not
bear the gravity of a formal assessment notice. The postreporting notice and pre-assessment notice merely hint at the
initial findings of the BIR against a taxpayer and invites the
latter
to
an
informal
conference
or clarificatory meeting. Neither notice contains a declaration
of the tax liability of the taxpayer or a demand for payment
thereof. Hence, the lack of such notices inflicts no prejudice
on the taxpayer for as long as the latter is properly served a
formal assessment notice. In the case of respondent, a formal
assessment notice was received by him as acknowledged in
his Petition for Review and Joint Stipulation; and, on the basis
thereof, he filed a protest with the BIR, Baguio City and
eventually a petition with the CTA.
WHEREFORE, the petition is GRANTED. The March 31,
2005
Decision of
the
Court
of
Appeals
is REVERSED and SET ASIDE and the April 2, 2002
Decision and October 10, 2002 Resolution of the Court of Tax
Appeals are REINSTATED.
SO ORDERED.
FIRST DIVISION
COMMISSIONER OF INTERNAL G.R. No. 166387
REVENUE, Petitioner, - v e r s u s - ENRON SUBIC
POWER
CORPORATION, Respondent.
Promulgated: January 19, 2009
x----------------------------------- - - - - - - - - - - - - - - -x
RESOLUTION
In this petition for review on certiorari under Rule 45 of
the Rules of Court, petitioner Commissioner of Internal
Revenue (CIR) assails the November 24, 2004
decision[1] of the Court of Appeals (CA) annulling the
formal assessment notice issued by the CIR against
respondent Enron Subic Power Corporation (Enron) for
failure to state the legal and factual bases for such
assessment.
Enron, a domestic corporation registered with
the Subic Bay Metropolitan Authority as a freeport
enterprise,[2] filed its annual income tax return for the
year 1996 on April 12, 1997. It indicated a net loss
of P7,684,948. Subsequently, the Bureau of Internal
Revenue, through a preliminary five-day letter,
[3]
informed it of a proposed assessment of an
alleged P2,880,817.25 deficiency income tax.[4] Enron

10
disputed the proposed deficiency assessment in its first
protest letter.[5]
On May 26, 1999, Enron received from the
a formal assessment notice[6] requiring it to pay
alleged deficiency income tax of P2,880,817.25 for
taxable year 1996. Enron protested this deficiency
assessment.[7]

CIR
the
the
tax

Due to the non-resolution of its protest within

the 180-day period, Enron filed a petition for review in
the Court of Tax Appeals (CTA). It argued that the
deficiency tax assessment disregarded the provisions
of Section 228 of the National Internal Revenue Code
(NIRC), as amended,[8] and Section 3.1.4 of Revenue
Regulations (RR) No. 12-99[9] by not providing the legal
and factual bases of the assessment. Enron likewise
questioned the substantive validity of the assessment.
[10]

In a decision dated September 12, 2001, the

CTA granted Enrons petition and ordered the
cancellation of its deficiency tax assessment for the
year 1996. The CTA reasoned that the assessment
notice sent to Enron failed to comply with the
requirements of a valid written notice under Section
228 of the NIRC and RR No. 12-99. The CIRs motion for
reconsideration of the CTA decision was denied in a
resolution dated November 12, 2001.
The CIR appealed the CTA decision to the CA
but the CA affirmed it. The CA held that the audit
working papers did not substantially comply with
Section 228 of the NIRC and RR No. 12-99 because
they failed to show the applicability of the cited law to
the facts of the assessment. The CIR filed a motion for
reconsideration but this was deemed abandoned when
he filed a motion for extension to file a petition for
review in this Court.
The CIR now argues that respondent was
informed of the legal and factual bases of the
deficiency assessment against it.

We adopt in toto the findings of fact of the CTA, as

affirmed by the CA. In Compagnie Financiere Sucres et
Denrees v. CIR,[11] we held:
We reiterate the well-established
doctrine that as a matter of practice
and principle, [we] will not set aside
the conclusion reached by an agency,
like the CTA, especially if affirmed by
the [CA]. By the very nature of its
function, it has dedicated itself to the
study
and
consideration of
tax
problems
and
has
necessarily
developed an expertise on the subject,
unless there has been an abuse or
improvident exercise of authority on its
part, which is not present here.

The CIR errs in insisting that the notice of

assessment
in
question
complied
with
the
requirements of the NIRC and RR No. 12-99.

A notice of assessment is:

[A] declaration of deficiency taxes

issued to a [t]axpayer who fails to
respond to a Pre-Assessment Notice
(PAN) within the prescribed period of
time, or whose reply to the PAN was
found to be without merit. The Notice
of Assessment shall inform the
[t]axpayer of this fact, and that the
report of investigation submitted by
the Revenue Officer conducting the
audit shall be given due course.

The formal letter of demand calling for

payment of the taxpayers deficiency
tax or taxes shall state the fact, the
law, rules and regulations or
jurisprudence on
which
the
assessment is based, otherwise
the formal letter of demand and
the notice of assessment shall be
void. (emphasis supplied)[12]

Section 228 of the NIRC provides that the

taxpayer shall be informed in writing of the law and the
facts on which the assessment is made. Otherwise, the
assessment is void. To implement the provisions of
Section 228 of the NIRC, RR No. 12-99 was enacted.
Section 3.1.4 of the revenue regulation reads:
3.1.4. Formal Letter of Demand
and Assessment Notice. The formal
letter of demand and assessment
notice shall be issued by the
Commissioner or his duly authorized
representative. The letter of demand
calling
for
payment
of
the
taxpayers deficiency tax or taxes
shall state the facts, the law, rules
and regulations, or jurisprudence
on which the assessment is based,
otherwise, the formal letter of
demand and assessment notice
shall be void. The same shall be sent
to the taxpayer only by registered mail
or by personal delivery. xxx (emphasis
supplied)

It is clear from the foregoing that a taxpayer must be

informed in writing of the legal and factual bases of the
tax assessment made against him. The use of the word
shall in these legal provisions indicates the mandatory
nature of the requirements laid down therein. We note
the CTAs findings:

In [this] case, [the CIR] merely issued a

formal assessment and indicated
therein the supposed tax, surcharge,
interest and compromise penalty due
thereon. The Revenue Officers of the
[the CIR] in the issuance of the Final
Assessment Notice did not provide
Enron with the written bases of the law
and facts on which the subject
assessment is based. [The CIR] did not

11
bother to explain how it arrived at such
an assessment. Moreso, he failed to
mention the specific provision of the
Tax Code or rules and regulations which
were not complied with by Enron.[13]

very
reason
for
the
Government itself.
WHEREFORE, the petition is hereby DENIED. The
November 24, 2004 decision of the Court of Appeals
is AFFIRMED.
No costs.
SO ORDERED.

Both the CTA and the CA concluded that the

deficiency tax assessment merely itemized the
deductions disallowed and included these in the gross
income. It also imposed the preferential rate of 5% on
some items categorized by Enron as costs. The legal
and factual bases were, however, not indicated.
The CIR insists that an examination of the facts
shows that Enron was properly apprised of its tax
deficiency. During the pre-assessment stage, the CIR
advised Enrons representative of the tax deficiency,
informed it of the proposed tax deficiency assessment
through a preliminary five-day letter and furnished
Enron a copy of the audit working paper [14] allegedly
showing in detail the legal and factual bases of the
assessment. The CIR argues that these steps sufficed
to inform Enron of the laws and facts on which the
deficiency tax assessment was based.
We disagree. The advice of tax deficiency,
given by the CIR to an employee of Enron, as well as
the preliminary five-day letter, were not valid
substitutes for the mandatory notice in writing of the
legal and factual bases of the assessment. These steps
were mere perfunctory discharges of the CIRs duties in
correctly assessing a taxpayer. [15] The requirement for
issuing a preliminary or final notice, as the case may
be, informing a taxpayer of the existence of a
deficiency tax assessment is markedly diferent from
the requirement of what such notice must contain. Just
because the CIR issued an advice, a preliminary letter
during the pre-assessment stage and a final notice, in
the order required by law, does not necessarily mean
that Enron was informed of the law and facts on which
the deficiency tax assessment was made.
The law requires that the legal and factual
bases of the assessment be stated in the formal letter
of demand and assessment notice. Thus, such cannot
be presumed. Otherwise, the express provisions of
Article 228 of the NIRC and RR No. 12-99 would be
rendered nugatory. The alleged factual bases in the
advice, preliminary letter and audit working papers did
not suffice. There was no going around the mandate of
the law that the legal and factual bases of the
assessment be stated in writing in the formal letter of
demand accompanying the assessment notice.
We note that the old law merely required that
the taxpayer be notified of the assessment made by
the CIR. This was changed in 1998 and the taxpayer
must now be informed not only of the law but also of
the facts on which the assessment is made. [16] Such
amendment is in keeping with the constitutional
principle that no person shall be deprived of property
without due process.[17] In view of the absence of a fair
opportunity for Enron to be informed of the legal and
factual bases of the assessment against it, the
assessment in question was void. We reiterate our
ruling in Reyes v. Almanzor, et al.:[18]
Verily, taxes are the
lifeblood of the Government
and so should be collected
without
unnecessary
hindrance.
However,
such
collection should be made in
accordance with law as any
arbitrariness will negate the

FIRST DIVISION
G.R. No. 120935
LUCAS G. ADAMSON, THERESE
JUNE D.
ADAMSON, and SARA S. DE LOS REYES, in
their capacities as President, Treasurer and
Secretary
of
Adamson
Management
Corporation, Petitioners, - versus - COURT OF
APPEALS and LIWAYWAY VINZONS-CHATO, in
her capacity as Commissioner of the Bureau
of Internal Revenue, Respondents.
x-- - - - - - - - - - - - - - - - - - - - - - - - x
G.R. No. 124557
COMMISSIONER
OF INTERNAL
REVENUE,
Petitioner, -versusCOURT OF APPEALS,
COURT
OF
TAX
APPEALS,
ADAMSON
MANAGEMENT
CORPORATION,
LUCAS
G.
ADAMSON, THERESE JUNE D. ADAMSON, and
SARA
S. DE LOS REYES, Respondents.
Promulgated: May 21, 2009
DECISION
Before the Court are the consolidated cases of G.R.
No. 120935 and G.R. No. 124557.
G.R. No. 120935 involves a petition for
review on certiorari filed by petitioners LUCAS G.
ADAMSON, THERESE JUNE D. ADAMSON, and SARA
S. DE LOS REYES (private respondents), in their
respective capacities as president, treasurer and
secretary of Adamson Management Corporation
(AMC) against then Commissioner of Internal
Revenue
Liwayway
Vinzons-Chato
(COMMISSIONER), under Rule 45 of the Revised
Rules of Court. They seek to review and reverse the
Decision promulgated on March 21, 1995 and
Resolution issued on July 6, 1995 of the Court of
Appeals in CA-G.R. SP No. 35488 (Liwayway
Vinzons-Chato, et al. v. Hon. Judge Erna FalloranAliposa, et al.).
G.R. No. 124557 is a petition for review
on certiorari filed by the Commissioner, assailing
the Decision dated March 29, 1996 of the Court of
Appeals in CA-G.R. SP No. 35520, titled
Commissioner of Internal Revenue v. Court of Tax
Appeals, Adamson Management Corporation, Lucas
G. Adamson, Therese June D. Adamson and Sara S.
de los Reyes. In the said Decision, the Court of
Appeals upheld the Resolution promulgated on
September 19, 1994 by the Court of Tax Appeals
(CTA) in C.T.A. Case No. 5075 (Adamson
Management Corporation, Lucas G. Adamson,
Therese Adamson and Sara de los Reyes v.
Commissioner of Internal Revenue).
The facts, as culled from the findings of the
appellate court, follow:
On June
20,
1990,
Lucas
Adamson
and AMC sold 131,897 common shares of stock in
Adamson and Adamson, Inc. (AAI) to APAC Holding
Limited
(APAC).
The
shares
were
valued
at P7,789,995.00.[1] On June 22, 1990, P159,363.21
was paid as capital gains tax for the transaction.

12
On October
12,
1990, AMC sold
to APAC Philippines, Inc. another 229,870 common
shares of stock in AAI for P17,718,360.00. AMC
paid the capital gains tax of P352,242.96.
On October 15, 1993, the Commissioner
issued a Notice of Taxpayer to AMC, Lucas G.
Adamson, Therese June D. Adamson and Sara S. de
los Reyes, informing them of deficiencies on their
payment of capital gains tax and Value Added Tax
(VAT). The notice contained a schedule for
preliminary conference.
The
events
preceding G.R.
No.
120935 are the following:
On October 22, 1993, the Commissioner
filed with the Department of Justice (DOJ) her
Affidavit of Complaint[2] against AMC, Lucas G.
Adamson, Therese June D. Adamson and Sara S. de
los Reyes for violation of Sections 45 (a) and (d) [3],
and 110[4], in relation to Section 100[5], as penalized
under Section 255,[6] and for violation of Section
253[7], in relation to Section 252 (b) and (d) of the
National Internal Revenue Code (NIRC).[8]
AMC, Lucas G. Adamson, Therese June D.
Adamson and Sara S. de los Reyes filed with the
DOJ a motion to suspend proceedings on the
ground of prejudicial question, pendency of a civil
case with the Supreme Court, and pendency of
their letter-request for re-investigation with the
Commissioner. After the preliminary investigation,
State Prosecutor Alfredo P. Agcaoili found probable
cause. The Motion for Reconsideration against the
findings of probable cause was denied by the
prosecutor.
On April 29, 1994, Lucas G. Adamson,
Therese June D. Adamson and Sara S. de los Reyes
were charged before the Regional Trial Court (RTC)
ofMakati, Branch 150 in Criminal Case Nos. 941842 to 94-1846. They filed a Motion to Dismiss or
Suspend the Proceedings. They invoked the
grounds that there was yet no final assessment of
their tax liability, and there were still pending
relevant Supreme Court and CTA cases. Initially,
the trial court denied the motion.A Motion for
Reconsideration was however filed, this time
assailing the trial courts lack of jurisdiction over the
nature of the subject cases. On August 8, 1994, the
trial court granted the Motion. It ruled that the
complaints for tax evasion filed by the
Commissioner should be regarded as a decision of
the Commissioner regarding the tax liabilities of
Lucas G. Adamson, Therese June D. Adamson and
Sara S. de los Reyes, and appealable to the CTA. It
further held that the said cases cannot proceed
independently of the assessment case pending
before the CTA, which has jurisdiction to determine
the civil and criminal tax liability of the
respondents therein.
On October 10, 1994, the Commissioner
filed a Petition for Review with the Court of Appeals
assailing the trial courts dismissal of the criminal
cases. She averred that it was not a condition
prerequisite that a formal assessment should first
be given to the private respondents before she
may file the aforesaid criminal complaints against
them. She argued that the criminal complaints for
tax evasion may proceed independently from the
assessment cases pending before the CTA.
On March 21, 1995, the Court of Appeals
reversed the trial courts decision and reinstated
the criminal complaints. The appellate court held
that, in a criminal prosecution for tax evasion,
assessment of tax deficiency is not required
because the offense of tax evasion is
complete or consummated when the offender
has knowingly and willfully filed a fraudulent

return with intent to evade the tax.[9] It ruled

that private respondents filed false and
fraudulent returns with intent to evade
taxes, and acting thereupon, petitioner filed
an
Affidavit
of
Complaint
with
the
Department
of
Justice,
without
an
accompanying
assessment
of
the
tax
deficiency of private respondents, in order to
commence criminal action against the latter
for tax evasion.[10]
Private respondents filed a Motion for
Reconsideration, but the trial court denied the
motion on July 6, 1995. Thus, they filed the petition
in G.R. No. 120935, raising the following issues:
1.

WHETHER OR NOT THE

RESPONDENT
HONORABLE
COURT OF APPEALS ERRED IN
APPLYING THE DOCTRINE IN
UNGAB V. CUSI (Nos. L-4191924, May 30, 1980, 97 SCRA
877) TO THE CASE AT BAR.

2.

WHETHER OR NOT AN
ASSESSMENT
IS
REQUIRED
UNDER
THE
SECOND
CATEGORY OF THE OFFENSE IN
SECTION 253 OF THE NIRC.

3.

WHETHER OR NOT THERE

WAS A VALID ASSESSMENT
MADE BY THE COMMISSIONER
IN THE CASE AT BAR.

4.

WHETHER OR NOT THE

FILING
OF
A
CRIMINAL
COMPLAINT SERVES AS AN
IMPLIED ASSESSMENT ON THE
TAX
LIABILITY
OF
THE
TAXPAYER.

5.

WHETHER OR NOT THE

FILING
OF
THE
CRIMINAL
INFORMATION
FOR
TAX
EVASION IN THE TRIAL COURT
IS PREMATURE BECAUSE THERE
IS YET NO BASIS FOR THE
CRIMINAL
CHARGE
OF
WILLFULL INTENT TO EVADE
THE PAYMENT OF A TAX.

6.

WHETHER OR NOT THE

DOCTRINES LAID DOWN IN THE
CASES OF YABES V. FLOJO (No.
L-46954, July 20, 1982, 115
SCRA 286) AND CIR V. UNION
SHIPPING CORP. (G.R. No.
66160, May 21, 1990, 185
SCRA 547) ARE APPLICABLE TO
THE CASE AT BAR.

7.

WHETHER OR NOT THE

COURT
OF
TAX
APPEALS HAS JURISDICTION
OVER THE DISPUTE ON WHAT
CONSTITUTES THE
PROPER
TAXES
DUE
FROM
THE
TAXPAYER.

In parallel circumstances, the following

events preceded G.R. No. 124557:
On December 1, 1993, AMC, Lucas G.
Adamson, Therese June D. Adamson and Sara S. de
los Reyes filed a letter request for re-investigation
with the Commissioner of the Examiners Findings
earlier issued by the Bureau of Internal Revenue
(BIR), which pointed out the tax deficiencies.

13
On March
15,
1994 before
the
Commissioner could act on their letter-request,
AMC, Lucas G. Adamson, Therese June D. Adamson
and Sara S. de los Reyes filed a Petition for Review
with the CTA. They assailed the Commissioners
finding of tax evasion against them. The
Commissioner moved to dismiss the petition, on
the ground that it was premature, as she had not
yet issued a formal assessment of the tax liability
of therein petitioners. On September 19, 1994,
theCTA denied the Motion to Dismiss. It considered
the criminal complaint filed by the Commissioner
with the DOJ as an implied formal assessment, and
the filing of the criminal informations with the RTC
as a denial of petitioners protest regarding the tax
deficiency.
The Commissioner repaired to the Court of
Appeals on the ground that the CTA acted with
grave abuse of discretion. She contended that, with
regard to the protest provided under Section 229 of
the NIRC, there must first be a formal assessment
issued by the Commissioner, and it must be in
accord with Section 6 of Revenue Regulation No.
12-85. She maintained that she had not yet issued
a formal assessment of tax liability, and the tax
deficiency amounts mentioned in her criminal
complaint with the DOJ were given only to show the
diference between the tax returns filed and the
audit findings of the revenue examiner.
The Court of Appeals sustained the CTAs
denial
of
the
Commissioners
Motion
to
Dismiss. Thus, the Commissioner filed the petition
for review under G.R. No. 124557, raising the
following issues:
1.

WHETHER OR NOT THE

INSTANT PETITION SHOULD BE
DISMISSED FOR FAILURE TO
COMPLY WITH THE MANDATORY
REQUIREMENT
OF
A
CERTIFICATION UNDER OATH
AGAINST FORUM SHOPPING;

2.

WHETHER OR NOT THE

CRIMINAL
CASE
FOR
TAX
EVASION IN THE CASE AT BAR
CAN PROCEED WITHOUT AN
ASSESSMENT;

3.

WHETHER OR NOT THE

COMPLAINT FILED WITH THE
DEPARTMENT OF JUSTICE CAN
BE CONSTRUED AS AN IMPLIED
ASSESSMENT; and

4.

WHETHER OR NOT THE

COURT
OF
TAX
APPEALS HAS JURISDICTION TO
ACT
ON
PRIVATE
RESPONDENTS PETITION FOR
REVIEW FILED WITH THE SAID
COURT.

The issues in G.R. No. 124557 and G.R.

No. 120935 can be compressed into three:
1.

2.

WHETHER
THE
COMMISSIONER HAS ALREA
DY
RENDERED
AN
ASSESSMENT (FORMAL OR
OTHERWISE) OF THE TAX
LIABILITY OF AMC, LUCAS G.
ADAMSON, THERESE JUNE
D. ADAMSON AND SARA S.
DE LOS REYES;
WHETHER THERE IS
BASIS FOR THE CRIMINAL

CASES FOR TAX EVASION TO

PROCEED AGAINST AMC,
LUCAS
G.
ADAMSON,
THERESE
JUNE
D.
ADAMSON AND SARA S. DE
LOS REYES; and
3.

WHETHER THE COURT

OF
TAX
APPEALS HAS JURISDICTION
TO TAKE COGNIZANCE OF
BOTH THE CIVIL AND THE
CRIMINAL ASPECTS OF THE
TAX LIABILITY OF AMC,
LUCAS
G.
ADAMSON,
THERESE
JUNE
D.
ADAMSON AND SARA S. DE
LOS REYES.

The case of CIR v. Pascor Realty, et al.[11] is

relevant. In this case, then BIR Commissioner Jose U.
Ong authorized revenue officers to examine the books
of accounts and other accounting records of Pascor
Realty and Development Corporation (PRDC) for 1986,
1987 and 1988. This resulted in a recommendation for
the issuance of an assessment in the amounts
of P7,498,434.65 and P3,015,236.35 for the years 1986
and 1987, respectively.

On March 1, 1995, the Commissioner filed a

criminal complaint before the DOJ against PRDC, its
President Rogelio A. Dio, and its Treasurer Virginia S.
Dio, alleging evasion of taxes in the total amount
of P10,513,671.00. Private respondents filed an Urgent
Request for Reconsideration/Reinvestigation disputing
the tax assessment and tax liability.

The Commissioner denied the urgent request

for reconsideration/reinvestigation because she had
not yet issued a formal assessment.

Private respondents then elevated the Decision

of the Commissioner to the CTA on a petition for
review. The Commissioner filed a Motion to Dismiss the
petition on the ground that the CTA has no jurisdiction
over the subject matter of the petition, as there was
yet no formal assessment issued against the
petitioners. The CTA denied the said motion to dismiss
and ordered the Commissioner to file an answer within
thirty (30) days. The Commissioner did not file an
answer nor did she move to reconsider the
resolution. Instead, the Commissioner filed a petition
for review of the CTA decision with the Court of
Appeals. The Court of Appeals upheld the CTA order.
However, this Court reversed the Court of Appeals
decision and the CTA order, and ordered the dismissal
of the petition. We held:
An assessment contains not only a
computation of tax liabilities, but also a
demand
for
payment
within
a
prescribed period. It also signals the
time when penalties and interests
begin
to
accrue
against
the
taxpayer. To enable the taxpayer to

14
determine his remedies thereon, due
process requires that it must be served
on
and
received
by
the
taxpayer. Accordingly,
an
affidavit,
which was executed by revenue
officers stating the tax liabilities of a
taxpayer and attached to a criminal
complaint for tax evasion, cannot be
deemed an assessment that can be
questioned before the Court of Tax
Appeals.

In the present case, the revenue

officers Affidavit merely contained a
computation
of
respondents
tax
liability. It did not state a demand or a
period for payment. Worse, it was
addressed to the justice secretary, not
to the taxpayers.

Neither the NIRC nor the revenue

regulations governing the protest of
assessments[12] provide
a
specific
definition
or
form
of
an
assessment. However, the NIRC defines
the specific functions and efects of an
assessment. To consider the affidavit
attached to the Complaint as a proper
assessment is to subvert the nature of
an assessment and to set a bad
precedent that will prejudice innocent
taxpayers.

A notice to the
efect that the amount
therein stated is due as
tax and a demand for
payment thereof.[18]

True, as pointed out by the private

respondents, an assessment informs
the taxpayer that he or she has tax
liabilities. But
not
all
documents
coming from the BIR containing a
computation of the tax liability can be
deemed assessments.
To start with, an assessment must
be sent to and received by a taxpayer,
and must demand payment of the
taxes described therein within a
specific period. Thus, the NIRC imposes
a 25 percent penalty, in addition to the
tax due, in case the taxpayer fails to
pay the deficiency tax within the time
prescribed for its payment in the notice
of assessment. Likewise, an interest of
20 percent per annum, or such higher
rate as may be prescribed by rules and
regulations, is to be collected from the
date prescribed for its payment until
the full payment.[13]
The issuance of an assessment is
vital in determining the period of
limitation regarding its proper issuance
and the period within which to protest
it. Section 203[14] of the NIRC provides
that internal revenue taxes must be
assessed within three years from the
last day within which to file the
return. Section 222,[15] on the other
hand, specifies a period of ten years in
case a fraudulent return with intent to
evade was submitted or in case of
failure to file a return. Also, Section
228[16] of the same law states that said
assessment may be protested only
within
thirty
days
from
receipt
thereof. Necessarily, the taxpayer must
be certain that a specific document
constitutes an assessment. Otherwise,
confusion would arise regarding the
period within which to make an
assessment or to protest the same, or
whether interest and penalty may
accrue thereon.
It should also be stressed that the
said document is a notice duly sent to
the taxpayer. Indeed, an assessment is
deemed made only when the collector
of internal revenue releases, mails or
sends such notice to the taxpayer.[17]

Respondents maintain that an

assessment, in relation to taxation, is
simply understood to mean:

Fixes
the
liability of the taxpayer
and
ascertains
the
facts and furnishes the
data for the proper
presentation
of
tax
rolls.[19]
Even these definitions fail to
advance private respondents case.
That the BIR examiners Joint Affidavit
attached to the Criminal Complaint
contained some details of the tax
liabilities of private respondents does
not ipso
facto make
it
an
assessment. The purpose of the Joint
Affidavit was merely to support and
substantiate the Criminal Complaint
for tax evasion. Clearly, it was not
meant to be a notice of the tax due
and a demand to the private
respondents for payment thereof.
The fact that the Complaint itself
was specifically directed and sent to
the Department of Justice and not to
private respondents shows that the
intent of the commissioner was to file a
criminal complaint for tax evasion, not
to issue an assessment. Although the
revenue officers recommended the
issuance of an assessment, the
commissioner opted instead to file a
criminal case for tax evasion. What
private respondents received was a
notice from the DOJ that a criminal
case for tax evasion had been filed
against them, not a notice that the
Bureau of Internal Revenue had made
an assessment.
Private respondents maintain that
the filing of a criminal complaint must
be preceded by an assessment. This is
incorrect, because Section 222 of the
NIRC specifically states that in cases
where a false or fraudulent return is
submitted or in cases of failure to file a
return such as this case, proceedings in
court may be commenced without an
assessment. Furthermore, Section 205
of the same Code clearly mandates
that the civil and criminal aspects of
the
case
may
be
pursued
simultaneously. In Ungab
v.
Cusi,
[20]
petitioner
therein
sought
the
dismissal of the criminal Complaints for
being premature, since his protest to
the CTA had not yet been resolved. The
Court held that such protests could not
stop or suspend the criminal action
which
was
independent
of
the
resolution of the protest in the

15
CTA. This
was
because
the
commissioner of internal revenue had,
in such tax evasion cases, discretion on
whether to issue an assessment or to
file a criminal case against the
taxpayer or to do both.
Private respondents insist that
Section 222 should be read in relation
to Section 255 of the NIRC, [21] which
penalizes failure to file a return. They
add that a tax assessment should
precede a criminal indictment. We
disagree. To reiterate, said Section 222
states that an assessment is not
necessary before a criminal charge can
be filed.This is the general rule. Private
respondents failed to show that they
are entitled to an exception. Moreover,
the criminal charge need only be
supported by a prima facieshowing of
failure to file a required return. This
fact need not be proven by an
assessment.
The issuance of an assessment
must be distinguished from the filing of
a complaint. Before an assessment is
issued, there is, by practice, a preassessment
notice
sent
to
the
taxpayer. The taxpayer is then given a
chance to submit position papers and
documents
to
prove
that
the
assessment is unwarranted. If the
commissioner
is
unsatisfied,
an
assessment signed by him or her is
then sent to the taxpayer informing the
latter specifically and clearly that an
assessment has been made against
him or her. In contrast, the criminal
charge need not go through all
these. The criminal charge is filed
directly with the DOJ. Thereafter, the
taxpayer is notified that a criminal case
had been filed against him, not that the
commissioner
has
issued
an
assessment. It must be stressed that a
criminal complaint is instituted not to
demand payment, but to penalize the
taxpayer for violation of the Tax Code.
In the cases at bar, the Commissioner denied that
she issued a formal assessment of the tax liability
of AMC, Lucas G. Adamson, Therese June D.
Adamson and Sara S. de los Reyes. She admits
though that she wrote the recommendation
letter[22] addressed to the Secretary of the DOJ
recommending the filing of criminal complaints
against AMC and the aforecited persons for
fraudulent returns and tax evasion.
The first issue is whether the Commissioners
recommendation letter can be considered as a
formal assessment of private respondents tax
liability.
In the context in which it is used in the
NIRC, an assessment is a written notice and
demand made by the BIR on the taxpayer for the
settlement of a due tax liability that is there
definitely set and fixed. A written communication
containing a computation by a revenue officer of
the tax liability of a taxpayer and giving him an
opportunity to contest or disprove the BIR
examiners findings is not an assessment since it is
yet indefinite.[23]
We rule that the recommendation letter of
the Commissioner cannot be considered a formal
assessment. Even a cursory perusal of the said
letter would reveal three key points:

1.
2.

3.

It was not addressed to the taxpayers.

There was no demand made on
the taxpayers to pay the tax
liability, nor a period for payment
set therein.
The letter was never mailed or sent to the
taxpayers by the Commissioner.

In fine, the said recommendation letter

served merely as the prima facie basis for filing
criminal informations that the taxpayers had
violated Section 45 (a) and (d), and 110, in relation
to Section 100, as penalized under Section 255,
and for violation of Section 253, in relation to
Section 252 9(b) and (d) of the Tax Code.[24]
The next issue is whether the filing of the
criminal
complaints
against
the
private
respondents by the DOJ is premature for lack of a
formal assessment.
Section 269 of the NIRC (now Section 222
of the Tax Reform Act of 1997) provides:
Sec. 269. Exceptions as to period of
limitation of assessment and collection
of taxes.-(a) In the case of a false or
fraudulent return with intent to evade
tax or of failure to file a return, the tax
may be assessed, or a proceeding in
court after the collection of such tax
may be begun without assessment, at
any time within ten years after the
discovery of the falsity, fraud or
omission: Provided, That in a fraud
assessment which has become final
and executory, the fact of fraud shall
be judicially taken cognizance of in the
civil or criminal action for collection
thereof

The law is clear. When fraudulent tax returns are

involved as in the cases at bar, a proceeding in
court after the collection of such tax may be
begun without assessment. Here, the private
respondents had already filed the capital gains tax
return and the VAT returns, and paid the taxes they
have declared due therefrom.Upon investigation of
the examiners of the BIR, there was a preliminary
finding of gross discrepancy in the computation of
the capital gains taxes due from the sale of two
lots of AAI shares, first to APAC and then to APAC
Philippines, Limited. The examiners also found that
the VAT had not been paid for VAT-liable sale of
services for the third and fourth quarters of
1990. Arguably, the gross disparity in the taxes due
and the amounts actually declared by the private
respondents constitutes badges of fraud.
Thus, the applicability of Ungab v.
Cusi[25] is evident to the cases at bar. In this
seminal case, this Court ruled that there was no
need for precise computation and formal
assessment in order for criminal complaints to be
filed against him. It quoted Mertens Law of Federal
Income Taxation, Vol. 10, Sec. 55A.05, p. 21, thus:
An assessment of a deficiency
is not necessary to a criminal
prosecution for willful attempt to defeat
and evade the income tax. A crime is
complete when the violator has
knowingly
and
willfully
filed
a
fraudulent return, with intent to evade
and defeat the tax. The perpetration of
the crime is grounded upon knowledge
on the part of the taxpayer that he has
made an inaccurate return, and the
governments failure to discover the

16
error and promptly to assess has no
connections with the commission of the
crime.
This hoary principle still underlies Section 269 and
related provisions of the present Tax Code.
We now go to the issue of whether the CTA
has no jurisdiction to take cognizance of both the
criminal and civil cases here at bar.
Under Republic Act No. 1125 (An Act
Creating the Court of Tax Appeals) as amended, the
rulings of the Commissioner are appealable to the
CTA, thus:
SEC. 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 laws or part of
law administered by
the Bureau of Internal
Revenue;

Republic Act No. 8424, titled An Act Amending

the National Internal Revenue Code, As Amended, And
For Other Purposes, later expanded the jurisdiction of
the Commissioner and, correspondingly, that of the
CTA, thus:

(a)
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 in
relation thereto, or other
matters arising under the
National Internal Revenue
or other laws administered
by the Bureau of Internal
Revenue;
(2) Inaction by the
Commissioner of Internal
Revenue in cases involving
disputed
assessments,
refunds
of
internal
revenue taxes, fees or
other charges, penalties in
relation thereto, or other
matters arising under the
National Internal Revenue
Code
or
other
laws
administered
by
the
Bureau
of
Internal
Revenue,
where
the
National Internal Revenue
Code provides a specific
period of action, in which
case the inaction shall be
deemed a denial;
(3) Decisions, orders
or resolutions
of
the
Regional Trial Courts in
local tax cases originally
decided or resolved by
them in the exercise of
their original or appellate
jurisdiction;
xxx

SEC.
4. Power
of
the
Commissioner to Interpret Tax Laws
and to Decide Tax Cases. The power to
interpret the provisions of this Code
and other tax laws shall be under the
exclusive and original jurisdiction of the
Commissioner, subject to review by the
Secretary of Finance.
The power to decide disputed
assessments,
refunds
of
internal
revenue taxes, fees or other charges,
penalties imposed in relation thereto,
or other matters arising under this
Code or other laws or portions thereof
administered by the Bureau of Internal
Revenue
is
vested
in
the
Commissioner, subject to the exclusive
appellate jurisdiction ofthe Court of Tax
Appeals.
The latest statute dealing with the jurisdiction of
the CTA is Republic Act No. 9282.[26] It provides:
SEC. 7. Section 7 of the same Act is hereby
amended to read as follows:
Sec.
exercise:

7. Jurisdiction.

The

CTA

shall

(b) Jurisdiction over cases

involving criminal ofenses as herein
provided:
(1) Exclusive original
jurisdiction
over
all
criminal ofenses arising
from violations of the
National Internal Revenue
Code or Tarif and Customs
Code and other laws
administered
by
the
Bureau
of
Internal
Revenue or the Bureau of
Customs: Provided,
however, That ofenses or
felonies mentioned in this
paragraph
where
the
principal amount of taxes
and fees, exclusive of
charges and penalties,
claimed is less than One
million
pesos
(P1,000,000.00) or where
there is no specified
amount claimed shall be
tried by the regular courts
and the jurisdiction of the
CTA shall be appellate.
Any provision of law or the
Rules of Court to the
contrary notwithstanding,
the criminal action and the

17
corresponding civil action
for the recovery of civil
liability for taxes and
penalties shall at all times
be
simultaneously
instituted with, and jointly
determined in the same
proceeding by the CTA,
the filing of the criminal
action being deemed to
necessarily carry with it
the filing of the civil
action, and no right to
reserve the filling of such
civil
action
separately
from the criminal action
will be recognized.

Metropolitan Trial Courts,

Municipal Trial Courts
and Municipal Circuit
Trial Courts, in their
respective jurisdiction.
These laws have expanded the jurisdiction of the
CTA. However, they did not change the jurisdiction
of the CTA to entertain an appeal only from a final
decision or assessment of the Commissioner, or in
cases where the Commissioner has not acted
within the period prescribed by the NIRC. In the
cases at bar, the Commissioner has not issued an
assessment of the tax liability of private
respondents.
Finally, we hold that contrary to private
respondents stance, the doctrines laid down in CIR
v. Union Shipping Co. and Yabes v. Flojo are
not applicable to the cases at bar. In these earlier
cases, the Commissioner already rendered an
assessment of the tax liabilities of the delinquent
taxpayers, for which reason the Court ruled that
the filing of the civil suit for collection of the taxes
due was a final denial of the taxpayers request for
reconsideration of the tax assessment.

(2)
Exclusive
appellate jurisdiction in
criminal ofenses:
(a) Over appeals from the
judgments, resolutions or orders
of the Regional Trial Courts in tax
cases originally decided by
them,
in
their
respected
territorial jurisdiction.

IN VIEW WHEREOF, premises considered,

judgment is rendered:

(b) Over petitions for review

of the judgments, resolutions or
orders of the Regional Trial
Courts in the exercise of their
appellate jurisdiction over tax
cases originally decided by the
Metropolitan
Trial
Courts,
Municipal
Trial
Courts
and
Municipal Circuit Trial Courts in
their respective jurisdiction.
(c) Jurisdiction over tax
collection
cases
as
herein
provided:
(1) Exclusive original
jurisdiction in tax collection
cases involving final and
executory assessments for
taxes, fees, charges and
penalties:
Provided,
however,
That
collection
cases where the principal
amount of taxes and fees,
exclusive of charges and
penalties, claimed is less
than One million pesos
(P1,000,000.00)
shall
be
tried by the proper Municipal
Trial Court, Metropolitan Trial
Court and Regional Trial
Court.
(2) Exclusive appellate
jurisdiction in tax collection
cases:
(a)

Over appeals
from
the
judgments,
resolutions or orders of
the Regional Trial Courts
in tax collection cases
originally decided
by
them, in their respective
territorial jurisdiction.
(b) Over petitions
for
review
of
the
judgments, resolutions or
orders of the Regional
Trial
Courts
in
the
exercise
of
their
appellate
jurisdiction
over tax collection cases
originally decided by the

1.

In
G.R.
No.
120935,
AFFIRMING the CA decision
dated March 21, 1995, which
set aside the Regional Trial
Courts Order dated August 8,
1994,
and
REINSTATING
Criminal Case Nos. 94-1842 to
94-1846
for
further
proceedings before the trial
court; and

2.

In
G.R.
No.
124557,
REVERSING and SETTING ASIDE
the Decision of the Court of
Appeals dated March 29, 1996,
and ORDERING the dismissal of
C.T.A. Case No. 5075.

No costs.
SO ORDERED.

The NIRC of the Philippines, Annotated, 16th and

Revised Edition, Nolledo, J. and Nolledo, M. (1993), p.
414.
[3]

Section 45. Corporation Returns. (A) Requirements. - Every corporation, subject

to the tax herein imposed, except foreign
corporations not engaged in trade or business
in the Philippines shall render, in duplicate, a
true and accurate quarterly income tax return
and final or adjustment return in accordance
with the provisions of Chapter IX of this Title.
The return shall be filed by the president, vicepresident or other principal officer, and shall be
sworn to by such officer and by the treasurer or
assistant treasurer.
xxx
(D) Return on Capital Gains Realized
from Sale of Shares of Stock. - Every

18
corporation deriving capital gains from the sale
or exchange of shares of stock not traded thru
a local stock exchange as prescribed under
Sections 24 (e) 2 A, 25 (a) (6) (C) (i), 25(b)(5)
(C) (i), shall file a return within thirty (30) days
after each transactions and a final consolidated
return of all transactions during the taxable
year on or before the fifteenth (15th) day of the
fourth (4th) month following the close of the
taxable year.
SECTION 110. Return and Payment of Value-Added
Tax.
[4]

(A) Where to File the Return and Pay the Tax. Every person subject to value-added tax shall
file a quarterly return of his gross sales or
receipts and pay the tax due thereon to a bank
duly accredited by the Commissioner located in
the revenue district where such person is
registered
or
required
to
be
registered. However, in cases where there are
no duly accredited agent banks within the city
or municipality, the return shall be filed and
any amount due shall be paid to any duly
accredited bank within the district, or to the
Revenue District Officer, Collection Agent or
duly authorized Treasurer of the city or
municipality where such taxpayer has his
principal
place
of
business. Only
one
consolidated return shall be filed by the
taxpayer for all the branches and lines of
business subject to value-added tax. If no tax is
payable because the amount of input tax and
any amount authorized to be ofset against the
output tax is equal to or is in excess of the
output tax due on the return, the taxpayer
shall file the return with the Revenue District
Officer,
Collection
Agent
or
authorized
municipal treasurer where the taxpayers
principal place of business is located.
(B) Time for filing of return and payment of
tax. The return shall be filed and the tax paid
within 20 days following the end of each
quarter specifically prescribed for a VATregistered person under regulations to be
promulgated by the Secretary of Finance:
Provided, however, That any person whose
registration is cancelled in accordance with
paragraph (e) of Section 107 shall file a return
within 20 days from the cancellation of such
registration.
(C) Initial returns. The Commissioner may
prescribe an initial taxable period for any VATregistered person for his first return, which in
no case shall exceed 5 months.
[5]

Supra note 3 at pp. 588-590.

Section 100. Value-Added Tax on Sale of Goods. (A) Rate and Base of Tax. - There shall be
levied, assessed and collected on every sale,
barter or exchange of goods, a value-added tax
equivalent to 10% of the gross selling price or
gross value in money of the goods or
properties sold, bartered or exchanged, such
tax to be paid by the seller or transferor:

Provided, That the following sales by VATregistered persons shall be subject to zero
percent (0%):
(1) Export sales; and
(2) Sales to persons or entities whose
exemption under special laws or
international agreements to which
the Philippines is a signatory efectively
subjects such sales to zero rate.
Export Sales means the sale and shipment or
exportation of goods from the Philippines to a
foreign country, irrespective of any shipping
arrangement that may be agreed upon which
may influence or determine the transfer of
ownership of the goods so exported, or foreign
currency denominated sales. Foreign currency
denominated
sales,
means
sales
to
nonresidents
of
goods
assembled
or
manufactured in the Philippines, for delivery to
residents in the Philippines and paid for in
convertible foreign currency remitted through
the banking system in the Philippines.
(B) Transactions Deemed Sale. - The following
transactions shall be deemed sale:
(1) Transfer, use or consumption not in
the course of business of goods
originally intended for sale or for use in
the course of business;
(2) Distribution or transfer to:
(a) Shareholders or investors
as share in the profits of the registered
person; or
(b) Creditors in payment of
debt;
(3) Consignment of goods if actual sale
is not made within sixty (60) days
following the date such goods were
consigned;
(4) Retirement from or cessation of
business, with respect to inventories of
taxable goods existing as of such
retirement or cessation.
(C) Changes in or Cessation of Status of a VATregistered Person. - The tax imposed in
paragraph (a) of this Section shall also apply to
goods disposed of or existing as of a certain
date if under circumstances to be prescribed in
Regulations to be promulgated by the
Secretary of Finance, the status of a person as
a VAT-registered person changes or is
terminated.
(D) Determination of the Tax. (1) Tax billed as a separate item in the
invoice. If the tax is billed as a separate
item in the invoice, the tax shall be
based on the gross selling price,
excluding the tax. Gross selling price
means the total amount of money or its
equivalent which the purchaser pays or
is obligated to pay to the seller in
consideration of the sale, barter or
exchange of the goods, excluding the

19
value-added tax. The excise tax, if any,
on such goods or properties shall form
part of the gross selling price.
(2) Tax not billed separately or is billed
erroneously in the invoice. In case the
tax is not billed separately or is billed
erroneously in the invoice, the tax shall
be determined by multiplying the gross
selling price, including th amount
intended by the seller to cover the tax
or the tax billed erroneously, by the
factor 1/11 or such factor as may be
prescribed by regulations in case of
persons partially exempt under special
laws.
(3) Sales Returns, Allowances and
Sales Discounts. - The value of goods
sold and subsequently returned or for
which allowances were granted by a
VAT-registered
person
may
be
deducted from the gross sales or
receipts for the quarter in which a
refund
is
made
or
a
credit
memorandum or refund is issued. Sales
discount granted and indicated in the
invoice at the time of sale may be
excluded from the gross sales within
the same quarter.
(4) Authority of the Commissioner to
Determine the Appropriate Tax Base. The
Commissioner
shall,
by regulations,
determine
the
appropriate tax base in cases where a
transaction is deemed a sale, barter or
exchange of goods under paragraph (b)
hereof, or where the gross selling price
is unreasonably lower than the actual
market value.
[6]

xxx
(d) In the case of associations, partnerships, or
corporations, the penalty shall be imposed on
the partner, president, general manager,
branch manager, treasurer, officer-in-charge,
and employees responsible for the violation.

NIRC (1997)
Sec. 205. Remedies for the Collection of Delinquent
Taxes. -- The civil remedies for the collection of internal
revenue, fees, or charges, and increment thereto
resulting from delinquency shall be:
(a) By distraint of goods, chattels, or
efects, and other personal property of
whatever character, including stocks
and other securities, debts, credits,
bank accounts, and interest in and
rights to personal property, and by levy
upon real property and interest in or
rights to real property; and
(b) By civil or criminal action.
Either of these remedies or both
simultaneously may be pursued in the
discretion of the authorities charged
with
the
collection
of
such
taxes: Provided, however, That the
remedies of distraint and levy shall not
be availed of where the amount of tax
involved is not more than One hundred
pesos (P100).
The judgment in the criminal case shall
not only impose the penalty but shall
also order payment of the taxes subject
of the criminal case as finally decided
by the Commissioner.
[13]

The Bureau of Internal Revenue shall

advance the amounts needed to defray
costs of collection by means of civil or
criminal
action,
including
the
preservation
or
transportation
of
personal property distrained and the
advertisement and sale thereof, as well
as of real property and improvements
thereon.

Id. at 1022.

Section 255. Penal Liability of Corporations. Any

corporation, association or general co-partnership
liable for any of the acts or omissions penalized under
this Code, in addition to the penalties imposed herein
upon the responsible corporate officers, partners or
employees, shall, upon conviction, for each act or
omission be fined for not less than ten thousand pesos
but not more than one hundred thousand pesos.
[7]

(b) Any person who willfully aids or abets in the

commission of a crime penalized herein or who
causes the commission of any such ofense by
another, shall be liable in the same manner as
the principal.

Id. at 1021.

Section 253. Attempt to evade or defeat tax. -- Any

person who willfully attempts in any manner to evade
or defeat any tax imposed under this Code or the
payment thereof shall, in addition to other penalties
provided by law, upon conviction thereof, be fined not
more than ten thousand pesos or imprisoned for not
more than two years, or both.
Id., pp. 1020-1021.
Section 252. General provisions.
[8]

[14]

SEC. 203. Period of Limitation Upon Assessment and

Collection. -- Except as provided in Section 222,
internal revenue taxes shall be assessed within three
(3) 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: Provided,
That in a case where a return is filed beyond the period
prescribed by law, the three (3)-year period shall be
counted from the day the return was filed. For
purposes of this Section, a return filed before the last
day prescribed by law for the filing thereof shall be
considered as filed on such last day.
[15]

xxx

Id.

Id.

20
Sec. 222. Exceptions as to Period of Limitation of
Assessment and Collection of Taxes.
(a) In the case of a false or
fraudulent return with intent to evade
tax or of failure to file a return, the tax
may be assessed, or a proceeding in
court for the collection of such tax may
be filed without assessment, at any
time within ten (10) years after the
discovery of the falsity, fraud or
omission: Provided, That in a fraud
assessment which has become final
and executory, the fact of fraud shall
be judicially taken cognizance of in the
civil or criminal action for the collection
thereof.
(b) If before the expiration of the
time prescribed in the Section 203 for
the assessment of the tax, both the
Commissioner and the taxpayer have
agreed in writing to its assessment
after such time, the tax may be
assessed within the period agreed
upon. The period so agreed upon may
be extended by subsequent written
agreement made before the expiration
of the period previously agreed upon.
(c) Any internal revenue tax which
has been assessed within the period of
limitation as prescribed in paragraph
(a) hereof may be collected by distraint
or levy or by a proceeding in court
within five (5) years following the
assessment of the tax.
(d) Any internal revenue tax, which
has been assessed within the period
agreed upon as provided in paragraph
(b) hereinabove, may be collected by
distraint or levy or by a proceeding in
court within the period agreed upon
writing before the expiration of the five
(5)-year period. The period so agreed
upon may be extended by subsequent
written agreements made before the
expiration of the period previously
agreed upon.
(e) Provided,
however,
That
nothing in the immediately preceding
Section and paragraph (a) hereof shall
be
construed
to
authorize
the
examination and investigation or
inquiry into any tax return filed in
accordance with the provisions of any
tax amnesty law or decree.
Id.
Section 228. Protesting of Assessment. -- When the
Commissioner or his duly authorized representative
finds that proper taxes should be assessed, he shall
first notify the taxpayer of his findings: Provided,
however, That a reassessment notice shall not be
required in the following cases:
(a) When the finding for any
deficiency tax is the result of
mathematical error in the computation
of the tax as appearing on the face of
the return; or
(b) When a discrepancy has been
determined between the tax withheld
and the amount actually remitted by
the withholding agent; or
(c) When a taxpayer who opted to
claim a refund or tax credit of excess
creditable withholding tax for a taxable
period was determined to have carried
over and automatically applied the
same amount claimed against the
estimated tax liabilities for the taxable
[16]

quarter or quarters of the succeeding

taxable year; or
(d) When the excise tax due on
excisable articles has not been paid; or
(e)
When
an
article
locally
purchased or imported by an exempt
person, such as, but not limited to,
vehicles,
capital
equipment,
machineries and spare parts, has been
sold, traded or transferred to nonexempt persons.
The taxpayer shall be informed in writing of the law
and the facts on which the assessment is made;
otherwise, the assessment shall be void.
Within a period to be prescribed by implementing rules
and regulations, the taxpayer shall be required to
respond to said notice. If the taxpayer fails to respond,
the Commissioner or his duly authorized representative
shall issue an assessment based on his findings.
SEC 255. Failure to File Return, Supply Correct and
Accurate Information, Pay Tax, Withhold and Remit Tax
and Refund Excess Taxes Withheld on Compensation. -Any person required under this Code or by rules and
regulations promulgated thereunder to pay any tax,
make a return, keep any record, or supply correct and
accurate any information, who willfully fails to pay such
tax, make such return, keep such record, or supply
correct and accurate information, or withhold or remit
taxes withheld, or refund excess taxes withheld on
compensation, at the time or times required by law or
rules and regulations shall, in addition to other
penalties provided by law, upon conviction thereof, be
punished by a fine of not less than one (1) year but not
more than ten (10) years.
[21]

Any person who attempts to make it appear for

any reason that he or another has in fact filed a return
or statement, or actually files a return or statement
and subsequently withdraws the same return or
statement after securing the official receiving seal or
stamp of receipt of an internal revenue office wherein
the same was actually filed shall, upon conviction
therefor, be punished by a fine of not less than Ten
thousand pesos (P10,000) but not more than Twenty
thousand pesos (P20,000) and sufer imprisonment of
not less than one (1) year but not more than three (3)
years.

FIRST DIVISION
SILKAIR (SINGAPORE) PTE. LTD., Petitioner, versus - COMMISSIONER OF INTERNAL
REVENUE, Respondent.

G.R. No

Promulg

DECISION
The Case
G.R. No. 171383
Silkair (Singapore) Pte. Ltd. (petitioner) filed this
Petition for Review[1] to reverse the Court of Tax
Appeals Decision[2] dated 20 October 2005 in C.T.A.
Case No. 6217 as well as the Resolution dated 3
February 2006 denying the Motion for Reconsideration.
In the assailed decision, the Court of Tax Appeals En
Bancdenied petitioners claim for refund or issuance of
a tax credit certificate of P4,239,374.81, representing
excise taxes paid on petitioners purchase of aviation
jet fuel from Petron Corporation (Petron) for the period
from 1 January 1999 to 30 June 1999.
G.R. No. 172379

21
Petitioner filed this Petition for Review [3] to reverse the
Court of Tax Appeals Decision[4] dated 5 January 2006
in C.T.A. Case No. 6308 as well as the Resolution dated
18 April 2006 denying the Motion for Reconsideration.
In the assailed decision, the Court of Tax Appeals En
Banc denied petitioners claim for refund or issuance of
a tax credit certificate of P4,831,224.70, representing
excise taxes paid on petitioners purchase of aviation
jet fuel from Petron for the period from 1 July 1999 to
31 December 1999.
On 2 August 2006, this Court issued a resolution to
consolidate both cases since they involve the same
parties and the same issue, whether petitioner is
entitled to a refund of the excise taxes paid on its
purchases of aviation jet fuel from Petron.
The Facts
Petitioner is a foreign corporation organized under the
laws of Singapore with a Philippine representative
office in Cebu City. It is engaged in business as an online international carrier, operating the SingaporeCebu-Singapore,
Singapore-Davao-Cebu-Singapore,
and Singapore-Cebu-Davao-Singapore routes.[5]
From 1 January 1999 to 31 December 1999, petitioner
purchased aviation jet fuel from Petron for use on
petitioners international flights.[6] Based on the Aviation
Delivery Receipts and Invoices presented, P3.67 per
liter as excise (specific) tax was added to the amount
paid by petitioner on its purchases of aviation jet fuel.
[7]
Petitioner, through its sister company Singapore
Airlines Ltd., paid P4,239,374.81 from 1 January 1999
to 30 June 1999[8] and P4,831,224.70 from 1 July 1999
to 31 December 1999,[9] as excise taxes for its
purchases of the aviation jet fuel from Petron.
Petitioner, contending that it is exempt from the
payment of excise taxes, filed a formal claim for refund
with
the
Commissioner
of
Internal
Revenue
(respondent).
Petitioner claims that it is exempt from the payment of
excise tax under the 1997 National Internal Revenue
Code (NIRC), specifically Section 135, and under Article
4 of the Air Transport Agreement between the
Governments of the Republic of the Philippines and the
Republic of Singapore (Air Agreement).[10]
Section 135 of the NIRC provides:
SEC. 135. Petroleum Products Sold
to
International
Carriers
and
Exempt Entities or Agencies. Petroleum products sold to the
following are exempt from excise tax:
(a) International carriers of Philippine
or foreign registry on their use or
consumption
outside
the
Philippines: Provided,
That
the
petroleum products sold to these
international carriers shall be stored in
a bonded storage tank and may be
disposed of only in accordance with the
rules and regulations to be prescribed
by the Secretary of Finance, upon
recommendation of the Commissioner;
(b) Exempt entities or agencies
covered by tax treaties, conventions
and other international agreements for
their use or consumption: Provided,
however, That the country of said
foreign international carrier or exempt
entities or agencies exempts from
similar taxes petroleum products sold
to Philippine carriers, entities or
agencies; and
(c)
Entities which are
by law exempt from direct and indirect
taxes.[11]

Article 4 of the Air Agreement provides:

Art. 4
xxx
2. Fuel, lubricants, spare parts, regular
equipment
and
aircraft
stores
introduced into, or taken on board
aircraft in the territory of one
Contracting Party by, or on behalf of, a
designated
airline
of
the
other
Contracting Party and intended solely
for use in the operation of the agreed
services shall, with the exception of
charges corresponding to the services
performed, be exempt from the same
custom duties, inspection fees and
other duties or taxes imposed in the
territory of the first Contracting Party,
even when these supplies are to be
used on the parts of the journey
performed over the territory of the
Contracting Party in which they are
introduced into or taken on board. The
materials referred to above may be
required to be kept under customs
supervision and control.[12]
Petitioner contends that in reality, it paid the excise
taxes due on the transactions and Petron merely
remitted the payment to the Bureau of Internal
Revenue (BIR). Petitioner argues that to adhere to the
view that Petron is the legal claimant of the refund will
make petitioners right to recover the erroneously paid
taxes dependent solely on Petrons action over which
petitioner has no control. If Petron fails to act or acts
belatedly, petitioners claim will be barred, depriving
petitioner of its private property.[13]
Petitioner also maintains that to hold that only Petron
can legally claim the refund will negate the tax
exemption expressly granted to petitioner under the
NIRC and the Air Agreement. [14] Petitioner argues that a
tax exemption is a personal privilege of the grantee,
which is petitioner in this case. Petitioner further
argues that a tax exemption granted to the buyer
cannot be availed of by the seller; hence, in the
present case, Petron as seller cannot legally claim the
refund. On the other hand, if only the entity that paid
the tax Petron in this case can claim the refund, then
petitioner as the grantee of the tax exemption cannot
enjoy its tax exemption. In short, neither petitioner nor
Petron can claim the refund, rendering the tax
exemption useless. Petitioner submits that this is
contrary to the language and intent of the NIRC and
the Air Agreement.[15]
Petitioner also cites this Courts Resolution in Maceda v.
Macaraig, Jr.,[16] quoting the opinion of the Secretary of
Justice which states, thus:
The view which refuses to accord the
exemption because the tax is first paid
by the seller disregards realities and
gives more importance to form than
substance. Equity and law always exalt
substance over form.[17]
Petitioner believes that its tax exemption under Section
135 of the NIRC also includes its entitlement to a
refund from the BIR in any case of erroneous payment
of excise tax.[18]
Respondent claims that as explained in Philippine
Acetylene Co., Inc. v. Commissioner of Internal
Revenue,[19] the nature of an indirect tax allows the tax
to be passed on to the purchaser as part of the
commoditys purchase price. However, an indirect tax
remains a tax on the seller. Hence, if the buyer
happens to be tax exempt, the seller is nonetheless
liable for the payment of the tax as the same is a tax
not on the buyer but on the seller. [20]

22
Respondent insists that in indirect taxation, the
manufacturer or seller has the option to shift the
burden of the tax to the purchaser. If and when shifted,
the amount added by the manufacturer or seller
becomes part of the purchase price of the goods. Thus,
the purchaser does not really pay the tax but only the
price of the commodity and the liability for the
payment of the indirect tax remains with the
manufacturer or seller.[21] Since the liability for the
excise tax payment is imposed by law on Petron as the
manufacturer of the petroleum products, any claim for
refund should only be made by Petron as the statutory
taxpayer.[22]
The Ruling of the Court of Tax Appeals
G.R. No. 171383
On 20 October 2005, the Court of Tax Appeals En
Banc (CTA) ruled that the excise tax imposed on the
removal of petroleum products by the oil companies is
an indirect tax.[23] Although the burden to pay an
indirect tax can be passed on to the purchaser of the
goods, the liability to pay the indirect tax remains with
the manufacturer or seller.[24] When the manufacturer
or seller decides to shift the burden of the indirect tax
to the purchaser, the tax becomes a part of the price;
therefore, the purchaser does not really pay the
tax per se but only the price of the commodity.[25]
The CTA pointed out that Section 130(A)(2) [26] of the
NIRC provides that the liability for the payment of
excise taxes is imposed upon the manufacturer or
producer of the petroleum products. Under the law, the
manufacturer or producer is the taxpayer. The CTA
stated that it is only the taxpayer that may ask for a
refund in case of erroneous payment of taxes.
Citing Cebu Portland Cement Co. v. Collector of Internal
Revenue,[27] the CTA ruled that the producer of the
goods is the one entitled to claim for a refund of
indirect taxes.[28] The CTA held that since the liability
for the excise taxes was placed on Petron as the
manufacturer of the petroleum products and it was
shown in the Excise Tax Returns[29] that the excise taxes
were paid by Petron, any claim for refund of the excise
taxes should only be made by Petron as the taxpayer.
This is in consonance with the rule on strictissimi
juris with respect to tax exemptions. Petitioner cannot
be considered the taxpayer because what was
transferred to petitioner was only the burden and not
the liability to pay the excise tax on petroleum
products.[30]
The CTA also considered the Aviation Fuel Supply
Agreement between petitioner and Petron, which
states:

the seller or manufacturer.[33] The CTA cited Maceda v.

Macaraig, Jr.:[34]
It may be useful to make a distinction,
for the purpose of this disposition,
between a direct tax and an indirect
tax. A direct tax is a tax for which a
taxpayer is directly liable on the
transaction or business it is engaged
in. Examples are custom duties and ad
valorem taxes
paid
by
the
oil
companies to the Bureau of Customs
for their importation of crude oil, and
the specific and ad valorem taxes they
pay to the Bureau of Internal Revenue
after converting the crude oil into
petroleum products.
On the other hand, indirect taxes are
taxes primarily paid by persons who
can shift the burden upon someone
else. For example, the excise tax
and ad valorem taxes that the oil
companies pay to the Bureau of
Internal Revenue upon removal of
petroleum products from its refinery
can be shifted to its buyer, like the
NPC, by adding them to the cash
and/or selling price.[35]
The CTA further cited Philippine Acetylene Co., Inc. v.
Commissioner of Internal Revenue[36] and Contex
Corporation v. Hon. Commissioner of Internal
Revenue[37] and concluded that the tax sought to be
refunded is an excise tax on petroleum products,
partaking of the nature of an indirect tax.[38]
The CTA further ruled that while it is cognizant of the
exempt status of petitioner under the NIRC and the Air
Agreement, it is also aware that the right to claim for
refund of taxes erroneously paid lies with the person
statutorily liable to pay the tax in accordance with
Section 204 of the NIRC.[39] The CTA also suggested
that petitioner should invoke its tax exemption to
Petron before buying the petroleum products.[40] The
CTA concluded that the right to claim for the refund of
the excise taxes paid on the petroleum products lies
with Petron which paid and remitted the excise taxes to
the BIR.
The Issue
Petitioner submits this sole issue for our consideration:
whether petitioner is the proper party to claim a refund
for the excise taxes paid.[41]
The Ruling of the Court

Buyer shall pay any taxes, fees or other

charges imposed by any national, local
or airport authority on the delivery,
sale, inspection, storage and use of
fuel, except for taxes on Sellers income
and taxes on raw material. To the
extent allowed, Seller shall show these
taxes, fees and other charges as
separate items on the invoice for the
account of the Buyer.[31]
However, the CTA held that even with this provision,
the liability for the excise tax remained with Petron as
manufacturer or producer of the aviation jet fuel.The
shifting of the burden of the excise tax to petitioner did
not transform petitioner into a taxpayer. Hence, Petron
is the proper party that can claim for refund of any
erroneous excise tax payments.[32]
G.R. No. 172379
The CTA En Banc held that excise taxes on domestic
products are paid by the manufacturer or producer
before removal of the products from the place of
production. The payment of an excise tax, being an
indirect tax, can be shifted to the purchaser of goods
but the statutory liability for such payment is still with

The issue presented is not novel. In a similar case

involving the same parties, this Court has categorically
ruled that the proper party to question, or seek a
refund of an indirect tax is the statutory taxpayer, the
person on whom the tax is imposed by law and who
paid the same even if he shifts the burden thereof to
another.[42] The Court added that even if Petron
Corporation passed on to Silkair the burden of the tax,
the additional amount billed to Silkair for jet fuel is not
a tax but part of the price which Silkair had to pay as a
purchaser.[43]
An excise tax is an indirect tax where the tax
burden
can be shifted to the consumer but the tax
liability remains with the
manufacturer or producer.
Section 129 of the NIRC provides that excise taxes refer
to taxes imposed on specified goods manufactured or
produced in the Philippines for domestic sale or
consumption or for any other disposition and to things
imported. The excise taxes are collected from
manufacturers or producers before removal of the
domestic products from the place of production.

23
Although excise taxes can be considered as taxes on
production, they are really taxes on property as they
are imposed on certain specified goods.[44]
Section 148(g) of the NIRC provides that there shall be
collected on aviation jet fuel an excise tax of P3.67 per
liter of volume capacity. Since the tax imposed is based
on volume capacity, the tax is referred to as specific
tax.[45] However, excise tax, whether classified as
specific or ad valorem tax, is basically an indirect tax
imposed on the consumption of a specified list of goods
or products. The tax is directly levied on the
manufacturer upon removal of the taxable goods from
the place of production but in reality, the tax is passed
on to the end consumer as part of the selling price of
the goods sold.[46]
In Commissioner of Internal Revenue v. Philippine Long
Distance
Company,[47] the
Court
explained
the
diference between a direct tax and an indirect tax:
Based on the possibility of shifting the
incidence of taxation, or as to who shall
bear the burden of taxation, taxes may
be classified into either direct tax or
indirect tax.
In context, direct taxes are those that
are exacted from the very person who,
it is intended or desired, should pay
them; they are impositions for which a
taxpayer is directly liable on the
transaction or business he is engaged
in.
On the other hand, indirect taxes are
those that are demanded, in the
first instance, from, or are paid by,
one person in the expectation and
intention that he can shift the
burden to someone else. Stated
elsewise, indirect taxes are taxes
wherein the liability for the
payment of the tax falls on one
person but the burden thereof can
be shifted or passed on to another
person, such as when the tax is
imposed
upon
goods
before
reaching
the
consumer
who
ultimately pays for it. When the
seller passes on the tax to his
buyer, he, in effect, shifts the tax
burden, not the liability to pay
it, to the purchaser as part of the
price of goods sold or services
rendered. (Emphasis supplied)
In Maceda v. Macaraig, Jr., the Court specifically
mentioned excise tax as an example of an indirect tax
where the tax burden can be shifted to the buyer:
On the other hand, indirect taxes are
taxes primarily paid by persons who
can shift the burden upon someone
else. For example, the excise and ad
valorem taxes that the oil companies
pay to the Bureau of Internal Revenue
upon removal of petroleum products
from its refinery can be shifted to its
buyer, like the NPC, by adding them to
the cash and/or selling price.[48]
When Petron removes its petroleum products from its
refinery in Limay, Bataan,[49] it pays the excise tax due
on the petroleum products thus removed. Petron, as
manufacturer or producer, is the person liable for the
payment of the excise tax as shown in the Excise Tax
Returns filed with the BIR. Stated otherwise, Petron is
the taxpayer that is primarily, directly and legally liable
for the payment of the excise taxes. However, since an
excise tax is an indirect tax, Petron can transfer to its
customers the amount of the excise tax paid by

treating it as part of the cost of the goods and tacking

it on to the selling price.
As correctly observed by the CTA, this Court held
in Philippine Acetylene Co., Inc. v. Commissioner of
Internal Revenue:
It may indeed be that the economic
burden of the tax finally falls on the
purchaser; when it does the tax
becomes part of the price which the
purchaser must pay.[50]
Even if the consumers or purchasers ultimately pay for
the tax, they are not considered the taxpayers. The
fact that Petron, on whom the excise tax is imposed,
can shift the tax burden to its purchasers does not
make the latter the taxpayers and the former the
withholding agent.
Petitioner, as the purchaser and end-consumer,
ultimately bears the tax burden, but this does not
transform petitioners status into a statutory taxpayer.
In the refund of indirect taxes, the statutory
taxpayer
is the proper party who can claim the refund.
Section 204(c) of the NIRC provides:
Sec.
204.
Authority
of
the
Commissioner to Compromise, Abate,
and Refund or Credit Taxes. The
Commissioner may xxx
(c) Credit or refund taxes erroneously
or illegally received or penalties
imposed without authority, refund the
value of internal revenue stamps when
they are returned in good condition by
the purchaser, and, in his discretion,
redeem or change unused stamps that
have been rendered unfit for use and
refund their value upon proof of
destruction. No credit or refund of
taxes or penalties shall be allowed
unless the taxpayer files in writing
with the Commissioner a claim for
credit or refund within two (2) years
after the payment of the tax or
penalty: Provided,
however, That
a
return filed showing an overpayment
shall be considered as a written claim
for credit or refund. (Emphasis and
underscoring supplied)
The person entitled to claim a tax refund is the
statutory taxpayer. Section 22(N) of the NIRC defines a
taxpayer
as
any
person
subject
to
tax.
In Commissioner of Internal Revenue v. Procter and
Gamble Phil. Mfg. Corp., the Court ruled that:
A person liable for tax has been held to
be a person subject to tax and properly
considered a taxpayer. The terms liable
for tax and subject to tax both connote
a legal obligation or duty to pay a tax.
[51]

The excise tax is due from the manufacturers of the

petroleum products and is paid upon removal of the
products from their refineries. Even before the aviation
jet fuel is purchased from Petron, the excise tax
is already
paid
by
Petron. Petron,
being
the
manufacturer, is the person subject to tax. In this case,
Petron, which paid the excise tax upon removal of the
products from its Bataan refinery, is the person liable
for tax. Petitioner is neither a person liable for tax nor a
person subject to tax. There is also no legal duty on the
part of petitioner to pay the excise tax; hence,
petitioner cannot be considered the taxpayer.
Even if the tax is shifted by Petron to its customers and
even if the tax is billed as a separate item in the

24
aviation delivery receipts and invoices issued to its
customers, Petron remains the taxpayer because the
excise tax is imposed directly on Petron as the
manufacturer. Hence, Petron, as the statutory
taxpayer, is the proper party that can claim the refund
of the excise taxes paid to the BIR.
The General Terms & Conditions for Aviation Fuel
Supply (Supply Contract) signed between petitioner
(buyer) and Petron (seller) provide:
11.3 If Buyer is entitled to purchase
any Fuel sold pursuant to the
Agreement free of any taxes, duties or
charges, Buyer shall timely deliver
to
Seller
a
valid
exemption
certificate
for
such
purchase.
[52]
(Emphasis supplied)
This provision instructs petitioner to timely submit a
valid exemption certificate to Petron in order that
Petron will not pass on the excise tax to petitioner. As
correctly suggested by the CTA, petitioner should
invoke its tax exemption to Petron before buying the
aviation jet fuel. Petron, however, remains the
statutory taxpayer on those excise taxes.
Revenue Regulations No. 3-2008 (RR 3-2008) provides
that subject to the subsequent filing of a claim for
excise tax credit/refund or product replenishment, all
manufacturers of articles subject to excise tax under
Title VI of the NIRC of 1997, as amended, shall pay the
excise tax that is otherwise due on every removal
thereof from the place of production that is intended
for exportation or sale/delivery to international carriers
or to tax-exempt entities/agencies. [53] The Department
of Finance and the BIR recognize the tax exemption
granted to international carriers but they consistently
adhere to the view that manufacturers of articles
subject to excise tax are the statutory taxpayers that
are liable to pay the tax, thus, the proper party to claim
any tax refunds.
WHEREFORE, we DENY the petition. We AFFIRM the
assailed Decisions dated 20 October 2005 and 5
January 2006 and the Resolutions dated 3 February
2006 and 18 April 2006 of the Court of Tax Appeals in
C.T.A. Case Nos. 6217 and 6308, respectively.
SO ORDERED.
FIRST DIVISION

COMMISSIONER
OF
INTERNAL
REVENUE,
Petitioner, - versus - FIRST
EXPRESS
PAWNSHOP
COMPANY,
INC.,
Respondent.

a. Assessment No. 31-1-98[4] for

deficiency
income
tax
of P20,712.58
with
compromise
penalty
of P3,000;
b. Assessment No. 31-14000053-98[5] for deficiency
value-added
tax
(VAT)
of P601,220.18
with
compromise
penalty
of P16,000;
c. Assessment No. 31-14000053-98[6] for deficiency
documentary stamp tax
(DST)
of P12,328.45
on
deposit
on
subscription
with compromise penalty
of P2,000; and
d. Assessment No. 31-1-00005398[7] for
deficiency
DST
of P62,128.87
on
pawn
tickets with compromise
penalty of P8,500.
Respondent received the assessment notices on 3
January 2002. On 1 February 2002, respondent filed its
written protest on the above assessments. Since
petitioner did not act on the protest during the 180-day
period,[8] respondent filed a petition before the CTA on
28 August 2002.[9]
Respondent contended that petitioner did not consider
the supporting documents on the interest expenses
and donations which resulted in the deficiency income
tax.[10] Respondent maintained that pawnshops are not
lending investors whose services are subject to VAT,
hence it was not liable for deficiency VAT. [11]Respondent
also alleged that no deficiency DST was due because
Section 180[12] of the National Internal Revenue Code
(Tax Code) does not cover any document or transaction
which relates to respondent. Respondent also argued
that the issuance of a pawn ticket did not constitute a
pledge under Section 195[13]of the Tax Code.[14]
In its Answer filed before the CTA, petitioner alleged
that the assessment was valid and correct and the
taxpayer had the burden of proof to impugn its validity
or correctness. Petitioner maintained that respondent
is subject to 10% VAT based on its gross receipts
pursuant to Republic Act No. 7716, or the Expanded
Value-Added Tax Law (EVAT). Petitioner also cited BIR
Ruling No. 221-91 which provides that pawnshop
tickets are subject to DST. [15]

G.R. Nos. 17204546

On 1 July 2003, respondent paid P27,744.88

deficiency income tax inclusive of interest.[16]

Promulgated:
June 16, 2009

After trial on the merits, the CTA First Division ruled,

thus:

x-------------------------------------------------x
DECISION
The Case
The Commissioner of Internal Revenue (petitioner) filed
this Petition for Review[1] to reverse the Court of Tax
Appeals Decision[2] dated 24 March 2006 in the
consolidated cases of C.T.A. EB Nos. 60 and 62. In the
assailed decision, the Court of Tax Appeals (CTA) En
Banc partially reconsidered the CTA First Divisions
Decision[3] dated 24 September 2004.
The Facts
On 28 December 2001, petitioner, through Acting
Regional Director Ruperto P. Somera of Revenue Region
6 Manila, issued the following assessment notices
against First Express Pawnshop Company, Inc.
(respondent):

IN VIEW OF ALL THE FOREGOING,

the
instant
petition
is
hereby PARTIALLY
GRANTED.
Assessment No. 31-1-000053-98 for
deficiency documentary stamp tax in
the amount of Sixty-Two Thousand One
Hundred Twenty-Eight Pesos
and
87/100 (P62,128.87) and Assessment
No. 31-14-000053-98 for deficiency
documentary stamp tax on deposits on
subscription in the amount of Twelve
Thousand Three Hundred Twenty-Eight
Pesos
and
45/100
(P12,328.45)
are CANCELLED and SET
ASIDE.
However, Assessment No. 31-14000053-98
is
hereby AFFIRMED except
the
imposition of compromise penalty in
the absence of showing that petitioner
consented thereto(UST vs. Collector,
104 SCRA 1062; Exquisite Pawnshop

as

25
Jewelry, Inc. vs. Jaime B. Santiago, et
al., supra).
Accordingly petitioner is ORDERED to
PAY the deficiency value added tax in
the amount of Six Hundred One
Thousand Two Hundred Twenty Pesos
and 18/100 (P601,220.18) inclusive of
deficiency interest for the year 1998. In
addition, petitioner is ORDERED to
PAY 25%
surcharge
and
20%
delinquency interest per annum from
February 12, 2002 until fully paid
pursuant to Sections 248 and 249 of
the 1997 Tax Code.
SO ORDERED.[17] (Boldfacing in the
original)
Both parties filed their Motions for Reconsideration
which were denied by the CTA First Division for lack of
merit. Thereafter, both parties filed their respective
Petitions for Review under Section 11 of Republic Act
No. 9282 (RA 9282) with the CTA En Banc.[18]
On 24 March 2006, the CTA En Banc promulgated a
Decision affirming respondents liability to pay the VAT
and ordering it to pay DST on its pawnshop tickets.
However, the CTA En Banc found that respondents
deposit on subscription was not subject to DST. [19]
Aggrieved by the CTA En Bancs Decision which ruled
that respondents deposit on subscription was not
subject to DST, petitioner elevated the case before this
Court.
The Ruling of the Court of Tax Appeals
On the taxability of deposit on subscription, the CTA,
citing First Southern Philippines Enterprises, Inc. v.
Commissioner of Internal Revenue,[20] pointed out that
deposit on subscription is not subject to DST in the
absence of proof that an equivalent amount of shares
was subscribed or issued in consideration for the
deposit. Expressed otherwise, deposit on stock
subscription is not subject to DST if: (1) there is no
agreement to subscribe; (2) there are no shares issued
or any additional subscription in the restructuring plan;
and (3) there is no proof that the issued shares can be
considered as issued certificates of stock.[21]
The CTA ruled that Section 175 [22] of the Tax Code
contemplates a subscription agreement. The CTA
explained that there can be subscription only with
reference to shares of stock which have been unissued,
in the following cases: (a) the original issuance from
authorized capital stock at the time of incorporation;
(b) the opening, during the life of the corporation, of
the portion of the original authorized capital stock
previously unissued; or (c) the increase of authorized
capital stock achieved through a formal amendment of
the articles of incorporation and registration of the
articles of incorporation with the Securities and
Exchange Commission.[23]
The CTA held that in this case, there was no
subscription or any contract for the acquisition of
unissued stock for P800,000 in the taxable year
assessed. The General Information Sheet (GIS) of
respondent
showed
only
a
capital
structure
of P500,000 as Subscribed Capital Stock and P250,000
as Paid-up Capital Stock and did not include the
assessed amount. Mere reliance on the presumption
that the assessment was correct and done in good faith
was unavailing vis--vis the evidence presented by
respondent. Thus, the CTA ruled that the assessment
for deficiency DST on deposit on subscription has not
become final.[24]
The Issue

Petitioner submits this sole issue for our consideration:

whether the CTA erred on a question of law in
disregarding the rule on finality of assessments
prescribed under Section 228 of the Tax Code.
Corollarily, petitioner raises the issue on whether
respondent is liable to pay P12,328.45 as DST on
deposit on subscription of capital stock.
The Ruling of the Court
Petitioner contends that the CTA erred in disregarding
the rule on the finality of assessments prescribed
under Section 228 of the Tax Code. [25] Petitioner asserts
that even if respondent filed a protest, it did not ofer
evidence to prove its claim that the deposit on
subscription was an advance made by respondents
stockholders.[26] Petitioner alleges that respondents
failure to submit supporting documents within 60 days
from the filing of its protest as required under Section
228 of the Tax Code caused the assessment
of P12,328.45 for deposit on subscription to become
final and unassailable.[27]
Petitioner alleges that revenue officers are aforded the
presumption of regularity in the performance of their
official functions, since they have the distinct
opportunity, aside from competence, to peruse records
of the assessments. Petitioner invokes the principle
that by reason of the expertise of administrative
agencies over matters falling under their jurisdiction,
they are in a better position to pass judgment thereon;
thus, their findings of fact are generally accorded great
respect, if not finality, by the courts. Hence, without
the supporting documents to establish the noninclusion from DST of the deposit on subscription,
petitioners assessment pursuant to Section 228 of the
Tax Code had become final and unassailable.[28]
Respondent, citing Standard Chartered Bank-Philippine
Branches v. Commissioner of Internal Revenue,
[29]
asserts that the submission of all the relevant
supporting documents within the 60-day period from
filing of the protest is directory.
Respondent claims that petitioner requested for
additional documents in petitioners letter dated 12
March 2002, to wit: (1) loan agreement from lender
banks; (2) official receipts of interest payments issued
to respondent; (3) documentary evidence to
substantiate donations claimed; and (4) proof of
payment of DST on subscription.[30] It must be noted
that the only document requested in connection with
respondents
DST
assessment
on
deposit
on
subscription is proof of DST payment. However,
respondent could not produce any proof of DST
payment because it was not required to pay the same
under the law considering that the deposit on
subscription was an advance made by its stockholders
for future subscription, and no stock certificates were
issued.[31] Respondent insists that petitioner could have
issued a subpoena requiring respondent to submit
other documents to determine if the latter is liable for
DST on deposit on subscription pursuant to Section 5(c)
of the Tax Code.[32]
Respondent argues that deposit on future subscription
is not subject to DST under Section 175 of the Tax
Code. Respondent explains:
It must be noted that deposits on
subscription represent advances made
by the stockholders and are in the
nature
of
liabilities
for
which
stocks may be issued in the future.
Absent
any
express
agreement
between
the
stockholders
and
petitioner
to
convert
said
advances/deposits to capital stock,
either
through
a
subscription
agreement or any other document,
these deposits remain as liabilities
owed by respondent to its stockholders.

26
For these deposits to be subject to DST,
it
is
necessary
that
a
conversion/subscription agreement be
made by First Express and its
stockholders. Absent such conversion,
no DST can be imposed on said
deposits under Section 175 of the Tax
Code.[33](Underscoring in the original)
Respondent contends that by presenting its GIS and
financial statements, it had already sufficiently proved
that the amount sought to be taxed is deposit on future
subscription, which is not subject to DST. [34] Respondent
claims that it cannot be required to submit proof of DST
payment on subscription because such payment is
non-existent. Thus, the burden of proving that there
was an agreement to subscribe and that certificates of
stock were issued for the deposit on subscription rests
on petitioner and his examiners. Respondent states
that absent any proof, the deficiency assessment has
no basis and should be cancelled.[35]
On the Taxability of Deposit on Stock
Subscription
DST is a tax on documents, instruments, loan
agreements, and papers evidencing the acceptance,
assignment, sale or transfer of an obligation, right or
property incident thereto. DST is actually an excise tax
because it is imposed on the transaction rather than on
the document.[36] DST is also levied on the exercise by
persons of certain privileges conferred by law for the
creation, revision, or termination of specific legal
relationships through the execution of specific
instruments.[37] The Tax Code provisions on DST relating
to shares or certificates of stock state:
Section 175. Stamp Tax on Original
Issue of Shares of Stock. - On every
original issue, whether on organization,
reorganization or for any lawful
purpose, of shares of stock by any
association, company or corporation,
there shall be collected a documentary
stamp tax of Two pesos (P2.00) on
each Two hundred pesos (P200), or
fractional part thereof, of the par
value,
of
such
shares
of
stock: Provided, That in the case of the
original issue of shares of stock without
par value the amount of the
documentary
stamp
tax
herein
prescribed shall be based upon the
actual consideration for the issuance of
such shares of stock: Provided, further,
That in the case of stock dividends, on
the actual value represented by each
share.[38]
Section 176. Stamp Tax on Sales,
Agreements to Sell, Memoranda of
Sales, Deliveries or Transfer of Duebills, Certificates of Obligation, or
Shares or Certificates of Stock. - On all
sales, or agreements to sell, or
memoranda of sales, or deliveries, or
transfer of due-bills, certificates of
obligation, or shares or certificates of
stock in any association, company or
corporation, or transfer of such
securities by assignment in blank, or by
delivery,
or
by
any
paper
or
agreement, or memorandum or other
evidences of transfer or sale whether
entitling the holder in any manner to
the
benefit
of
such
due-bills,
certificates of obligation or stock, or to
secure the future payment of money,
or for the future transfer of any duebill, certificate of obligation or stock,
there shall be collected a documentary
stamp tax of One peso and fifty

centavos (P1.50) on each Two hundred

pesos (P200), or fractional part thereof,
of the par value of such due-bill,
certificate
of
obligation
or
stock: Provided, That only one tax shall
be collected on each sale or transfer of
stock or securities from one person to
another, regardless of whether or not a
certificate of stock or obligation is
issued, indorsed, or delivered in
pursuance of such sale or transfer:
And provided, further, That in the case
of stock without par value the amount
of the documentary stamp tax herein
prescribed shall be equivalent to
twenty-five percent (25%) of the
documentary stamp tax paid upon the
original issue of said stock.[39]
In Section 175 of the Tax Code, DST is imposed on the
original issue of shares of stock. The DST, as an excise
tax, is levied upon the privilege, the opportunity and
the facility of issuing shares of stock. In Commissioner
of Internal Revenue v. Construction Resources of Asia,
Inc.,[40] this Court explained that the DST attaches upon
acceptance of the stockholders subscription in the
corporations capital stock regardless of actual or
constructive delivery of the certificates of stock.
Citing Philippine Consolidated Coconut Ind., Inc. v.
Collector of Internal Revenue,[41] the Court held:
The documentary stamp tax under this
provision of the law may be levied only
once, that is upon the original issue of
the certificate. The crucial point
therefore, in the case before Us is the
proper interpretation of the word issue.
In other words, when is the certificate
of stock deemed issued for the purpose
of imposing the documentary stamp
tax? Is it at the time the certificates of
stock are printed, at the time they are
filled up (in whose name the stocks
represented in the certificate appear as
certified by the proper officials of the
corporation), at the time they are
released by the corporation, or at the
time they are in the possession (actual
or constructive) of the stockholders
owning them?
xxx
Ordinarily, when a corporation issues a
certificate of stock (representing the
ownership of stocks in the corporation
to
fully
paid
subscription)
the
certificate of stock can be utilized for
the exercise of the attributes of
ownership over the stocks mentioned
on its face. The stocks can be
alienated; the dividends or fruits
derived therefrom can be enjoyed, and
they can be conveyed, pledged or
encumbered. The certificate as issued
by the corporation, irrespective of
whether or not it is in the actual or
constructive
possession
of
the
stockholder, is considered issued
because it is with value and hence the
documentary stamp tax must be paid
as imposed by Section 212 of the
National Internal Revenue Code, as
amended.
In Section 176 of the Tax Code, DST is imposed on the
sales, agreements to sell, memoranda of sales,
deliveries or transfer of shares or certificates of stock
in any association, company, or corporation, or transfer
of such securities by assignment in blank, or by
delivery, or by any paper or agreement, or

27
memorandum or other evidences of transfer or sale
whether entitling the holder in any manner to the
benefit of such certificates of stock, or to secure the
future payment of money, or for the future transfer of
certificates of stock. In Compagnie Financiere Sucres
et Denrees v. Commissioner of Internal Revenue, this
Court held that under Section 176 of the Tax Code,
sales to secure the future transfer of due-bills,
certificates of obligation or certificates of stock are
subject to documentary stamp tax.[42]
Revenue Memorandum Order No. 08-98 (RMO 08-98)
provides the guidelines on the corporate stock
documentary stamp tax program. RMO 08-98 states
that:
1. All existing corporations shall file
the
Corporation
Stock
DST
Declaration, and the DST Return, if
applicable when DST is still due
on the subscribed share issued
by the corporation, on or before
the tenth day of the month following
publication of this Order.
xxx
3. All existing corporations with
authorization for increased capital
stock shall file their Corporate Stock
DST Declaration, together with the
DST Return, if applicablewhen DST
is due on subscriptions made
after the authorization, on or
before the tenth day of the month
following the date of authorization.
(Boldfacing supplied)
RMO 08-98, reiterating Revenue Memorandum Circular
No. 47-97 (RMC 47-97), also states that what is being
taxed is the privilege of issuing shares of stock, and,
therefore, the taxes accrue at the time the shares are
issued. RMC 47-97 also defines issuance as the point in
which the stockholder acquires and may exercise
attributes of ownership over the stocks.
As pointed out by the CTA, Sections 175 and 176 of the
Tax Code contemplate a subscription agreement in
order for a taxpayer to be liable to pay the DST. A
subscription contract is defined as any contract for the
acquisition of unissued stocks in an existing
corporation or a corporation still to be formed. [43] A
stock subscription is a contract by which the subscriber
agrees to take a certain number of shares of the capital
stock of a corporation, paying for the same or
expressly or impliedly promising to pay for the same. [44]
In this case, respondents Stockholders Equity section of
its Balance Sheet as of 31 December 1998[45] shows:
STOCKHOLDERS
EQUITY
Authorized
Capital Stock
Paid-up
Stock

1998
P 2,000,000.
00

Capital 250,000.00

1997
P 2,000,000.
00
250,000.00

Deposit
on 800,000.00
Subscription
Retained
Earnings

62,820.34

209,607.20

Net Income

(858,498.38)

(146,786.86)

TOTAL

P 254,321.96

P 312,820.34

The GIS submitted to the Securities and Exchange

Commission on 31 March 1999 shows the following
Capital Structure:[46]
B. Financial Profile
1. Capital Structure :

AUTHORIZED - P2,000,000.00
SUBSCRIBED - 500,000.00
PAID-UP - 250,000.00
These entries were explained by Miguel Rosario, Jr.
(Rosario), respondents external auditor, during the
hearing before the CTA on 11 June 2003. Rosario
testified in this wise:
Atty. Napiza
Q. Mr. Rosario, I refer you to the
balance sheet of First Express for the
year 1998 particularly the entry of
deposit on subscription in the amount
of P800 thousand, will you please tell
us what is (sic) this entry represents?
Mr. Rosario Jr.
A. This amount of P800 thousand
represents the case given by the
stockholders to the company but
does not necessarily made (sic)
payment to subscribed portion.
Atty. Napiza
Q. What is
stands for?

(sic)

that

payment

Mr. Rosario Jr.

A. This payment stands as (sic) for
the
deposit
for
future
subscription.
Atty. Napiza
Q. Would you know if First Express
issued corresponding shares pertinent
to the amount being deposited?
Mr. Rosario Jr.
A. No.
Atty. Napiza
Q. What do you mean by no? Did they
or they did not?
Mr. Rosario Jr.
A. They did not issue any shares
because that is not the payment of
subscription. That is just a mere
deposit.
Atty. Napiza
Q. Would you know, Mr. Rosario, how
much is the Subscribed Capital of First
Express Pawnshop?
Mr. Rosario Jr.
A. The Subscribed Capital of First
Express Pawnshop Company, Inc. for
the year 1998 is P500 thousand.
Atty. Napiza
Q. How about the Paid Up Capital?
Mr. Rosario Jr.
A. The Paid
thousand.

Up

Capital

is P250

Atty. Napiza
Q. Are (sic) all those figures appear in
the balance sheet?
Mr. Rosario Jr.
A. The Paid Up Capital appeared here
but the Subscribed Portion was not
stated. (Boldfacing supplied)
Based on Rosarios testimony and respondents financial
statements as of 1998, there was no agreement to
subscribe to the unissued shares. Here, the deposit on
stock subscription refers to an amount of money

28
received by the corporation as a deposit with the
possibility of applying the same as payment for the
future issuance of capital stock.[47] In Commissioner of
Internal Revenue v. Construction Resources of Asia,
Inc.,[48] we held:
We are firmly convinced that the
Government stands to lose nothing in
imposing the documentary stamp tax
only on those stock certificates duly
issued, or wherein the stockholders can
freely exercise the attributes of
ownership and with value at the time
they are originally issued. As regards
those
certificates
of
stocks
temporarily subject to suspensive
conditions they shall be liable for
said tax only when released from
said conditions, for then and only
then shall they truly acquire any
practical
value
for
their
owners. (Boldfacing supplied)
Clearly, the deposit on stock subscription as reflected
in respondents Balance Sheet as of 1998 is not a
subscription agreement subject to the payment of DST.
There is no P800,000 worth of subscribed capital stock
that is reflected in respondents GIS. The deposit on
stock subscription is merely an amount of money
received by a corporation with a view of applying the
same as payment for additional issuance of shares in
the future, an event which may or may not happen.
The person making a deposit on stock subscription
does not have the standing of a stockholder and he is
not entitled to dividends, voting rights or other
prerogatives and attributes of a stockholder. Hence,
respondent is not liable for the payment of DST on its
deposit on subscription for the reason that there is yet
no subscription that creates rights and obligations
between the subscriber and the corporation.
On the Finality of Assessment as Prescribed
under Section 228 of the Tax Code
Section 228 of the Tax Code provides:
SEC.
228. Protesting
of
Assessment.
When
the
Commissioner or his duly authorized
representative finds that proper
taxes should be assessed, he shall
first notify the taxpayer of his
findings: Provided, however, That a
preassessment notice shall not be
required in the following cases:
(a) When the finding for any
deficiency tax is the result of
mathematical
error
in
the
computation of the tax as appearing
on the face of the return; or
(b) When a discrepancy has been
determined
between
the
tax
withheld and the amount actually
remitted by the withholding agent;
or
(c) When a taxpayer who opted to
claim a refund or tax credit of excess
creditable withholding tax for a
taxable period was determined to
have carried over and automatically
applied the same amount claimed
against the estimated tax liabilities
for the taxable quarter or quarters of
the succeeding taxable year; or
(d) When the excise tax due on
excisable articles has not been paid;
or
(e) When an article locally purchased
or imported by an exempt person,
such as, but not limited to, vehicles,

capital equipment, machineries and

spare parts, has been sold, traded or
transferred to non-exempt persons.
The taxpayer shall be informed in
writing of the law and the facts on
which the assessment is made;
otherwise, the assessment shall be
void.
Within a period to be prescribed by
implementing rules and regulations,
the taxpayer shall be required to
respond to said notice. If the
taxpayer fails to respond, the
Commissioner or his duly authorized
representative
shall
issue
an
assessment based on his findings.
Such assessment may be protested
administratively by filing a request
for reconsideration or reinvestigation
within thirty (30) days from receipt
of the assessment in such form and
manner as may be prescribed by
implementing
rules
and
regulations. Within sixty (60) days
from filing of the protest, all
relevant supporting documents
shall have been submitted;
otherwise, the assessment shall
become final.
If the protest is denied in whole or in
part, or is not acted upon within one
hundred eighty (180) days from
submission
of
documents,
the
taxpayer adversely afected by the
decision or inaction may appeal to
the Court of Tax Appeals within thirty
(30) days from receipt of the said
decision, or from the lapse of the
one
hundred
eighty
(180)-day
period; otherwise, the decision shall
become
final,
executory
and
demandable. (Boldfacing supplied)
Section 228 of the Tax Code [49] provides the remedy to
dispute a tax assessment within a certain period of
time. It states that an assessment may be protested by
filing a request for reconsideration or reinvestigation
within 30 days from receipt of the assessment by the
taxpayer. Within 60 days from filing of the protest, all
relevant supporting documents shall have been
submitted; otherwise, the assessment shall become
final.
In this case, respondent received the tax assessment
on 3 January 2002 and it had until 2 February 2002 to
submit its protest. On 1 February 2002, respondent
submitted its protest and attached the GIS and Balance
Sheet as of 31 December 1998. Respondent explained
that it received P800,000 as a deposit with the
possibility of applying the same as payment for the
future issuance of capital stock.
Within 60 days from the filing of protest or until 2 April
2002, respondent should submit relevant supporting
documents. Respondent, having submitted the
supporting documents together with its protest,
did not present additional documents anymore.
In a letter dated 12 March 2002, petitioner requested
respondent to present proof of payment of DST on
subscription. In a letter-reply, respondent stated that it
could not produce any proof of DST payment because
it was not required to pay DST under the law
considering that the deposit on subscription was an
advance made by its stockholders for future
subscription, and no stock certificates were issued.

29
Since respondent has not allegedly submitted any
relevant supporting documents, petitioner now claims
that the assessment has become final, executory and
demandable, hence, unappealable.
We reject petitioners view that the assessment has
become final and unappealable. It cannot be said that
respondent failed to submit relevant supporting
documents that would render the assessment final
because when respondent submitted its protest,
respondent attached the GIS and Balance Sheet.
Further, petitioner cannot insist on the submission of
proof of DST payment because such document does
not exist as respondent claims that it is not liable to
pay, and has not paid, the DST on the deposit on
subscription.
The term relevant supporting documents should be
understood as those documents necessary to support
the legal basis in disputing a tax assessment as
determined by the taxpayer. The BIR can only inform
the taxpayer to submit additional documents. The BIR
cannot demand what type of supporting documents
should be submitted. Otherwise, a taxpayer will be at
the mercy of the BIR, which may require the production
of documents that a taxpayer cannot submit.
After respondent submitted its letter-reply stating that
it could not comply with the presentation of the proof
of DST payment, no reply was received from petitioner.
Section 228 states that if the protest is not acted upon
within 180 days from submission of documents, the
taxpayer adversely afected by the inaction may
appeal to the CTA within 30 days from the lapse of the
180-day period. Respondent, having submitted its
supporting documents on the same day the protest
was filed, had until 31 July 2002 to wait for petitioners
reply to its protest. On 28 August 2002 or within 30
days after the lapse of the 180-day period counted
from the filing of the protest as the supporting
documents were simultaneously filed, respondent filed
a petition before the CTA.
Respondent has complied with the requisites in
disputing an assessment pursuant to Section 228 of
the Tax Code. Hence, the tax assessment cannot be
considered as final, executory and demandable.
Further, respondents deposit on subscription is not
subject to the payment of DST. Consequently,
respondent is not liable to pay the deficiency DST
of P12,328.45.
WHEREFORE, we DENY the petition. We AFFIRM the
Court of Tax Appeals Decision dated 24 March 2006 in
the consolidated cases of C.T.A. EB Nos. 60 and 62.
SO ORDERED.
EN BANC
[G.R. No. L-19495. November 24, 1966.]
COMMISSIONER OF INTERNAL
REVENUE, Petitioner, v. LILIA YUSAY GONZALES
and THE COURT OF TAX APPEALS, Respondents.
SYLLABUS
1. TAXATION; DISPUTED ASSESSMENTS; APPEAL FROM
A DECISION THEREON TO BE BROUGHT TO THE COURT
OF TAX APPEALS. An action involving a disputed
assessment for internal revenue taxes falls within the
exclusive appellate jurisdiction of the Court of Tax
Appeals (Sec. 7[1], Rep. Act 1125; Blaquera v.
Rodriguez, L-11295, March 29, 1958). It is in that forum
to the exclusion of the Court of First Instance where the
taxpayer can ventilate his or her defense against the
assessment.
2. ID.; ID.; ID.; 30-DAY PERIOD TO COMMENCE FROM
DATE OF RECEIPT OF COMMISSIONER OF INTERNAL

REVENUES DECISION. On November 17, 1959 Lilia

Yusay disputed the legality of the assessment of
February 13, 1958. On March 14, 1960, Lilia Yusay
received the decision of the Commissioner of Internal
Revenue on a disputed assessment. On April 13, 1960
she filed her petition for review in the Court of Tax
Appeals. HELD: The appeal was seasonably interposed
pursuant to Section 11 of Republic Act 1125. We
already ruled in St. Stephens Association v. Collector
of Internal Revenue (L-11238, August 21, 1958), that
the counting of the thirty days within which to institute
an appeal in the Court of Tax Appeals should
commence from the date of receipt of the decision of
the Commissioner on the disputed assessment, not
from the date the assessment was issued. Accordingly,
the thirty-day period should begin running from March
14, 1960, the date Lilia Yusay received the appealable
decision. From said date to April 13, 1960, when she
filed her appeal in the Court of Tax Appeals, is exactly
thirty days. Hence, the appeal was timely.
3. ID.; ID.; PROBATE COURT WITHOUT JURISDICTION TO
ADJUDICATE THE SAME. The settlement court is of
limited jurisdiction. And under the Rules (Rules 74-92,
now Rules 73-91, Rules of Court), its authority relates
only to matters of estates and probate of wills of
deceased persons. Said Court has no jurisdiction to
adjudicate on questions of disputed tax assessments.
4. ID.; TAX RETURNS; FRAUD IN THE MAKING THEREOF
MUST BE PROVED. Fraud is a question of fact. The
circumstances constituting it must be alleged and
proved in the court below. And the finding of said court
as to its existence and non-existence is final unless
clearly shown to be erroneous. (Perez v. Court of Tax
Appeals, L-9738, May 31, 1957). As the court a quo
found that no fraud was alleged and proved therein, we
see no reason to entertain the Commissioners
assertion that the return was fraudulent.
5. ID.; ID.; REQUIREMENTS OF SUBSTANTIAL
COMPLIANCE WITH THE LAW. A return need not be
complete in all particulars. It is sufficient if it complies
substantially with the law. There is substantial
compliance (1) when the return is made in good faith
and is not false or fraudulent; (2) when it covers the
entire period involved; and (3) when it contains
information as to the various items of income,
deduction and credit with such definiteness as to
permit the computation and assessment of the tax.
(Jacob Mertens, Jr., The Law of Federal Income Taxation,
1958 ed., Vol. 10, Section 57.13.)
6. ID.; ID.; ESTATE AND INHERITANCE TAX RETURN IN
CASE AT BAR INSUFFICIENT. Tax return filed by Jose
S. Yusay was substantially defective. First, it was
incomplete. It declared only ninety-three parcels of
land representing about 400 hectares and left out
ninety- two parcels covering 503 hectares. Said huge
under declaration could not have been the result of an
oversight or mistake. Second, the return mentioned no
heir. Thus, no inheritance tax could be assessed. As a
matter of law, on the basis of the return, there would
be no occasion for the imposition of estate and
inheritance taxes.
7. ID.; ID.; RETURNS MADE ON THE WRONG FORM;
PRESCRIPTION DOES NOT RUN. Where the return
was made on the wrong form, the Supreme Court of
the United States held that the filing thereof did not
start the running of the period of limitations. The return
filed in this case was so deficient, that it prevented the
Commissioner from computing the taxes due on the
estate. It was as though no return was made. The
Commissioner had to determine and assess the taxes
on data obtained, not from the return, but from other
sources. We therefore hold the view that the return in
question was no return at all as required in Section 93
of the Tax Code. If the taxpayer failed to observe the
law, Section 332 of the National Internal Revenue Code
which grants the Commissioner 10 years period within

30
which to bring an action for tax collection applies. As
stated, the Commissioner came to know of the identity
of the heirs on September 24, 1953 and the huge
under declaration in the gross estate on July 12, 1957.
From the latter date, Section 94 of the Tax Code
obligated him to make a return or amend one already
filed based on his own knowledge and information
obtained through testimony or otherwise, and
subsequently to assess thereon the taxes due. The
running of the period of limitations under Section
332(a) of the Tax Code should therefore be reckoned
from said date. From July 12, 1957 to February 13,
1958, the date of the assessment now in dispute, less
than ten years have elapsed. Hence, prescription did
not abate the Commissioners right to issue said
assessment.
8. ID.; ID.; TAXPAYERS WILLINGNESS TO PAY NO BAR
TO RAISE DEFENSES AGAINST THE TAX LEGALITY.
Commissioner contends that Lilia Yusay is estopped
from raising the defense of prescription because she
failed to raise the same in her answer to the motion for
allowance of claim and for the payment of taxes filed in
the settlement court. Held: The Court of First Instance
acting as a settlement court is not the proper tribunal
to pass upon such defense, therefore it would be futile
to raise it therein. Moreover, the Tax Code does not bar
the right to contest the legality of the tax after a
taxpayer pays it. Under Section 306 thereof, he can
pay the tax and claim a refund therefor. A fortiori his
willingness to pay the tax is no waiver to raise
defenses against the taxs legality.
DECISION
Matias Yusay, a resident of Pototan, Iloilo, died
intestate on May 13, 1948, leaving two heirs, namely,
Jose S. Yusay, a legitimate child, and Lilia Yusay
Gonzales, an acknowledged natural child. Intestate
proceedings for the settlement of his estate were
instituted in the Court of First Instance of Iloilo (Special
Proceedings No. 459). Jose S. Yusay was therein
appointed administrator.
On May 11, 1949 Jose S. Yusay filed with the Bureau of
Internal Revenue an estate and inheritance tax return
declaring therein the following properties:
Personal properties:

Real properties:
Capital, 25 parcels assessed P 87,715.32
1/2 of Conjugal, 130 parcels assessed at P121,425.00

P209,140.32

Total P219,584.32
The fair market value of the real properties was
computed by increasing the assessed value by forty
percent.
Based on the above findings, the Bureau of Internal
Revenue assessed on October 29, 1953 estate and
inheritance taxes in the sums of P6,849.78 and
P16,970.63, respectively.
On January 25, 1955 the Bureau of Internal Revenue
increased the assessment to P8,225.89 as estate tax
and P22,117.10 as inheritance tax plus delinquency
interest and demanded payment thereof on or before
February 28, 1955. Meanwhile, on February 16, 1955,
the Court of First Instance of Iloilo required Jose S.
Yusay to show proof of payment of said estate and
inheritance taxes.
On March 3, 1955 Jose S. Yusay requested an extension
of time within which to pay the tax. He posted a surety
bond to guarantee payment of the taxes in question
within one year. The Commissioner of Internal Revenue
however denied the request. Then he issued a warrant
of distraint and levy which he transmitted to the
Municipal Treasurer of Pototan for execution. This
warrant was not enforced because all the personal
properties subject to distraint were located in Iloilo City.
On May 20, 1955 the Provincial Treasurer of Iloilo
requested the BIR Provincial Revenue Officer to furnish
him copies of the assessment notices to support a
motion for payment of taxes which the Provincial Fiscal
would file in Special Proceedings No. 459 before the
Court of First Instance of Iloilo. The papers requested
were sent by the Commissioner of Internal Revenue to
the Provincial Revenue Officer of Iloilo to be
transmitted to the Provincial Treasurer. The records do
not however show whether the Provincial Fiscal filed a
claim with the Court of First Instance for the taxes due.

Palay P6,444.00

Real properties: Capital, 74) parcels)

On May 30, 1956 the commissioner appointed by the

Court of First Instance for the purpose, submitted a
recommended project of partition which listed the
following properties:chanrob1es virtual 1aw library

Conjugal 19) Parcels) assessed at P179,760.00

Personal properties:

Buick Sedan P 8,100.00

Total gross estate P187,204.00

Packard car 2,000.00

Aparadors 500.00

The return mentioned no heir.

Cash in Bank (PNB) 8,858.46

Upon investigation however the Bureau of Internal

Revenue found the following properties:

Palay 6,444.00

Carabaos 1,000.00 P7,444.00

Carabaos 1,500.00 P27,402.46

Personal properties:

Palay P6,444.00
Real properties:
Carabaos 1,500.00
Land, 174 parcels
Packard Automobile 2,000.00
assessed at P324,797.21
2 Aparadors 500.00 P10,444.00
Buildings 4,500.00 P329,297.21

31
Total P356,699.67
More than a year later particularly on July 12, 1957, an
agent of the Bureau of Internal Revenue apprised the
Commissioner of Internal Revenue of the existence of
said recommended project of partition. Whereupon, the
Internal Revenue Commissioner caused the estate of
Matias Yusay to be reinvestigated for estate and
inheritance tax liability. Accordingly, on February 13,
1958 he issued the following assessment:
Estate tax P16,246.04
5% surcharge 411.29
Delinquency interest 11,868.90

force and efect. This request was rejected by the

Commissioner in his letter dated January 20, 1960,
received by Lilia Yusay on March 14, 1960, for the
reasons, namely, (1) that the right to assess the taxes
in question has not been lost by prescription since the
return which did not name the heirs cannot be
considered a true and complete return sufficient to
start the running of the period of limitations of five
years under Section 331 of the Tax Code and pursuant
to Section 332 of the same Code he has ten years
within which to make the assessment counted from the
discovery on September 24, 1953 of the identity of the
heirs; and (2) that the estates administrator waived
the defense of prescription when he filed a surety bond
on March 3, 1955 to guarantee payment of the taxes in
question and when he requested postponement of the
payment of the taxes pending determination of who
the heirs are by the settlement court.

Compromise No notice of death P15.00

Late payment 40.00 55.00

Total P28,581.23

On April 13, 1960 Lilia Yusay filed a petition for review

in the Court of Tax Appeals assailing the legality of the
assessment dated February 13, 1958. After hearing the
parties, said court declared the right of the
Commissioner of Internal Revenue to assess the estate
and inheritance taxes in question to have prescribed
and rendered the following judgment:

Inheritance Tax P38,178.12

"WHEREFORE, the decision of respondent assessing

against the estate of the late Matias Yusay estate and
inheritance taxes is hereby reversed. No. costs."

5% surcharge 1,105.86
Delinquency interest 28,808.75
Compromise for late payment 50.00

Total P69,142.73

Total estate and inheritance taxes P97,723.96

The Commissioner of Internal Revenue appealed to this

Court and raises the following issues:
1. Was the petition for review filed in the Court of Tax
Appeals within the 30-day period provided for in
Section 11 of Republic Act 1125?
2. Could the Court of Tax Appeals take cognizance of
Lilia Yusays appeal despite the pendency of the "Proof
of Claim" and "Motion for Allowance of Claim and for an
Order of Payment of Taxes" filed by the Commissioner
of Internal Revenue in Special Proceedings No. 459
before the Court of First Instance of Iloilo?

Like in previous assessments, the fail market value of

the real properties was arrived at by adding 40% to the
assessed value.
In view of the demise of Jose S. Yusay, said assessment
was sent to his widow, Mrs. Florencia Piccio Vda. de
Yusay, who succeeded him in the administration of the
estate of Matias Yusay.
No payment having been made despite repeated
demands, the Commissioner of Internal Revenue filed a
proof of claim for the estate and inheritance taxes due
and a motion for its allowance with the settlement
court invoking priority of lien pursuant to Section 315
of the Tax Code.
On June 1, 1959, Lilia Yusay, through her counsel,
Ramon Gonzalez, filed an answer to the proof of claim
alleging non-receipt of the assessment of February 13,
1958, the existence of two administrators, namely,
Florencia Piccio Vda. de Yusay who administered twothirds of the estate, and Lilia Yusay, who administered
the remaining one-third, and her willingness to pay the
taxes corresponding to her share, and praying for
deferment of the resolution on the motion for the
payment of taxes until after a new assessment
corresponding to her share was issued.
On November 17, 1959 Lilia Yusay disputed the legality
of the assessment dated February 13, 1958. She
claimed that the right to make the same had
prescribed inasmuch as more than five years had
elapsed since the filing of the estate and inheritance
tax return on May 11, 1949. She therefore requested
that the assessment be declared invalid and without

3. Has the right of the Commissioner of Internal

Revenue to assess the estate and inheritance taxes in
question prescribed?
On November 17, 1959 Lilia Yusay disputed the legality
of the assessment of February 13, 1958. On March 14,
1960 she received the decision of the Commissioner of
Internal Revenue on the disputed assessment. On April
13, 1960 she filed her petition for review in the Court of
Tax Appeals. Said Court correctly held that the appeal
was seasonably interposed pursuant to Section 11 of
Republic Act 1125. We already ruled in St. Stephens
Association v. Collector of Internal Revenue, 1 that the
counting of the thirty days within which to institute an
appeal in the Court of Tax Appeals should commence
from the date of receipt of the decision of the
Commissioner on the disputed assessment, not from
the date the assessment was issued.
Accordingly, the thirty-day period should begin running
from March 14, 1960, the date Lilia Yusay received the
appealable decision. From said date to April 13, 1960,
when she filed her appeal in the Court of Tax Appeals,
is exactly thirty days. Hence, the appeal was timely.
Next, the Commissioner attacks the jurisdiction of the
Court of Tax Appeals to take cognizance of Lilia Yusays
appeal on the ground of lis pendens. He maintains that
the pendency of his motion for allowance of claim and
for order of payment of taxes in the Court of First
Instance of Iloilo would preclude the Court of Tax
Appeals from acquiring jurisdiction over Lilia Yusays
Appeal. This contention lacks merit.
Lilia Yusays cause seeks to resist the legality of the
assessment in question. Should she maintain it in the

32
settlement court or should she elevate her cause to the
Court of Tax Appeals? We say, she acted correctly by
appealing to the latter court. An action involving a
disputed assessment for internal revenue taxes falls
within the exclusive appellate jurisdiction of the Court
of Tax Appeals. 2 It is in that forum, to the exclusion of
the Court of First Instance, 3 where she could ventilate
her defenses against the assessment.
Moreover, the settlement court, where the
Commissioner would wish Lilia Yusay to contest the
assessment is of limited jurisdiction. And under the
Rules, 4 its authority relates only to matters having to
do with the settlement of estates and probate of wills
of deceased persons. 5 Said court has no jurisdiction to
adjudicate the contentions in question, which
assuming they do not come exclusively under the Tax
Courts cognizance must be submitted to the Court
of First Instance in the exercise of its general
Jurisdiction. 6
We now come to the issue of prescription. Lilia Yusay
claims that since the latest assessment was issued
only on February 13, 1958 or eight years, nine months
and two days from the filing of the estate and
inheritance tax return, the Commissioners right to
make it has expired. She would rest her stand on
Section 331 of the Tax Code which limits the right of
the Commissioner to assess the tax within five years
from the filing of the return.
The Commissioner claims that fraud attended the filing
of the return; that this being so, Section 332(a) of the
Tax Code would apply. 7 It may be well to note that the
assessment letter itself (Exhibit 22) did not impute
fraud in the return with intent to evade payment of the
tax. Precisely, no surcharge for fraud was imposed. In
his answer to the petition for review filed by Lilia Yusay
in the Court of Tax Appeals, the Commissioner alleged
no fraud. Instead, he broached the insufficiency of the
return as barring the commencement of the running of
the statute of limitations. He raised the point of fraud
for the first time in the proceedings, only in his
memorandum filed with the Tax Court subsequent to
resting his case. Said Court rejected the plea of fraud
for lack of allegation and proof, and ruled that the
return, although not accurate, was sufficient to start
the period of prescription.
Fraud is a question of fact. 8 The circumstances
constituting it must be alleged and proved in the court
below. 9 And the finding of said court as to its
existence and nonexistence is final unless clearly
shown to be erroneous. 10 As the court a quo found
that no fraud was alleged and proved therein, we see
no reason to entertain the Commissioners assertion
that the return was fraudulent.
The conclusion, however, that the return filed by Jose
S. Yusay was sufficient to commence the running of the
prescriptive period, under Section 331 of the Tax Code
rests on no solid ground.
Paragraph (a) of Section 93 of the Tax Code lists the
requirements of a valid return. It states:
"(a) Requirements. In all cases of inheritance or
transfers subject to either the estate tax or the
inheritance tax, or both, or where, though exempt from
both taxes, the gross value of the estate exceeds three
thousand pesos, the executor, administrator, or anyone
of the heirs, as the case may be, shall file a return
under oath in duplicate, setting forth (1) the value of
the gross estate of the decedent at the time of his
death, or, in case of a nonresident not a citizen of the
Philippines, or that part of his gross estate situated in
the Philippines; (2) the deductions allowed from gross
estate in determining net estate as defined in section
eighty-nine; (3) such part of such information as may
at the time be ascertainable and such supplemental
data as may be necessary to establish the correct

taxes."
A return need not be complete in all particulars. It is
sufficient if it complies substantially with the law. There
is substantial compliance (1) when the return is made
in good faith and is not false or fraudulent; (2) when it
covers the entire period involved; and (3) when it
contains information as to the various items of income,
deduction and credit with such definiteness as to
permit the computation and assessment of the tax. 11
There is no question that the estate and inheritance
tax return filed by Jose S. Yusay was substantially
defective.
First, it was incomplete. It declared only ninety-three
parcels of land representing about 400 hectares and
left out ninety-two parcels covering 503 hectares. Said
huge under declaration could not have been the result
of an oversight or mistake. As found in L-11378, supra
note 7, Jose S. Yusay very well knew of the existence of
the omitted properties. Perhaps his motive in under
declaring the inventory of properties attached to the
return was to deprive Lilia Yusay from inheriting her
legal share in the hereditary estate, but certainly not
because he honestly believed that they did not form
part of the gross estate.
Second, the return mentioned no heir. Thus, no
inheritance tax could be assessed. As a matter of law,
on the basis of the return, there would be no occasion
for the imposition of estate and inheritance taxes.
When there is no heir the return showed none the
intestate estate is escheated to the State. 12 The State
taxes not itself.
In a case where the return was made on the wrong
form, the Supreme Court of the United States held that
the filing thereof did not start the running of the period
of limitations. 13 The reason is that the return
submitted did not contain the necessary information
required in the correct form. In this jurisdiction,
however, the Supreme Court refrained from applying
the said ruling of the United States Supreme Court in
Collector of Internal Revenue v. Central Azucarera de
Tarlac, L-11760-61, July 31, 1958, on the ground that
the return was complete in itself although inaccurate.
To our mind, it would not make much diference where
a return is made on the correct form prescribed by the
Bureau of Internal Revenue if the data therein required
are not supplied by the taxpayer. Just the same, the
necessary information for the assessment of the tax
would be missing.
The return filed in this case was so deficient that it
prevented the Commissioner from computing the taxes
due on the estate. It was as though no return was
made. The Commissioner had to determine and assess
the taxes on data obtained, not from the return, but
from other sources. We therefore hold the view that the
return in question was no return at all as required in
Section 93 of the Tax Code.
The law imposes upon the taxpayer the burden of
supplying by the return the information upon which an
assessment would be based. 14 His duty complied
with, the taxpayer is not bound to do anything more
than to wait for the Commissioner to assess the tax.
However, he is not required to wait forever. Section
331 of the Tax Code gives the Commissioner five years
within which to make his assessment. 15 Except, of
course, if the taxpayer failed to observe the law, in
which case Section 332 of the same Code grants the
Commissioner a longer period. Non-observance
consists in filing a false or fraudulent return with intent
to evade the tax or in filing no return at all.
Accordingly, for purposes of determining whether or
not the Commissioners assessment of February 13,
1958 is barred by prescription, Section 332 (a) which is
an exception to Section 331 of the Tax Code finds

33
application. 16 We quote Section 332(a)

Internal Revenue states:

"SEC. 332. Exception as to period of limitations of

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

"2. That he likewise admits, as alleged in paragraph 1

thereof having received the letter of the petitioner
dated November 27, 1959 (Annex "A" of the Petition for
Review), contesting the assessment of estate and
inheritance taxes levied against the Intestate Estate of
the late Matias Yusay, Special Proceedings No. 459,
Court of First Instance of Iloilo, on the ground that the
said assessment has already prescribed, but
specifically denies the allegations that the assessments
have already prescribed, the truth of the matter being
that the returns filed on May 11, 1949 cannot be
considered as a true, and complete return sufficient to
start the running of the period of five (5) years
prescribed in Sec. 331 of the Tax Code;"

As stated, the Commissioner came to know of the

identity of the heirs on September 24, 1953 and the
huge under declaration in the gross estates on July 12,
1957. From the latter date, Section 94 of the Tax Code
obligated him to make a return or amend one already
filed based on his own knowledge and information
obtained through testimony or otherwise, and
subsequently to assess thereon the taxes due. The
running of the period of limitations under Section
332(a) of the Tax Code should therefore be reckoned
from said date for, as aforesaid, it is from that time
that the Commissioner was expected by law to make
his return and assess the tax due thereon. From July
12, 1957 to February 13, 1958, the date of the
assessment now in dispute, less than ten years have
elapsed. Hence, prescription did not abate the
Commissioners right to issue said assessment.
Anent the Commissioners contention that Lilia Yusay is
estopped from raising the defense of prescription
because she failed to raise the same in her answer to
the motion for allowance of claim and the payment of
taxes filed in the settlement court (Court of First
Instance of Iloilo), suffice it to state that it would be
unjust to the taxpayer if We were to sustain such a
view. The Court of First Instance acting as a settlement
court is not the proper tribunal to pass upon such
defense, therefore it would be but futile to raise it
therein. Moreover, the Tax Code does not bar the right
to contest the legality of the tax after a taxpayer pays
it. Under Section 306 thereof, he can pay the tax and
claim a refund therefore. A fortiori his willingness to
pay the tax is no waiver to raise defenses against the
taxs legality.
WHEREFORE, the judgment appealed from is set aside
and another entered affirming the assessment of the
Commissioner of Internal Revenue dated February 13,
1958. Lilia Yusay Gonzales, as administratrix of the
intestate estate of Matias Yusay, is hereby ordered to
pay the sums of P16,246.04 and P39,178.12 as estate
and inheritance taxes, respectively, plus interest and
surcharge for delinquency in accordance with Section
101 of the National Internal Revenue Code, without
prejudice to reimbursement from her co-administratrix,
Florencia Piccio Vda. de Yusay for the latters
corresponding tax liability. No costs. So ordered.
RESOLUTION
ON MOTION FOR RECONSIDERATION

This point was discussed in the memorandum of the

Commissioner of Internal Revenue, thus:
"In the estate and inheritance tax return filed by Jose S.
Yusay (Exhibits B & 1, pp. 14-20, B.I.R. records) the net
value of the estate of the deceased was claimed to be
P203,354.00 and no inheritance tax was shown as the
heirs were not indicated. In the final computation of the
estate by an examiner of the respondent, the net
estate was found to be worth P410,518.38 (p. 105,
B.I.R. records) or about more than twice the original
amount declared in the return. In the subsequent
investigation of this case, it was also determined that
the heirs of the deceased were Jose S. Yusay, a
legitimate son, and Lilia Yusay, an acknowledged
natural child, (petitioner herein).
"Under the circumstances, we believe the return filed
on May 11, 1949 was false or fraudulent in the sense
that the value of the properties were under declared
and that the said return was also incomplete as the
heirs to the estate were not specified. Inasmuch as the
respondent was not furnished adequate data upon
which to base an assessment, the said return cannot
be considered a true and complete return sufficient to
start the running of the period of limitations of five (5)
years prescribed in Section 331 of the Tax Code."
In the lower court the defense of the Commissioner of
Internal Revenue against Lilia Yusay Gonzales plea of
prescription, centered on the insufficiency and
fraudulence or falsity of the return filed by Jose Yusay.
The Court of Tax Appeals overruled the Commissioner
of Internal Revenue. Said of Tax Code:
"The provision of Section 332 (a) of the Tax Code
cannot be invoked in this case as it was neither alleged
in respondents answer, nor proved during the hearing
that the return was false or fraudulent with intent to
evade the payment of tax. Moreover, the failure of
respondent to charge fraud and impose the penalty
thereof in the assessments made in 1953, 1955 and
1956 is an eloquent demonstration that the filing of
petitioners transfer tax return was not attended by
falsity or fraud with intent to evade tax.
x
x
x

April 24, 1967

Respondent Lilia Yusay Gonzales seeks reconsideration
of our decision holding her liable for the payment of
P97,723.96 as estate and inheritance taxes plus
delinquency penalties as administratrix of the intestate
estate of Matias Yusay. The grounds raised by her
deserve this extended resolution.
Firstly, movant maintains that the issue of whether or
not the estate and inheritance tax return filed by Jose
Yusay on May 13, 1949 was sufficient to start the
running of the statute of limitations on assessment,
was neither raised in the Court of Tax Appeals nor
assigned as error before this Court. The records in the
Court of Tax Appeals however show the contrary.
Paragraph 2 of the answer filed by the Commission of

"But respondent urges upon us that the filing of the

return did not start the running of the five (5) year
period for the reason that the return did not disclose
the heirs of the deceased Matias, Yusay, and contained
inadequate data regarding the value of the estate. We
believe that these mere omissions do not require
additional returns for the same. Altho incomplete for
being deficient on these matters, the return cannot be
regard as a case of failure to file a return where want of
good faith and intent to evade the tax on the part of
petitioner are not charged. It served as a sufficient
notice of the Commissioner of Internal Revenue to
make his assessment and start the running of the
period of limitation. In this connection, it must be borne
in mind that the Commissioner is not confined to the
taxpayers return in making assessment of the tax, and

34
for his purpose he may secure additional information
from other sources. As was done in the case at bar, he
sends investigators to examine the taxpayers records
and other pertinent data. His assessment is based
upon the facts uncovered by the investigation
(Collector v. Central Azucarera de Tarlac, G.R. Nos. L11760 and L-11761, July 31, 1958).
"Furthermore, the failure to state the heirs in the return
can be attributed to the then unsettled conflict raging
before the probate court as to who are the heirs of the
estate. Such failure could not have been a deliberate
attempt to mislead the government in the assessment
of the correct taxes."
In his appeal, the Commissioner of Internal Revenue
assigned as third error of the Court of Tax Appeals the
finding that the assessment in question was "made
beyond the five-year statutory period provided in
Section 332(a) of the Tax Code," and that the right of
the Commissioner of Internal Revenue to assess the
estate and inheritance taxes has already prescribed. To
sustain his side, the Commissioner ventilated in his
brief, fraud in the filing of the return, absence of
certain data from the return which prevented him from
assessing thereon the tax due and the pendency in this
Court of L-11374 entitled "Intestate Estate of the late
Yusay Gonzales" which allegedly had the efect of
suspending the running of the period of limitations on
assessment.
Clearly, therefore, it would be incorrect to say that the
question of whether or not the return filed by Jose
Yusay was sufficient to start the running of the statute
of limitations to assess the corresponding tax, was not
raised by the Commissioner in the Court of Tax Appeals
and in this Court.
Second. Movant contends that contrary to Our ruling,
the return filed by Jose Yusay was sufficient to start the
statute of limitations on assessment. Inasmuch as this
question was amply discussed in Our decision sought
to be reconsidered, and no new argument was
advanced, We deem it unnecessary to pass upon the
same. There is no reason for any change on Our stand
on this point.
Third. Movant insists that since she administers only
one-third of the estate of Matias Yusay, she should not
be liable for the whole tax. And she suggests that We
hold the intestate estate of Matias Yusay liable for said
taxes, one-third to be paid by Lilia Yusay Gonzales and
two-thirds to be paid by Florencia P. Vda. de Yusay.
The foregoing suggestion to require payment of twothirds of the totals taxes by Florencia P. Vda. de Yusay
is not acceptable, for she (Florencia P. Vda. de Yusay) is
not a party in this case.
It should be pointed out that Lilia Yusay Gonzales
appealed the whole assessment to the Court of Tax
Appeals. Thereupon, the Commissioner of Internal
Revenue questioned her legal capacity to institute the
appeal on the ground that she administered only onethird of the estate of Matias Yusay. In opposition, she
espoused the view, which was sustained by the Tax
Court, that in co-administration, the administratrices
are regarded as one person and the acts of one of
them in relation to the regular administration of the
estate are deemed to be the acts of all; hence, each
administratrix can represent the whole estate. In
advancing such proposition, Lilia Yusay Gonzales
represented the whole estate and hoped to benefit
from the favorable outcome of the case. For the same
reason that she represented her co- administratrix and
the whole estate of Matias Yusay, she risked being
ordered to pay the whole assessment, should the
assessment be sustained.
Her change of stand adopted in the motion for
reconsideration to the efect that she should be made

liable for only one-third of the total tax, would negate

her aforesaid proposition before the Court of Tax
Appeals. She is now estopped from denying liability for
the whole tax.
At any rate, estate and inheritance taxes are satisfied
from the estate and are to be paid by the executor or
administrator. 1 Where there are two or more
executors, all of them are severally liable for the
payment of the estate tax. 2 The inheritance tax,
although charged against the account of each
beneficiary, should be paid by the executor or
administrator. 3 Failure to pay the estate and
inheritance taxes before distribution of the estate
would subject the executor or administrator to criminal
liability under Section 107(c) of the Tax Code.
It is immaterial therefore that Lilia Yusay Gonzales
administers only one-third of the estate and will
receive as her share only said portion, for her right to
the estate comes after taxes. 4 As an administratrix,
she is liable for the entire estate tax. As an heir, she is
liable for the entire inheritance tax although her
liability would not exceed the amount of her share in
the estate. 5 The entire inheritance tax which amounts
to P39,178.12 excluding penalties is obviously much
less than her distributive share.
Motion for reconsideration denied.

FIRST DIVISION
[G.R. NO. 168498 : June 16, 2006]
RIZAL COMMERCIAL BANKING
CORPORATION, Petitioner, v. COMMISSIONER OF
INTERNAL REVENUE, Respondent.
DECISION
This is a Petition for Review under Rule 45 of the Rules
of Court assailing the Decision1 of the Court of Tax
Appeals (CTA) En Banc dated June 7, 2005 in C.T.A. EB
No. 50 which affirmed the Resolutions of the CTA
Second Division dated May 3, 20042 and November 5,
20043 in C.T.A. Case No. 6475 denying petitioner's
Petition for Relief from Judgment and the Motion for
Reconsideration thereof, respectively.
The undisputed facts are as follows:
On July 5, 2001, petitioner Rizal Commercial Banking
Corporation received a Formal Letter of Demand dated
May 25, 2001 from the respondent Commissioner of
Internal Revenue for its tax liabilities particularly for
Gross Onshore Tax in the amount of P53,998,428.29
and Documentary Stamp Tax for its Special Savings
Placements in the amount of P46,717,952.76, for the
taxable year 1997.4
On July 20, 2001, petitioner filed a protest
letter/request for reconsideration/reinvestigation
pursuant to Section 228 of the National Internal
Revenue Code of 1997 (NIRC).5
As the protest was not acted upon by the respondent,
petitioner filed on April 30, 2002 a Petition for Review
with the CTA for the cancellation of the assessments
which was docketed as C.T.A. Case No. 6475. 6
On July 15, 2003, respondent filed a motion to resolve
first the issue of CTA's jurisdiction, 7 which was granted
by the CTA in a Resolution dated September 10,
2003.8 The Petition for Review was dismissed because
it was filed beyond the 30-day period following the

35
lapse of 180 days from petitioner's submission of
documents in support of its protest, as provided under
Section 228 of the NIRC and Section 11 of R.A. No.
1125, otherwise known as the Law Creating the Court
of Tax Appeals.
Petitioner did not file a motion for reconsideration or an
appeal to the CTA En Banc from the dismissal of its
Petition for Review . Consequently, the September 10,
2003 Resolution became final and executory on
October 1, 2003 and Entry of Judgment was made on
December 1, 2003.9 Thereafter, respondent sent a
Demand Letter to petitioner for the payment of the
deficiency tax assessments.
On February 20, 2004, petitioner filed a Petition for
Relief from Judgment10 on the ground of excusable
negligence of its counsel's secretary who allegedly
misfiled and lost the September 10, 2003 Resolution.
The CTA Second Division set the case for hearing on
April 2, 200411 during which petitioner's counsel was
present.12 Respondent filed an Opposition13 while
petitioner submitted its Manifestation and CounterMotion.14
On May 3, 2004, the CTA Second Division rendered a
Resolution15 denying petitioner's Petition for Relief from
Judgment.
Petitioner's motion for reconsideration was denied in a
Resolution dated November 5, 2004, 16 hence it filed a
Petition for Review with the CTA En Banc, docketed as
C.T.A. EB No. 50, which affirmed the assailed
Resolutions of the CTA Second Division in a Decision
dated June 7, 2005.
Hence, this Petition for Review based on the following
grounds:
I.
THE HONORABLE CTA AND CTA EN BANC GRAVELY
ERRED IN DENYING PETITIONER'S PETITION FOR
RELIEF, WITHOUT FIRST AFFORDING IT THE
OPPORTUNITY TO ADDUCE EVIDENCE TO ESTABLISH
THE FACTUAL ALLEGATIONS CONSTITUTING ITS
ALLEGED EXCUSABLE NEGLIGENCE, IN CLEAR
VIOLATION OF PETITIONER'S BASIC RIGHT TO DUE
PROCESS.
II.
CONSIDERING THAT THE SUBJECT ASSESSMENT,
INSOFAR AS IT INVOLVES ALLEGED DEFICIENCY
DOCUMENTARY STAMP TAXES ON SPECIAL SAVINGS
ACCOUNTS, IS AN ISSUE AFFECTING ALL MEMBERS OF
THE BANKING INDUSTRY, PETITIONER, LIKE ALL OTHER
BANKS, SHOULD BE AFFORDED AN EQUAL
OPPORTUNITY TO FULLY LITIGATE THE ISSUE, AND
HAVE THE CASE DETERMINED BASED ON ITS MERITS,
RATHER THAN ON A MERE TECHNICALITY. 17
Relief from judgment under Rule 38 of the Rules of
Court is a legal remedy that is allowed only in
exceptional cases whereby a party seeks to set aside a
judgment rendered against him by a court whenever
he was unjustly deprived of a hearing or was prevented
from taking an appeal, in either case, because of fraud,
accident, mistake or excusable neglect.18
Petitioner argues that it was denied due process when
it was not given the opportunity to be heard to prove
that its failure to file a motion for reconsideration or
appeal from the dismissal of its Petition for Review was
due to the failure of its employee to forward the copy
of the September 10, 2003 Resolution which
constitutes excusable negligence.

Petitioner's argument lacks merit.

It is basic that as long as a party is given the
opportunity to defend his interests in due course, he
would have no reason to complain, for it is this
opportunity to be heard that makes up the essence of
due process.19 In Batongbakal v. Zafra,20 the Court held
that:
There is no question that the "essence of due process
is a hearing before conviction and before an impartial
and disinterested tribunal" but due process as a
constitutional precept does not, always and in all
situations, require a trial-type proceeding. The essence
of due process is to be found in the reasonable
opportunity to be heard and submit any evidence one
may have in support of one's defense. "To be heard"
does not only mean verbal arguments in court;
one may be heard also through pleadings. Where
opportunity to be heard, either through oral
arguments or pleadings, is accorded, there is no
denial of procedural due process. (Emphasis
supplied).
As correctly pointed by the Office of the Solicitor
General (OSG), the CTA Second Division set the case
for hearing on April 2, 2004 after the filing by the
petitioner of its petition for relief from judgment.
Petitioner's counsel was present on the scheduled
hearing and in fact orally argued its petition.
Moreover, after the CTA Second Division dismissed the
petition for relief from judgment in a Resolution dated
May 3, 2004, petitioner filed a motion for
reconsideration and the court further required both
parties to file their respective memorandum. Indeed,
petitioner was not denied its day in court considering
the opportunities given to argue its claim.
Relief cannot be granted on the flimsy excuse that the
failure to appeal was due to the neglect of petitioner's
counsel.21 Otherwise, all that a losing party would do to
salvage his case would be to invoke neglect or mistake
of his counsel as a ground for reversing or setting aside
the adverse judgment, thereby putting no end to
litigation.22
Negligence to be "excusable" must be one which
ordinary diligence and prudence could not have
guarded against and by reason of which the rights of
an aggrieved party have probably been
impaired.23Petitioner's former counsel's omission could
hardly be characterized as excusable, much less
unavoidable.
The Court has repeatedly admonished lawyers to adopt
a system whereby they can always receive promptly
judicial notices and pleadings intended for
them.24 Apparently, petitioner's counsel was not only
remiss in complying with this admonition but he also
failed to check periodically, as an act of prudence and
diligence, the status of the pending case before the
CTA Second Division. The fact that counsel allegedly
had not renewed the employment of his secretary,
thereby making the latter no longer attentive or
focused on her work, did not relieve him of his
responsibilities to his client. It is a problem personal to
him which should not in any manner interfere with his
professional commitments.
In exceptional cases, when the mistake of counsel is so
palpable that it amounts to gross negligence, this Court
afords a party a second opportunity to vindicate his
right. But this opportunity is unavailing in the case at
bar, especially since petitioner had squandered the
various opportunities available to it at the diferent
stages of this case. Public interest demands an end to
every litigation and a belated efort to reopen a case

36
that has already attained finality will serve no purpose
other than to delay the administration of justice.25

jurisdictional and failure to comply therewith may be

raised in a motion to dismiss.

Since petitioner's ground for relief is not well-taken, it

follows that the assailed judgment stands.

In fine, the failure to comply with the 30-day statutory

period would bar the appeal and deprive the Court of
Tax Appeals of its jurisdiction to entertain and
determine the correctness of the assessment.29

Assuming ex gratia argumenti that the negligence of

petitioner's counsel is excusable, still the petition must
fail. As aptly observed by the OSG, even if the petition
for relief from judgment would be granted, petitioner
will not fare any better if the case were to be returned
to the CTA Second Division since its action for the
cancellation of its assessments had already
prescribed.26
Petitioner protested the assessments pursuant to
Section 228 of the NIRC, which provides:

WHEREFORE, in view of the foregoing, the Decision of

the Court of Tax Appeals En Banc dated June 7, 2005 in
C.T.A. EB No. 50 affirming the Resolutions of the Court
of Tax Appeals Second Division dated May 3, 2004 and
November 5, 2004 in C.T.A. Case No. 6475 denying
petitioner's Petition for Relief from Judgment and
Motion for Reconsideration, respectively, is AFFIRMED.
SO ORDERED.

SEC. 228. Protesting of Assessment. - x x x.

xxxx

THIRD DIVISION

Within a period to be prescribed by implementing rules

and regulations, the taxpayer shall be required to
respond to said notice. If the taxpayer fails to respond,
the Commissioner or his duly authorized representative
shall issue an assessment based on his findings.

[G.R. NO. 168498 : April 24, 2007]

Such assessment may be protested administratively by

filing a request for reconsideration or reinvestigation
within thirty (30) days from receipt of the assessment
in such form and manner as may be prescribed by
implementing rules and regulations. Within sixty (60)
days from filing of the protest, all relevant supporting
documents shall have been submitted; otherwise, the
assessment shall become final.
If the protest is denied in whole or in part, or is
not acted upon within one hundred eighty (180)
days from submission of documents, the
taxpayer adversely affected by the decision or
inaction may appeal to the Court of Tax Appeals
within (30) days from receipt of the said
decision, or from the lapse of the one hundred
eighty (180)-day period; otherwise the decision
shall become final, executory and
demandable. (Emphasis supplied).
The CTA Second Division held:
Following the periods provided for in the
aforementioned laws, from July 20, 2001, that is, the
date of petitioner's filing of protest, it had until
September 18, 2001 to submit relevant documents and
from September 18, 2001, the Commissioner had until
March 17, 2002 to issue his decision. As admitted by
petitioner, the protest remained unacted by the
Commissioner of Internal Revenue. Therefore, it had
until April 16, 2002 within which to elevate the case to
this court. Thus, when petitioner filed its Petition for
Review on April 30, 2002, the same is outside the thirty
(30) period.27
As provided in Section 228, the failure of a taxpayer to
appeal from an assessment on time rendered the
assessment final, executory and demandable.
Consequently, petitioner is precluded from disputing
the correctness of the assessment.

RIZAL COMMERCIAL BANKING

CORPORATION, Petitioner, v. COMMISSIONER OF
INTERNAL REVENUE, Respondent.
RESOLUTION
For resolution is petitioner's Motion for Reconsideration
of our Decision1 dated June 16, 2006 affirming the
Decision of the Court of Tax Appeals En Banc dated
June 7, 2005 in C.T.A. EB No. 50, which affirmed the
Resolutions of the Court of Tax Appeals Second Division
dated May 3, 2004 and November 5, 2004 in C.T.A.
Case No. 6475, denying petitioner's Petition for Relief
from Judgment and Motion for Reconsideration,
respectively.
Petitioner reiterates its claim that its former counsel's
failure to file Petition for Review with the Court of Tax
Appeals within the period set by Section 228 of the
National Internal Revenue Code of 1997 (NIRC) was
excusable and raised the following issues for
resolution:
A.
THE DENIAL OF PETITIONER'S PETITION FOR RELIEF
FROM JUDGMENT WILL RESULT IN THE DENIAL OF
SUBSTANTIVE JUSTICE TO PETITIONER, CONTRARY TO
ESTABLISHED DECISIONS OF THIS HONORABLE COURT
BECAUSE THE ASSESSMENT SOUGHT TO BE
CANCELLED HAS ALREADY PRESCRIBED - A FACT NOT
DENIED BY THE RESPONDENT IN ITS ANSWER.
B.
CONTRARY TO THIS HONORABLE COURT'S DECISION,
AND FOLLOWING THE LASCONA DECISION, AS WELL AS
THE 2005 REVISED RULES OF THE COURT OF TAX
APPEALS, PETITIONER TIMELY FILED ITS PETITION FOR
REVIEW BEFORE THE COURT OF TAX APPEALS; THUS,
THE COURT OF TAX APPEALS HAD JURISDICTION OVER
THE CASE.
C.

In Ker & Company, Ltd. v. Court of Tax Appeals,28 the

Court held that while the right to appeal a decision of
the Commissioner to the Court of Tax Appeals is merely
a statutory remedy, nevertheless the requirement that
it must be brought within 30 days is jurisdictional. If a
statutory remedy provides as a condition precedent
that the action to enforce it must be commenced
within a prescribed time, such requirement is

CONSIDERING THAT THE SUBJECT ASSESSMENT

INVOLVES AN INDUSTRY ISSUE, THAT IS, A DEFICIENCY
ASSESSMENT FOR DOCUMENTARY STAMP TAX ON
SPECIAL SAVINGS ACCOUNTS AND GROSS ONSHORE
TAX, PETITIONER IN THE INTEREST OF SUBSTANTIVE
JUSTICE AND UNIFORMITY OF TAXATION, SHOULD BE

37
ALLOWED TO FULLY LITIGATE THE ISSUE BEFORE THE
COURT OF TAX APPEALS.2
Petitioner's motion for reconsideration is denied for
lack of merit.
Other than the issue of prescription, which is raised
herein for the first time, the issues presented are a
mere rehash of petitioner's previous arguments, all of
which have been considered and found without merit in
our Decision dated June 16, 2006.
Petitioner maintains that its counsel's neglect in not
filing the Petition for Review within the reglementary
period was excusable. It alleges that the counsel's
secretary misplaced the Resolution hence the counsel
was not aware of its issuance and that it had become
final and executory.
We are not persuaded.

of the outcome of said motion and be prepared for the

necessary action to take whatever the outcome may
have been. Such kind of negligence cannot support
petitioner's claim for relief from judgment.
Besides, tax assessments by tax examiners are
presumed correct and made in good faith, and all
presumptions are in favor of the correctness of a tax
assessment unless proven otherwise.4 Also, petitioner's
failure to file a Petition for Review with the Court of Tax
Appeals within the statutory period rendered the
disputed assessment final, executory and demandable,
thereby precluding it from interposing the defenses of
legality or validity of the assessment and prescription
of the Government's right to assess.5
The Court of Tax Appeals is a court of special
jurisdiction and can only take cognizance of such
matters as are clearly within its jurisdiction. Section 7
of Republic Act (R.A.) No. 9282, amending R.A. No.
1125, otherwise known as the Law Creating the Court
of Tax Appeals, provides:

In our Decision, we held that:

Sec. 7. Jurisdiction. - The CTA shall exercise:
Relief cannot be granted on the flimsy excuse that the
failure to appeal was due to the neglect of petitioner's
counsel. Otherwise, all that a losing party would do to
salvage his case would be to invoke neglect or mistake
of his counsel as a ground for reversing or setting aside
the adverse judgment, thereby putting no end to
litigation.
Negligence to be "excusable" must be one which
ordinary diligence and prudence could not have
guarded against and by reason of which the rights of
an aggrieved party have probably been impaired.
Petitioner's former counsel's omission could hardly be
characterized as excusable, much less unavoidable.
The Court has repeatedly admonished lawyers to adopt
a system whereby they can always receive promptly
judicial notices and pleadings intended for them.
Apparently, petitioner's counsel was not only remiss in
complying with this admonition but he also failed to
check periodically, as an act of prudence and diligence,
the status of the pending case before the CTA Second
Division. The fact that counsel allegedly had not
renewed the employment of his secretary, thereby
making the latter no longer attentive or focused on her
work, did not relieve him of his responsibilities to his
client. It is a problem personal to him which should not
in any manner interfere with his professional
commitments.3
Petitioner also argues that, in the interest of substantial
justice, the instant case should be re-opened
considering that it was allegedly not accorded its day
in court when the Court of Tax Appeals dismissed its
Petition for Review for late filing. It claims that rules of
procedure are intended to help secure, not override,
substantial justice.
Petitioner's arguments fail to persuade us.
As correctly observed by the Court of Tax Appeals in its
Decision dated June 7, 2005:
If indeed there was negligence, this is obviously on the
part of petitioner's own counsel whose prudence in
handling the case fell short of that required under the
circumstances. He was well aware of the motion filed
by the respondent for the Court to resolve first the
issue of this Court's jurisdiction on July 15, 2003, that a
hearing was conducted thereon on August 15, 2003
where both counsels were present and at said hearing
the motion was submitted for resolution. Petitioner's
counsel apparently did not show enthusiasm in the
case he was handling as he should have been vigilant

(a) 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
in relation thereto, or other matters arising under the
National Internal Revenue or other laws administered
by the Bureau of Internal Revenue;
(2) Inaction by the Commissioner of Internal Revenue
in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties
in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue, where
the National Internal Revenue Code provides a specific
period of action, in which case the inaction shall be
deemed a denial;
Also, Section 3, Rule 4 and Section 3(a), Rule 8 of the
Revised Rules of the Court of Tax Appeals 6 state:
RULE 4
Jurisdiction of the Court
x

SECTION 3. Cases Within the Jurisdiction of the Court in

Divisions. - The Court in Divisions shall exercise:
(a) Exclusive original or appellate jurisdiction to review
by appeal the following:
(1) Decisions of the Commissioner of Internal Revenue
in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties
in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue;
(2) Inaction by the Commissioner of Internal Revenue
in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties
in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue, where
the National Internal Revenue Code or other applicable
law provides a specific period for action: Provided, that
in case of disputed assessments, the inaction of the
Commissioner of Internal Revenue within the one

38
hundred eighty day-period under Section 228 of the
National Internal Revenue Code shall be deemed a
denial for purposes of allowing the taxpayer to appeal
his case to the Court and does not necessarily
constitute a formal decision of the Commissioner of
Internal Revenue on the tax case; Provided, further,
that should the taxpayer opt to await the final decision
of the Commissioner of Internal Revenue on the
disputed assessments beyond the one hundred eighty
day-period abovementioned, the taxpayer may appeal
such final decision to the Court under Section 3(a),
Rule 8 of these Rules; and Provided, still further, that in
the case of claims for refund of taxes erroneously or
illegally collected, the taxpayer must file a Petition for
Review with the Court prior to the expiration of the
two-year period under Section 229 of the National
Internal Revenue Code;
xxx
RULE 8
Procedure in Civil Cases
x

SECTION 3. Who May Appeal; Period to File Petition. (a) A party adversely afected by a decision, ruling or
the inaction of the Commissioner of Internal Revenue
on disputed assessments or claims for refund of
internal revenue taxes, or by a decision or ruling of the
Commissioner of Customs, the Secretary of Finance,
the Secretary of Trade and Industry, the Secretary of
Agriculture, or a Regional Trial Court in the exercise of
its original jurisdiction may appeal to the Court by
Petition for Review filed within thirty days after receipt
of a copy of such decision or ruling, or expiration of the
period fixed by law for the Commissioner of Internal
Revenue to act on the disputed assessments. In case of
inaction of the Commissioner of Internal Revenue on
claims for refund of internal revenue taxes erroneously
or illegally collected, the taxpayer must file a Petition
for Review within the two-year period prescribed by law
from payment or collection of the taxes. (n)
From the foregoing, it is clear that the jurisdiction of
the Court of Tax Appeals has been expanded to include
not only decisions or rulings but inaction as well of the
Commissioner of Internal Revenue. The decisions,
rulings or inaction of the Commissioner are necessary
in order to vest the Court of Tax Appeals with
jurisdiction to entertain the appeal, provided it is filed
within 30 days after the receipt of such decision or
ruling, or within 30 days after the expiration of the 180day period fixed by law for the Commissioner to act on
the disputed assessments. This 30-day period within
which to file an appeal is jurisdictional and failure to
comply therewith would bar the appeal and deprive the
Court of Tax Appeals of its jurisdiction to entertain and
determine the correctness of the assessments. Such
period is not merely directory but mandatory and it is
beyond the power of the courts to extend the same.7
In case the Commissioner failed to act on the disputed
assessment within the 180-day period from date of
submission of documents, a taxpayer can either: 1) file
a Petition for Review with the Court of Tax Appeals
within 30 days after the expiration of the 180-day
period; or 2) await the final decision of the
Commissioner on the disputed assessments and appeal
such final decision to the Court of Tax Appeals within
30 days after receipt of a copy of such decision.
However, these options are mutually exclusive, and
resort to one bars the application of the other.
In the instant case, the Commissioner failed to act on
the disputed assessment within 180 days from date of
submission of documents. Thus, petitioner opted to file
a Petition for Review before the Court of Tax Appeals.

Unfortunately, the Petition for Review was filed out of

time, i.e., it was filed more than 30 days after the lapse
of the 180-day period. Consequently, it was dismissed
by the Court of Tax Appeals for late filing. Petitioner did
not file a motion for reconsideration or make an
appeal; hence, the disputed assessment became final,
demandable and executory.
Based on the foregoing, petitioner can not now claim
that the disputed assessment is not yet final as it
remained unacted upon by the Commissioner; that it
can still await the final decision of the Commissioner
and thereafter appeal the same to the Court of Tax
Appeals. This legal maneuver cannot be countenanced.
After availing the first option, i.e., filing a Petition for
Review which was however filed out of time, petitioner
can not successfully resort to the second
option, i.e., awaiting the final decision of the
Commissioner and appealing the same to the Court of
Tax Appeals, on the pretext that there is yet no final
decision on the disputed assessment because of the
Commissioner's inaction.
Lastly, we note that petitioner is raising the issue of
prescription for the first time in the instant motion for
reconsideration. Although the same was raised in the
Petition for Review, it was dismissed for late filing. No
motion for reconsideration was filed hence the
disputed assessment became final, demandable and
executory. Thereafter, petitioner filed with the Court of
Tax Appeals a petition for relief from judgment.
However, it failed to raise the issue of prescription
therein. After its petition for relief from judgment was
denied by the Court of Tax Appeals for lack of merit,
petitioner filed a Petition for Review before this Court
without raising the issue of prescription. It is only in the
instant motion for reconsideration that petitioner raised
the issue of prescription which is not allowed. The rule
is well-settled that points of law, theories, issues and
arguments not adequately brought to the attention of
the lower court need not be considered by the
reviewing court as they cannot be raised for the first
time on appeal,8 much more in a motion for
reconsideration as in this case, because this would be
ofensive to the basic rules of fair play, justice and due
process.9 This last ditch efort to shift to a new theory
and raise a new matter in the hope of a favorable
result is a pernicious practice that has consistently
been rejected.
WHEREFORE, in view of the foregoing, petitioner's
motion for reconsideration is DENIED.
SO ORDERED.

39
EN BANC
G.R. No. 158885
FORT BONIFACIO DEVELOPMENT
CORPORATION, Petitioner, - versus - COMMISSIONER
OF INTERNAL REVENUE, REGIONAL DIRECTOR,
REVENUE REGION NO. 8, and CHIEF, ASSESSMENT
DIVISION: REVENUE REGION NO. 8, BIR, Respondents.
Promulgated April 2, 2009
x--------------------------------------------------------------------------x
G.R. No. 170680
FORT BONIFACIO DEVELOPMENT CORPORATION,
Petitioner, versus - COMMISSIONER OF INTERNAL
REVENUE and REVENUE DISTRICT OFFICER, REVENUE
DISTRICT NO. 44, TAGUIG and PATEROS, BUREAU OF
INTERNAL REVENUE, Respondents.
x--------------------------------------------------------------------------x
DECISION
The value-added tax (VAT) system was first introduced
in the Philippines on 1 January 1988, with the tax
imposable on any person who, in the course of trade or
business, sells, barters or exchanges goods, renders
services, or engages in similar transactions and any
person who imports goods.[1] The first VAT law is found
in Executive Order No. 273 (E.O. 273), which amended
several provisions of the then National Internal
Revenue Code of 1986 (Old NIRC). E.O. No. 273 likewise
accommodated the potential burdens of the shift to the
VAT system by allowing newly liable VAT-registered
persons to avail of a transitional input tax credit, as
provided for in Section 105 of the old NIRC, as
amended by E.O. No. 273. Said Section 105 is quoted,
thus:

SEC. 105. Transitional input tax

credits. A person who becomes liable to
value-added tax or any person who
elects to be a VAT-registered person
shall, subject to the filing of an
inventory as prescribed by regulations,
be allowed input tax on his beginning
inventory of goods, materials and
supplies equivalent to 8% of the value of
such inventory or the actual valueadded tax paid on such goods, materials
and supplies, whichever is higher, which
shall be creditable against the output
tax.[2]
There are other measures contained in E.O. No.
273 which were similarly intended to ease the shift to
the VAT system. These measures also took the form of
transitional input taxes which can be credited against
output tax,[3] and are found in Section 25 of E.O. No.
273, the section entitled Transitory Provisions. Said
transitory provisions, which were never incorporated in
the Old NIRC, read:

Sec. 25. Transitory provisions.

(a) All VAT-registered persons shall be
allowed transitional input taxes which
can be credited against output tax in the
same manner as provided in Sections

104 of the National Internal Revenue

Code as follows:
1) The balance of the deferred
sales
tax
credit
account
as
of December 31, 1987 which are
accounted for in accordance with
regulations prescribed therefor;
2) A presumptive input tax
equivalent to 8% of the value of the
inventory as of December 31, 1987
of materials and supplies which are
not for sale, the tax on which was
not taken up or claimed as deferred
sales tax credit; and
3) A presumptive input tax
equivalent to 8% of the value of the
inventory as of December 31, 1987
as goods for sale, the tax on which
was not taken up or claimed as
deferred sales tax credit.
Tax credit prescribed in paragraphs
(2) and (3) above shall be allowed only
to a VAT-registered person who files an
inventory of the goods referred to in
said
paragraphs
as
provided
in
regulations.
(b) Any unused tax credit certificate
issued prior to January 1, 1988 for
excess tax credits which are applicable
against advance sales tax shall be
surrendered to, and replaced by the
Commissioner with new tax credit
certificates which can be used in
payment for value-added tax liabilities.
(c) Any person already engaged in
business whose gross sales or receipts
for a 12-month period from September
1, 1986 to August 1, 1987, exceed the
amount ofP200,000.00, or any person
who has been in business for less than
12 months as of August 1, 1987 but
expects his gross sales or receipts to
exceed
P200,000
on
or
before
December 31, 1987, shall apply for
registration on or before October 29,
1987.[4]

On 1 January 1996, Republic Act (Rep. Act) No.

7716 took efect.[5] It amended provisions of the Old
NIRC principally by restructuring the VAT system. It was
under Rep. Act No. 7716 that VAT was imposed for the
first time on the sale of real properties. This was
accomplished by amending Section 100 of the NIRC to
include real properties among the goods or properties,
the sale, barter or exchange of which is made subject
to VAT. The relevant portions of Section 100, as
amended by Rep. Act No. 7716, thus read:
Sec. 100. Value-added-tax on sale of
goods or properties.
(a) Rate and base of tax. There
shall be levied, assessed and collected
on every sale, barter or exchange of

40
goods or properties, a value-added tax
equivalent to 10% of the gross selling
price or gross value in money of the
goods, or properties sold, bartered or
exchanged, such tax to be paid by the
seller or transferor.
(1) The
term
'goods
or
properties' shall mean all
tangible
and
intangible
objects which are capable of
pecuniary estimation and
shall include:
(A) Real properties held
primarily
for
sale
to
customers or held for
lease in the ordinary
course
of
trade
or
business; xxx[6]
The provisions of Section 105 of the NIRC, on
the transitional input tax credit, had remained intact
despite the enactment of Rep. Act No. 7716. Said
provisions would however be amended following the
passage of the new National Internal Revenue Code of
1997 (New NIRC), also officially known as Rep Act No.
8424. The section on the transitional input tax credit
was renumbered from Section 105 of the Old NIRC to
Section 111(A) of the New NIRC. The new amendments
on the transitional input tax credit are relatively minor,
hardly material to the case at bar. They are highlighted
below for easy reference:

Section 111. Transitional/Presumptive

Input Tax Credits. (A) Transitional
Input
Tax
Credits. - A person who becomes liable
to value-added tax or any person who
elects to be a VAT-registered person
shall, subject to the filing of an
inventory according to rules and
regulations
prescribed
by
the
Secretary
of
finance,
upon
recommendation
of
the
Commissioner, be allowed input tax on
his beginning inventory of goods,
materials and supplies equivalent for
eight percent (8%) of the value of such
inventory or the actual value-added tax
paid on such goods, materials and
supplies, whichever is higher, which
shall be creditable against the output
tax.[7] (Emphasis supplied).

Rep. Act No. 8424 also made part of the NIRC, for the
first time, the concept of presumptive input tax credits,
with Section 111(b) of the New NIRC providing as
follows:
(B) Presumptive Input Tax Credits. (1) Persons or firms engaged in
the processing of sardines,
mackerel and milk, and in
manufacturing refined sugar
and cooking oil, shall be allowed
a
presumptive
input
tax,
creditable against the output
tax, equivalent to one and one-

half percent (1 1/2%) of the

gross value in money of their
purchases
of
primary
agricultural products which are
used
as
inputs
to
their
production.
As used in this Subsection, the
term 'processing' shall mean
pasteurization,
canning
and
activities which through physical
or chemical process alter the
exterior texture or form or inner
substance of a product in such
manner as to prepare it for
special use to which it could not
have been put in its original
form or condition.

(2) Public works contractors

shall be allowed a presumptive
input tax equivalent to one and
one-half percent (1 1/2%) of the
contract price with respect to
government contracts only in
lieu of actual input taxes
therefrom.[8]

What we have explained above are the statutory

antecedents that underlie the present petitions for
review. We now turn to the factual antecedents.
I.
Petitioner Fort Bonifacio Development Corporation
(FBDC) is engaged in the development and sale of real
property. On 8 February 1995, FBDC acquired by way of
sale from the national government, a vast tract of land
that formerly formed part of the Fort Bonifacio military
reservation,
located
in
what
is
now
the FortBonifacio Global City (Global City)
in Taguig City.[9] Since the sale was consummated prior
to the enactment of Rep. Act No. 7716, no VAT was
paid thereon. FBDC then proceeded to develop the
tract of land, and from October, 1966 onwards it has
been selling lots located in the Global City to interested
buyers.[10]
Following the efectivity of Rep. Act No. 7716,
real estate transactions such as those regularly
engaged in by FBDC have since been made subject to
VAT. As the vendor, FBDC from thereon has become
obliged to remit to the Bureau of Internal Revenue
(BIR) output VAT payments it received from the sale of
its properties to the Bureau of Internal Revenue (BIR).
FBDC likewise invoked its right to avail of the
transitional input tax credit and accordingly submitted
an inventory list of real properties it owned, with a total
book value of P71,227,503,200.00.[11]
On 14 October 1996, FBDC executed in favor of
Metro Pacific Corporation two (2) contracts to sell,
separately conveying two (2) parcels of land within
the Global City in consideration of the purchase prices
at P1,526,298,949.00
and P785,009,018.00,
both
payable in installments.[12] For the fourth quarter of
1996, FBDC earned a total of P3,498,888,713.60 from
the sale of its lots, on which the output VAT payable to
the BIR was P318,080,792.14. In the context of
remitting its output VAT payments to the BIR, FBDC
paid
a
total
of P269,340,469.45
and
utilized
(a) P28,413,783.00 representing a portion of its then

41
total
transitional/presumptive
input
tax
credit of P5,698,200,256.00, which petitioner allocated
for the two (2) lots sold to Metro Pacific; and (b) its
regular input tax credit of P20,326,539.69 on the
purchase of goods and services.[13]
Between July and October 1997, FBDC sent two
(2) letters to the BIR requesting appropriate action on
whether its use of its presumptive input VAT on its land
inventory, to the extent of P28,413,783.00 in partial
payment of its output VAT for the fourth quarter of
1996, was in order. After investigating the matter, the
BIR recommended that the claimed presumptive input
tax credit be disallowed. [14] Consequently, the BIR
issued to FBDC a Pre-Assessment Notice (PAN)
dated 23 December 1997 for deficiency VAT for the
4th quarter of 1996. This was followed by a letter of
respondent Commissioner of Internal Revenue (CIR),
[15]
addressed to and received by FBDC on 5 March
1998, disallowing the presumptive input tax credit
arising from the land inventory on the basis of Revenue
Regulation 7-95 (RR 7-95) and Revenue Memorandum
Circular 3-96 (RMC 3-96). Section 4.105-1 of RR 7-95
provided the basis in main for the CIRs opinion, the
section reading, thus:
Sec. 4.105-1. Transitional input
tax on beginning inventories. Taxpayers
who became VAT-registered persons
upon efectivity of RA No. 7716 who
have exceeded the minimum turnover
of P500,000.00
or
who
voluntarily
register even if their turnover does not
exceed P500,000.00 shall be entitled to
a presumptive input tax on the
inventory on hand as of December 31,
1995 on the following: (a) goods
purchased for resale in their present
condition; (b) materials purchased for
further processing, but which have not
yet undergone processing; (c) goods
which have been manufactured by the
taxpayer; (d) goods in process and
supplies, all of which are for sale or for
use in the course of the taxpayers trade
or business as a VAT-registered person.
However, in the case of real
estate dealers, the basis of the
presumptive input tax shall be the
improvements, such as buildings, roads,
drainage systems, and other similar
structures, constructed on or after the
efectivity of EO 273 (January 1, 1988).
The transitional input tax shall
be 8% of the value of the inventory or
actual VAT paid, whichever is higher,
which amount may be allowed as tax
credit against the output tax of the VATregistered person.
The CIR likewise cited from the Transitory
Provisions of RR 7-95, particularly the following:

description and amount filed with the

RDO not later than JanuAry 31, 1996.
xxx
Consequently, FBDC received an Assessment
Notice in the amount of P45,188,708.08, representing
deficiency VAT for the 4th quarter of 1996, including
surcharge, interest and penalty. After respondent
Regional
Director
denied
FBDCs
motion
for
reconsideration/protest, FBDC filed a petition for review
with the Court of Tax Appeals (CTA), docketed as C.T.A.
Case No. 5665.[16] On 11 August 2000, the CTA
rendered a decision affirming the assessment made by
the respondents.[17] FBDC assailed the CTA decision
through a petition for review filed with the Court of
Appeals, docketed as CA-G.R. SP No. 60477. On 15
November 2002, the Court of Appeals rendered a
decision affirming the CTA decision, but removing the
surcharge, interests and penalties, thus reducing the
amount due to P28,413,783.00.[18] From said decision,
FBDC filed a petition for review with this Court, the first
of the two petitions now before us, seeking the reversal
of the CTA decision dated 11 August 2000 and a
pronouncement that FBDC is entitled to the
transitional/presumptive
input
tax
credit
of
P28,413,783.00. This petition has been docketed
as G.R. No. 158885.
The second petition, which is docketed as G.R.
No. 170680, involves the same parties and legal
issues, but concerns the claim of FBDC that it is
entitled to claim a similar transitional/presumptive
input tax credit, this time for the third quarter of 1997.
A brief recital of the anteceding facts underlying this
second claim is in order.
For the third quarter of 1997, FBDC derived the
total amount of P3,591,726,328.11 from its sales and
lease of lots, on which the output VAT payable to the
BIR was P359,172,632.81.[19] Accordingly, FBDC made
cash payments totaling P347,741,695.74 and utilized
its regular input tax credit of P19,743,565.73 on
purchases of goods and services. [20] On 11 May 1999,
FBDC filed with the BIR a claim for refund of the
amount of P347,741,695.74 which it had paid as VAT
for the third quarter of 1997. [21] No action was taken on
the refund claim, leading FBDC to file a petition for
review with the CTA, docketed as CTA Case No. 5926.
Utilizing the same valuation[22] of 8% of the total book
value of its beginning inventory of real properties
(or P71,227,503,200.00) FBDC argued that its input tax
credit was more than enough to ofset the VAT paid by
it for the third quarter of 1997.[23]
On 17 October 2000, the CTA promulgated its
decision[24] in CTA Case No. 5926, denying the claim for
refund. FBDC then filed a petition for review with the
Court of Appeals, docketed as CA-G.R. SP No. 61517.
On 3 October 2003, the Court of Appeals rendered a
decision[25] affirming the judgment of the CTA. As a
result, FBDC filed its second petition, docketed as G.R.
No. 170680.
II.

(a)
Credits -

Presumptive

Input

Tax

xxx
(iii) For real estate dealers, the
presumptive input tax of 8% of the
book value of improvements on or
after January 1, 1988 (the efectivity of
E.O. 273) shall be allowed.
For
purposes
of
subparagraphs (i), (ii) and (iii) above, an
inventory as of December 31, 1995 of
such
goods
or
properties
and
improvements showing the quantity,

The two petitions were duly consolidated [26] and

called for oral argument on 18 April 2006. During the
oral arguments, the parties were directed to discuss
the following issues:
1.

In determining the
10% value-added tax in
Section 100 of the [Old NIRC]
on the sale of real properties
by real estate dealers, is the
8% transitional input tax
credit in Section 105 applied
only to the improvements on
the real property or is it

42
applied on the value of the
entire real property?
2.

Are Section 4.105.1

and paragraph (a)(III) of the
Transitory
Provisions
of
Revenue Regulations No. 795 valid in limiting the 8%
transitional input tax to the
improvements on the real
property?

While the two issues are linked, the main issue

is evidently whether Section 105 of the Old NIRC may
be interpreted in such a way as to restrict its
application in the case of real estate dealers only to the
improvements on the real property belonging to their
beginning inventory, and not the entire real property
itself. There would be no controversy before us if the
Old NIRC had itself supplied that limitation, yet the law
is tellingly silent in that regard. RR 7-95, which imposes
such restrictions on real estate dealers, is discordant
with the Old NIRC, so it is alleged.
III.
On its face, there is nothing in Section 105 of the Old
NIRC that prohibits the inclusion of real properties,
together with the improvements thereon, in the
beginning inventory of goods, materials and supplies,
based on which inventory the transitional input tax
credit is computed. It can be conceded that when it
was drafted Section 105 could not have possibly
contemplated concerns specific to real properties, as
real estate transactions were not originally subject to
VAT. At the same time, when transactions on real
properties were finally made subject to VAT beginning
with Rep. Act No. 7716, no corresponding amendment
was adopted as regards Section 105 to provide for a
diferentiated treatment in the application of the
transitional input tax credit with respect to real
properties or real estate dealers.
It was Section 100 of the Old NIRC, as amended by
Rep. Act No. 7716, which made real estate transactions
subject to VAT for the first time. Prior to the
amendment, Section 100 had imposed the VAT on
every sale, barter or exchange of goods, without
however specifying the kind of properties that fall
within or under the generic class goods subject to the
tax.
Rep. Act No. 7716, which significantly is also
known as the Expanded Value-Added Tax (EVAT) law,
expanded the coverage of the VAT by amending
Section 100 of the Old NIRC in several respects, some
of which we will enumerate. First, it made every sale,
barter or exchange of goods or properties subject to
VAT.[27] Second, it generally defined goods or
properties as all tangible and intangible objects which
are capable of pecuniary estimation.[28] Third, it
included a non-exclusive enumeration of various
objects that fall under the class goods or properties
subject to VAT, including [r]eal properties held primarily
for sale to customers or held for lease in the ordinary
course of trade or business.[29]
From these amendments to Section 100, is
there any diferentiated VAT treatment on real
properties or real estate dealers that would justify the
suggested limitations on the application of the
transitional input tax on them? We see none.
Rep. Act No. 7716 clarifies that it is the real
properties held primarily for sale to customers or held
for lease in the ordinary course of trade or business
that are subject to the VAT, and not when the real
estate transactions are engaged in by persons who do
not sell or lease properties in the ordinary course of
trade or business. It is clear that those regularly
engaged in the real estate business are accorded the

same treatment as the merchants of other goods or

properties available in the market. In the same way
that a milliner considers hats as his goods and a
rancher considers cattle as his goods, a real estate
dealer holds real property, whether or not it contains
improvements, as his goods.
Had
Section
100
itself
supplied
any
diferentiation between the treatment of real properties
or real estate dealers and the treatment of the
transactions involving other commercial goods, then
such difering treatment would have constituted the
statutory basis for the CIR to engage in such
diferentiation which said respondent did seek to
accomplish in this case through Section 4.105-1 of RR
7-95. Yet the amendments introduced by Rep. Act No.
7716 to Section 100, coupled with the fact that the
said law left Section 105 intact, reveal the lack of any
legislative intention to make persons or entities in the
real estate business subject to a VAT treatment
diferent from those engaged in the sale of other goods
or properties or in any other commercial trade or
business.
If the plain text of Rep. Act No. 7716 fails to
supply any apparent justification for limiting the
beginning inventory of real estate dealers only to the
improvements on their properties, how then were the
CIR and the courts a quo able to justify such a view?
IV.
The fact alone that the denial of FBDCs claims
is in accord with Section 4.105-1 of RR 7-95 does not,
of course, put this inquiry to rest. If Section 4.105-1 is
itself incongruent to Rep. Act No. 7716, the
incongruence cannot by itself justify the denial of the
claims. We need to inquire into the rationale behind
Section 4.105-1, as well as the question whether the
interpretation of the law embodied therein is validated
by the law itself.
The CTA, in its rulings, proceeded from a thesis
which is not readily apparent from the texts of the laws
we have cited. The transitional input tax credit is
conditioned on the prior payment of sales taxes or the
VAT, so the CTA observed. The introduction of the VAT
through E.O. No. 273 and its subsequent expansion
through Rep. Act No. 7716 subjected various persons to
the tax for the very first time, leaving them unable to
claim the input tax credit based on their purchases
before they became subject to the VAT. Hence, the
transitional input tax credit was designed to alleviate
that relatively iniquitous loss. Given that rationale,
according to the CTA, it would be improper to allow
FBDC, which had acquired its properties through a taxfree purchase, to claim the transitional input tax credit.
The CTA added that Section 105.4.1 of RR 7-95 is
consonant with its perceived rationale behind the
transitional input tax credit since the materials used for
the construction of improvements would have most
likely involved the payment of VAT on their purchase.
Concededly, this theory of the CTA has some
sense, extravagantly extrapolated as it is though from
the seeming silence on the part of the provisions of the
law. Yet ultimately, the theory is woefully limited in
perspective.
It is correct, as pointed out by the CTA, that
upon the shift from sales taxes to VAT in 1987 newlyVAT registered people would have been prejudiced by
the inability to credit against the output VAT their
payments by way of sales tax on their existing stocks
in trade. Yet that inequity was precisely addressed by a
transitory provision in E.O. No. 273 found in Section 25
thereof.
The
provision authorized
VAT-registered
persons to invoke a presumptive input tax equivalent
to 8% of the value of the inventory as of December 31,
1987 of materials and supplies which are not for sale,
the tax on which was not taken up or claimed as

43
deferred sales tax credit, and a similar presumptive
input tax equivalent to 8% of the value of the inventory
as of December 31, 1987 of goods for sale, the tax on
which was not taken up or claimed as deferred sales
tax credit.[30]
Section 25 of E.O. No. 273 perfectly remedies
the problem assumed by the CTA as the basis for the
introduction of transitional input tax credit in 1987. If
the core purpose of the tax credit is only, as hinted by
the CTA, to allow for some mode of accreditation of
previously-paid sales taxes, then Section 25 alone
would have sufficed. Yet E.O. No. 273 amended the Old
NIRC itself by providing for the transitional input tax
credit under Section 105, thereby assuring that the tax
credit would endure long after the last goods made
subject to sales tax have been consumed.
If indeed the transitional input tax credit is
integrally related to previously paid sales taxes, the
purported causal link between those two would have
been nonetheless extinguished long ago. Yet Congress
has reenacted the transitional input tax credit several
times; that fact simply belies the absence of any
relationship between such tax credit and the longabolished sales taxes. Obviously then, the purpose
behind the transitional input tax credit is not confined
to the transition from sales tax to VAT.
There is hardly any constricted definition of
"transitional" that will limit its possible meaning to the
shift from the sales tax regime to the VAT regime.
Indeed, it could also allude to the transition one
undergoes from not being a VAT-registered person to
becoming a VAT-registered person. Such transition does
not take place merely by operation of law, E.O. No. 273
or Rep. Act No. 7716 in particular. It could also occur
when one decides to start a business. Section 105
states that the transitional input tax credits become
available either to (1) a person who becomes liable to
VAT; or (2) any person who elects to be VATregistered. The clear language of the law entitles new
trades or businesses to avail of the tax credit once they
become VAT-registered. The transitional input tax
credit, whether under the Old NIRC or the New NIRC,
may be claimed by a newly-VAT registered person such
as when a business as it commences operations. If we
view the matter from the perspective of a starting
entrepreneur, greater clarity emerges on the continued
utility of the transitional input tax credit.
Following the theory of the CTA, the new
enterprise should be able to claim the transitional input
tax credit because it has presumably paid taxes, VAT in
particular, in the purchase of the goods, materials and
supplies in its beginning inventory. Consequently, as
the CTA held below, if the new enterprise has not paid
VAT in its purchases of such goods, materials and
supplies, then it should not be able to claim the tax
credit. However, it is not always true that the
acquisition of such goods, materials and supplies entail
the payment of taxes on the part of the new business.
In fact, this could occur as a matter of course by virtue
of the operation of various provisions of the NIRC, and
not only on account of a specially legislated exemption.
Let us cite a few examples drawn from the New
NIRC. If the goods or properties are not acquired from a
person in the course of trade or business, the
transaction would not be subject to VAT under Section
105.[31] The sale would be subject to capital gains taxes
under Section 24(D),[32] but since capital gains is a tax
on passive income it is the seller, not the buyer, who
generally would shoulder the tax.

If the goods or properties are acquired through testate

or intestate succession, the transfer would not be
subject to VAT but liable instead for estate tax under
Title III of the New NIRC. [36] If the net estate does not
exceed P200,000.00, no estate tax would be assessed.
[37]

The interpretation profered by the CTA would

exclude goods and properties which are acquired
through sale not in the ordinary course of trade or
business, donation or through succession, from the
beginning inventory on which the transitional input tax
credit is based. This prospect all but highlights the
ultimate absurdity of the respondents' position. Again,
nothing in the Old NIRC (or even the New NIRC) speaks
of such a possibility or qualifies the previous payment
of VAT or any other taxes on the goods, materials and
supplies as a pre-requisite for inclusion in the
beginning inventory.
It is apparent that the transitional input tax
credit operates to benefit newly VAT-registered
persons, whether or not they previously paid taxes in
the acquisition of their beginning inventory of goods,
materials and supplies. During that period of transition
from non-VAT to VAT status, the transitional input tax
credit serves to alleviate the impact of the VAT on the
taxpayer. At the very beginning, the VAT-registered
taxpayer is obliged to remit a significant portion of the
income it derived from its sales as output VAT. The
transitional input tax credit mitigates this initial
diminution of the taxpayers income by afording the
opportunity to ofset the losses incurred through the
remittance of the output VAT at a stage when the
person is yet unable to credit input VAT payments.
There is another point that weighs against the
CTAs interpretation. Under Section 105 of the Old NIRC,
the rate of the transitional input tax credit is 8% of the
value of such inventory or the actual value-added tax
paid on such goods, materials and supplies, whichever
is higher.[38] If indeed the transitional input tax credit is
premised on the previous payment of VAT, then it does
not make sense to aford the taxpayer the benefit of
such credit based on 8% of the value of such inventory
should the same prove higher than the actual VAT paid.
This intent that the CTA alluded to could have been
implemented with ease had the legislature shared such
intent by providing the actual VAT paid as the sole
basis for the rate of the transitional input tax credit.
The CTA harped on the circumstance that FBDC
was excused from paying any tax on the purchase of
its properties from the national government, even
claiming that to allow the transitional input tax credit is
"tantamount to giving an undeserved bonus to real
estate dealers similarly situated as [FBDC] which the
Government cannot aford to provide." Yet the tax laws
in question, and all tax laws in general, are designed to
enforce uniform tax treatment to persons or classes of
persons who share minimum legislated standards. The
common standard for the application of the transitional
input tax credit, as enacted by E.O. No. 273 and all
subsequent tax laws which reinforced or reintegrated
the tax credit, is simply that the taxpayer in question
has become liable to VAT or has elected to be a VATregistered person. E.O. No. 273 and the subsequent tax
laws are all decidedly neutral and accommodating in
ascertaining who should be entitled to the tax credit,
and it behooves the CIR and the CTA to adopt a
similarly judicious perspective.
IV.

If the goods or properties are acquired through

donation, the acquisition would not be subject to VAT
but to donors tax under Section 98 instead. [33] It is the
donor who would be liable to pay the donors tax, [34] and
the donation would be exempt if the donors total net
gifts
during
the
calendar
year
does
not
exceedP100,000.00.[35]

Given the fatal flaws in the theory ofered by

the CTA as supposedly underlying the transitional input
tax credit, is there any other basis to justify the
limitations imposed by the CIR through RR 7-95? We
discern nothing more. As seen in our discussion, there
is no logic that coheres with either E.O. No. 273 or Rep.

44
Act No. 7716 which supports the restriction imposed on
real estate brokers and their ability to claim the
transitional input tax credit based on the value of their
real properties. In addition, the very idea of excluding
the real properties itself from the beginning inventory
simply runs counter to what the transitional input tax
credit seeks to accomplish for persons engaged in the
sale of goods, whether or not such goods take the form
of real properties or more mundane commodities.
Under Section 105, the beginning inventory of
goods forms part of the valuation of the transitional
input tax credit. Goods, as commonly understood in the
business sense, refers to the product which the VATregistered person ofers for sale to the public. With
respect to real estate dealers, it is the real properties
themselves which constitute their goods. Such real
properties are the operating assets of the real estate
dealer.
Section 4.100-1 of RR No. 7-95 itself includes in
its enumeration of goods or properties such real
properties held primarily for sale to customers or held
for lease in the ordinary course of trade or business.
Said definition was taken from the very statutory
language of Section 100 of the Old NIRC. By limiting
the definition of goods to improvements in Section
4.105-1, the BIR not only contravened the definition of
goods as provided in the Old NIRC, but also the
definition which the same revenue regulation itself has
provided.
The Court of Tax Appeals claimed that under
Section 105 of the Old NIRC the basis for the inventory
of goods, materials and supplies upon which the
transitional input VAT would be based shall be left to
regulation by the appropriate administrative authority.
This is based on the phrase filing of an inventory as
prescribed by regulations found in Section 105.
Nonetheless, Section 105 does include the particular
properties to be included in the inventory, namely
goods, materials and supplies. It is questionable
whether the CIR has the power to actually redefine the
concept of goods, as she did when she excluded real
properties from the class of goods which real estate
companies in the business of selling real properties
may include in their inventory. The authority to
prescribe regulations can pertain to more technical
matters, such as how to appraise the value of the
inventory or what papers need to be filed to properly
itemize the contents of such inventory. But such
authority cannot go as far as to amend Section 105
itself, which the Commissioner had unfortunately
accomplished in this case.
It is of course axiomatic that a rule or
regulation must bear upon, and be consistent with, the
provisions of the enabling statute if such rule or
regulation is to be valid.[39] In case of conflict between a
statute and an administrative order, the former must
prevail.[40] Indeed, the CIR has no power to limit the
meaning and coverage of the term goods in Section
105 of the Old NIRC absent statutory authority or basis
to make and justify such limitation. A contrary
conclusion would mean the CIR could very well moot
the law or arrogate legislative authority unto himself by
retaining sole discretion to provide the definition and
scope of the term goods.

V.
At this juncture, we turn to some of the points raised in
the dissent of the esteemed Justice Antonio T. Carpio.
The dissent adopts the CTAs thesis that the transitional
input tax credit applies only when taxes were

previously paid on the properties in the beginning

inventory. Had the dissenting view won, it would have
introduced a new requisite to the application of the
transitional input tax credit and required the taxpayer
to supply proof that it had previously paid taxes on the
acquisition of goods, materials and supplies comprising
its beginning inventory. We have sufficiently rebutted
this thesis, but the dissent adds a twist to the
argument by using the term presumptive input tax
credit to imply that the transitional input tax credit
involves a presumption that there was a previous
payment of taxes.
Let us clarify the distinction between the presumptive
input tax credit and the transitional input tax credit. As
with the transitional input tax credit, the presumptive
input tax credit is creditable against the output VAT. It
necessarily has come into existence in our tax
structure only after the introduction of the VAT. As
quoted earlier,[41] E.O. No. 273 provided for a
presumptive input tax credit as one of the transitory
measures in the shift from sales taxes to VAT, but such
presumptive input tax credit was never integrated in
the NIRC itself. It was only in 1997, or eleven years
after the VAT was first introduced, that the presumptive
input tax credit was first incorporated in the NIRC,
more particularly in Section 111(B) of the New NIRC. As
borne out by the text of the provision, [42] it is plain that
the presumptive input tax credit is highly limited in
application as it may be claimed only by persons or
firms engaged in the processing of sardines, mackerel
and milk, and in manufacturing refined sugar and
cooking oil;[43] and public works contractors.[44]
Clearly, for more than a decade now, the term
presumptive input tax credit has contemplated a
particularly idiosyncratic tax credit far divorced from its
original usage in the transitory provisions of E.O. No.
273. There is utterly no sense then in latching on to the
term as having any significant meaning for the purpose
of the cases at bar.
The dissent, in arguing for the efectivity of
Section 4.105-1 of RR 7-95, ratiocinates in this manner:
(1) Section 4.105-1 finds basis in Section 105 of the Old
NIRC, which provides that the input tax is allowed on
the beginning inventory of goods, materials and
supplies; (2) input taxes must have been paid on such
goods, materials and supplies; (3) unlike real property
itself, the improvements thereon were already subject
to VAT even prior to the passage of Rep. Act No. 7716;
(4) since no VAT was paid on the real property prior to
the passage of Rep. Act No. 7716, it could not form part
of the beginning inventory of goods, materials and
supplies.
This chain of premises have already been
debunked. It is apparent that the dissent believes that
only those goods, materials and supplies on which
input VAT was paid could form the basis of valuation of
the input tax credit. Thus, if the VAT-registered person
acquired all the goods, materials and supplies of the
beginning inventory through a sale not in the ordinary
course of trade or business, or through succession or
donation, said person would be unable to receive a
transitional input tax credit. Yet even RR 7-95, which
imposes the restriction only on real estate dealers
permits such other persons who obtained their
beginning inventory through tax-free means to claim
the transitional input tax credit. The dissent thus
betrays a view that is even more radical and more
misaligned with the language of the law than that
expressed by the CIR.
VI.
A final observation. Section 4.105.1 of RR No.
7-95, insofar as it disallows real estate dealers from
including the value of their real properties in the
beginning inventory of goods, materials and supplies,
has in fact already been repealed. The ofending
provisions were deleted with the enactment of

45
Revenue Regulation No. 6-97 (RR 6-97) dated 2 January
1997, which amended RR 7-95. [45] The repeal of the
basis for the present assessments by RR 6-97 only
highlights the continuing absurdity of the position of
the BIR towards FBDC.
FBDC points out that while the transactions
involved in G.R. No. 158885 took place during the
efectivity of RR 7-95, the transactions involved in G.R.
No. 170680 in fact took place after RR No. 6-97 had
taken efect. Indeed, the assessments subject of G.R.
No. 170680 were for the third quarter of 1997, or
several months after the efectivity of RR 6-97. That
fact provides additional reason to sustain FBDCs claim
for refund of its 1997 Third Quarter VAT payments.
Nevertheless,
since
the
assailed
restrictions
implemented by RR 7-95 were not sanctioned by law in
the first place there is no longer need to dwell on such
fact.

WHEREFORE, the petitions are GRANTED. The

assailed decisions of the Court of Tax Appeals and the
Court of Appeals are REVERSED and SET ASIDE.
Respondents are hereby (1) restrained from collecting
from
petitioner
the
amount
of P28,413,783.00
representing the transitional input tax credit due it for
the fourth quarter of 1996; and (2) directed to refund
to petitioner the amount of P347,741,695.74 paid as
output VAT for the third quarter of 1997 in light of the
persisting transitional input tax credit available to
petitioner for the said quarter, or to issue a tax credit
corresponding to such amount. No pronouncement as
to costs.
SO ORDERED.