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[CA-G.R. SP No. 72992. December 16, 2003.] assigned to FAC a portion of its rights in the said project in payment of a subscription
amounting to P500.7M worth of shares of stock in FAC. As a result, FDC reported a net loss of
c





    
 c 

 P190,695,061.00 in its Annual Income Tax Return for the taxable year 1996.


On January 3, 2000, FDC received from the BIR a Formal Notice of Demand 4 with
   
GOZO-DADOLE, J p:
This is a Petition filed under Rule 43 of the 1997 Rules of Civil Procedure (as amended) for
review of the Decision 1 dated September 10, 2002 rendered by the Court of Tax Appeals in
CTA Case No. 6182, entitled "Filinvest Development Corporation and Filinvest Alabang, Inc.
vs. Commissioner of Internal Revenue", insofar as the afore-mentioned Decision directs
petitioner Filinvest Development Corporation to pay the amount of P5,691,972.03,
representing deficiency income tax on allegedly undeclared interest income for the taxable
year 1997, plus 20% delinquency interest computed from February 16, 2000 until full
payment thereof. The dispositive portion of the assailed Decision reads: CAcIES
"WHEREFORE, in view of all the foregoing, the court finds the instant petition partly
meritorious. Accordingly, Assessment Notice No. SP-INC-96-00018-2000 imposing deficiency
income tax on FDC for taxable year 1996, Assessment Notice No. SP-DST-96-00020-2000 and
SP-DST-97-00021-2000 imposing deficiency documentary stamp tax on FDC for taxable years
1996-1997, respectively and Assessment Notice No. SP-INV-97-0027-2000 imposing
deficiency income tax on FAI for the taxable year 1997 are hereby CANCELLED and SET ASIDE.
However, petitioner is hereby ORDERED to PAY the amount of P5,691,972.03 as deficiency
income tax for taxable year 1997. In addition, petitioner is also ORDERED to PAY 20%
delinquency interest computed from February 16, 2000 until full payment thereof pursuant
to Section 249(c)(3) of the Tax Code.
SO ORDERED." (emphasis supplied)
The antecedent facts of the case are as follows:
On November 29, 1996, Filinvest Development Corporation (FDC), Filinvest Alabang, Inc. (FAI)
and, Filinvest Land Incorporated (FLI) entered into a Deed of Exchange 2 whereby FDC and
FAI both transferred to FLI certain parcels of land with a total appraised value of
P4,306,777,000.00 in exchange for 463,094,301 shares of stock in FLI. The transfer is
intended to facilitate the development of medium-rise residential and commercial building.
As a result of the Deed of Exchange, FDC's ownership over FLI increased by almost 7%. On
January 13, 1997, FLI wrote to the Bureau of Internal Revenue (BIR) requesting for a ruling
that no gain or loss would be recognized in such transfer of real properties. This was acted
upon favorably by the BIR on February 3, 1997, with a ruling that the transaction falls
squarely within the Tax Code provision of a tax-free exchange. 3
Meanwhile, FDC extended to its affiliates advances on various dates during the years 1996
and 1997. In November 1996, FDC entered into a Shareholder's Agreement with Reco
Herrera PTE Ltd. (RHPL) for the formation of a joint venture company named Filinvest Asia
Corporation (FAC). The latter was tasked to manage 50% ownership interest of FDC in its
project with the Philippine Bank of Communications. Pursuant to this agreement, FDC
accompanying four Assessment Notices, all dated January 3, 2000, informing FDC that after
investigation, the following taxes were found due: a deficiency income tax of
P150,074,066.27 for 1996, a deficiency documentary stamp tax of P10,425,487.06 for the
same year, a deficiency income tax of P5,716,972.03 for 1997, and a deficiency documentary
stamp tax of P5,796,699.40, also for 1997. The said deficiency income tax assessments were
based upon the examiner's findings that FDC failed to reflect in its income tax returns several
interest income, gains on property and, advances to its affiliates. Likewise, FDC was found
not to have reflected its taxable income resulting from the exchange of property for shares of
stock in FLI.
On January 26, 2000, FDC filed with the BIR a Request for Reconsideration/Protest 5 of the
assessments against it. On March 24, 2000, FDC submitted all relevant documents in support
thereof. The request/protest had not been acted upon, hence, FDC sent to the BIR Appellate
Division a letter, dated September 11, 2000, seeking an early resolution of the same. On
September 19, 2000, FDC filed with the Commissioner of Internal Revenue a letter 6
reiterating this previous request. However, the BIR failed to take any action on FDC's request.
FDC and FAI claim that the deficiency income tax assessments issued against them are
improper because the transaction under the Deed of Exchange is tax-free. Moreover, the
imputation of interest income on inter-company advances has no factual and legal basis
because the prospective gain resulting from the alleged appreciation in the value of FDC's
shareholdings in FAC is not taxable income. Finally FDC and FAI both postulate that the
assessment of deficiency documentary stamp tax is erroneous for the reason that
instructional letters or cash vouchers covering the advances given by FDC to its subsidiaries
are not subject to any stamp tax. In contrast, the BIR defends its assessments by claiming
that the exchange of property between FDC and FAI, on one hand, and FLI, on the other, is a
taxable gain on the part of the former. Furthermore, the imposition of documentary stamp
tax (DST) is warranted because loan transactions are, under the law, subject to DST.
Consequently, on October 17, 2000 FDC and FAI, as petitioners, filed with the Court of Tax
Appeals a Petition for Review 7 against the Commissioner of Internal Revenue (CIR), as
respondent. The case was docketed as CTA Case No. 6182. TAacHE
In its petition, FDC and FAI alleged that the exchange of their property for shares of stock in
FLI under the Deed of Exchange is not considered taxable gain because the exchange meets
all the requisites for the non-recognition of taxable gain, considering the fact that FAI and
FDC collectively gained further control of FLI after the exchange. To bolster their contention,
petitioner sought solace in BIR Ruling No. S-34-046-97 8 where the BIR explicitly stated that
FDC, FAI and, FLI are not required to recognize a taxable gain or a deductible loss from the
exchange. They, further, argued that there is no law which empowers the CIR to impute a
theoretical interest on interest-free advances made by one taxpayer to another, even though
they are related parties. Since FDC cannot demand the payment of interest from its affiliates
in the absence of stipulation to this effect, neither could the BIR assess against FDC income
tax on such unrealizable income. Moreso, income tax may not be imposed on a prospective
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gain from an alleged appreciation in the value of FDC's shareholdings in FAC because the
same has not yet been realized through sale or conversion of the property. Finally,
documentary stamp tax may not be imposed on mere instructional letters or cash vouchers
evidencing advances extended by FDC to its affiliates because they are not categorized as
promissory notes nor certificates of obligations. Hence, petitioners prayed that the deficiency
income tax and documentary stamp tax assessments levied against FDC for the taxable years
1996 and 1997 and, the deficiency income tax assessments against FAI for taxable year 1997
be cancelled and annulled.
The CIR filed its Answer 9 on November 28, 2000 claiming that the transfer of property for
shares of stocks should not be considered as tax-free since FDC's interest in FLI was eroded
after the exchange. Also, the transfer leading to the corporate re-organization did not result
in further control for FDC. According to the respondent, petitioner FDC realized a taxable
gain on dilution arising from the Shareholder's Agreement with Reco Herrera PTE Ltd. for the
formation of a joint venture company. The deficiency assessments were justified by
respondent on the basis of Section 50, 1997 Tax Code which vests upon the CIR the power to
allocate or distribute income or deductions between or among organizations in order to
prevent evasion of taxes, as well as, to place a controlled taxpayer on a tax parity with an
uncontrolled taxpayer. Further, the respondent defended the impugned assessments by
stating that loan transactions, such as those entered into by FDC with its affiliates, whether
or not evidenced by formal agreement or by mere office memo, shall be subject to
documentary stamp tax. Thus, respondent prayed that the instant petition be denied and
that petitioners be ordered to pay the amount of taxes as assessed.
During the pre-trial conference, the petitioners and respondent filed a Stipulation of Facts,
Documents and Issues. 10 In a Resolution 11 promulgated on February 16, 2001, the Court of
Tax Appeals (CTA) approved the same. Meanwhile, the Formal Offer of Documentary
Evidence 12 filed by petitioners on August 10, 2001 was admitted by the CTA subject to a
final evaluation as regards their probative value. Afterwhich, trial ensured where the
petitioners presented the oral testimony of Susana Macabelda for the purpose of proving the
type of documentation covering the advances granted by FDC which became the subject of
the impugned deficiency tax assessment. For its part, respondent presented neither
testimonial nor documentary evidence.
On September 10, 2002, the CTA rendered its Decision 13 finding the petition partly
meritorious. It cancelled and set aside the assessed deficiency income taxes for the years
1996 and 1997, as well as, the documentary stamp tax for 1997 against petitioners.
Nevertheless, the court ordered petitioner FDC to pay P5,691,972.03 representing deficiency
income tax on undeclared interest income for the taxable year 1997, plus 20% delinquency
interest computed from February 16, 2000 until full payment thereof. According to the CTA,
the exchange of properties between FDC and FAI, on one hand, and FLI, on the other,
resulted in the further control of FDC and FAI, as far as stock ownership in FLI is concerned.
Evidence disclosed that, after the exchange, new shares of stock were issued and, as a result
FDC owned 61.03% and FAI had 9.96% stockholdings. Since the law contemplates as
collective increase of equity participation in the transferee corporation, the court found that
the seeming reduction in the number of shares owned by FDC, after the exchange, should be
viewed together with the increase of ownership of FAI. Hence, any again or loss derived from
the transaction is a tax-free exchange.
Anent the alleged interest income on the advances made by petitioner FDC to its affiliates,
the court found dubious FDC's act of extending several cash advances to its affiliates (FLI. FAI
and Davao Sugar Central Co.) with no stipulation on interest. Thus, the court invoked the
CIR's power, under Section 43 (now Section 50) of the Tax Code, to make necessary
adjustments by rectifying any distortions on income, through the adoption of reasonable
standards in order to determine the true net income of each of the parties. The CTA posits
that the said provision of law is intended to place a controlled taxpayer on a tax parity with
an uncontrolled taxpayer by determining the true net income from the property and
business of a controlled taxpayer. Thus, the court ruled that in case of understatement of the
true taxable net income, the CIR shall intervene by making distributions, apportionments, or
allocations of gross income or deductions for the purpose of forestalling tax evasion.
Furthermore, the CTA ruled that the increase in value of shares in FAC owned by the
petitioner FDC did not result to any economic advantage on the part of the latter. It held that
in the absence of sale or conversion of the property, a mere increase in the value of the
shares purchased is not income, but merely an unrealized increase in capital. On this score,
the assessment by the BIR of deficiency income tax on the joint venture transaction was
struck down by the CTA. Finally, the CTA ruled that the instructional letters or vouchers
issued by petitioner FDC cannot be considered loan agreements as to warrant the imposition
of documentary stamp tax. These documents do not embody an express stipulation between
the parties where one is obliged to deliver and the other to re-pay. It is merely an internal
document, unilaterally prepared by petitioner FDC for the purpose of recording the advance
it made to its affiliates and, to avoid the co-mingling of funds of the corporate affiliates. As
such, the imposition by the respondent of documentary stamp tax on instructional letters or
vouchers was set aside by the CTA.
Not satisfied by the above-stated Decision of the CTA, insofar as it orders FDC to pay
deficiency income tax on allegedly undeclared interest income for the taxable year 1997, plus
20% delinquency interest thereon, FDC filed the instant petition 14 on October 11, 2002,
assigning the following errors committed by the tax court, to wit:
"I.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONER IS LIABLE FOR DEFICIENCY
INCOME TAX ON ALLEGEDLY UNDECLARED INTEREST INCOME FROM ADVANCES WHICH IT
EXTENDED TO AFFILIATES FOR THE TAXABLE YEAR 1997, NOTWITHSTANDING THAT
PETITIONER DID NOT ACTUALLY EARN ANY INTEREST INCOME ON SAID ADVANCES.
II.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT AN "ARM'S-LENGTH" INTEREST RATE,
OR THEORETICAL INTEREST INCOME, MAY BE IMPUTED ON PETITIONER ON THE BASIS OF
SECTION 43 OF THE OLD NATIONAL INTERNAL REVENUE CODE (NOW SECTION 50 OF THE
1997 NATIONAL INTERNAL REVENUE CODE) AND SECTION 179(B) OF REVENUE REGULATIONS
NO. 2 IMPLEMENTING SECTION 43;
III.
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THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE 1965-69 REGULATIONS ON THE
LAW OF FEDERAL INCOME TAXATION OF THE UNITED STATES, PARTICULARLY SECTION 1.482-
2 THEREOF, HAVE "PERSUASIVE EFFECT" IN THE PHILIPPINES;
IV.
THE COURT OF TAX APPEALS ERRED IN TAKING COGNIZANCE OF THE AFORESAID
REGULATIONS, NOTWITHSTANDING THAT RESPONDENT DID NOT PRESENT EVIDENCE TO
PROVE THE EXISTENCE THEREOF;
V.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONER IS LIABLE FOR DEFICIENCY
INCOME TAX ON ALLEGEDLY UNDECLARED INTEREST INCOME UNDER SECTION 43 OF THE
OLD NATIONAL INTERNAL REVENUE CODE, NOTWITHSTANDING THE LACK OF FACTUAL AND
EVIDENTIARY BASIS THEREFOR;
VI.
THE COURT OF TAX APPEALS ERRED IN UPHOLDING THE COMPUTATION MADE BY
RESPONDENT COMMISSIONER OF PETITIONER'S SUPPOSED INTEREST INCOME BASED ON
THE ALLEGED SCHEDULE OF INTEREST RATES OF THE BANGKO SENTRAL NG PILIPINAS,
DESPITE THE NON-PRESENTATION BY RESPONDENT OF ANY EVIDENCE ON SUCH ALLEGED
SCHEDULE;
VII.
THE COURT OF TAX APPEALS ERRED IN FINDING THAT IT WAS "QUITE DUBIOUS" FOR
PETITIONER TO ADVANCE MONEY TO ITS AFFILIATES WITHOUT INTEREST;
VIII.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONER IS LIABLE FOR DEFICIENCY
INCOME TAX ON ALLEGEDLY UNDECLARED INTEREST INCOME, NOTWITHSTANDING ITS
FINDING THAT THERE WAS "NO STIPULATION ON INTEREST" WITH REGARD TO THE CASH
ADVANCES EXTENDED BY PETITIONER TO ITS AFFILIATES and;
IX.
THE COURT OF TAX APPEALS ERRED IN ORDERING PETITIONER TO PAY THE AMOUNT OF
P5,691,972.03, REPRESENTING DEFICIENCY INCOME TAX ON ALLEGEDLY UNDECLARED
INTEREST INCOME FOR THE TAXABLE YEAR 1997, PLUS 20% DELINQUENCY INTEREST
COMPUTED FROM FEBRUARY 16, 2000 UNTIL FULL PAYMENT THEREOF. 15
Petitioner in its first and second assigned errors contends that there is no statutory authority
for the CTA's decision affirming the imputation by respondent CIR of an "arm's-length"
interest rate or a theoretical interest income on petitioner. Petitioner claims that the power
of the CIR under Section 43 of the old Tax Code is merely to distribute, apportion or allocate
gross income or deductions between or among organizations, trades or business owned or
controlled directly or indirectly by the same interests. According to petitioner, the CIR has no
authority to make an imputation of an imaginary interest income because his power to
distribute, apportion and allocate do not include the power to impute an "arms-length"
interest rate or imaginary interest income. Moreover, Section 43 is directed only against
controlled taxpayers and not against the mother or holding corporation. Thus, the CTA erred
in imputing interest income to FDC, the parent company and in failing to distribute any gross
income or deductions among the affiliates of FDC, under Section 43.
Parenthetically, petitioner, in its fifth, sixth and seventh assigned errors, claims that there is
no factual and evidentiary basis for the application of Section 43 of the old NIRC and of
Section 170(b) of Revenue Regulations No. 2. This is because such statute can only be
invoked where the taxable net income of the controlled taxpayer is understated or where
there is a clear case of tax evasion. According to petitioner, respondent has not established
that there had been an understatement of income of any taxpayer controlled by FDC or that
the latter had resorted to any fraudulent scheme of tax evasion. Accordingly, petitioner
argued that the respondent should not use a theoretical interests based on the schedule of
interest rates implemented by the Bangko Sentral ng Pilipinas (BSP) since the same was not
proven in the trial.
To further bolster its assertions, petitioner, in its eighth assigned error, posits that the BIR's
imputation of an "arm's-length" interest rate on FDC's advances violates Article 1956 which
prohibits the imposition of interest in the absence of express stipulation therefor. Petitioner
argues that it could not legally recognize and collect interest income for advances to its
affiliates because there is no written agreement for this purpose. As such, there is absolutely
no basis for the BIR to assess against petitioner an income tax on such unrealizable and
unrealized interest income.
Petitioner's contentions are meritorious. ATDHSC
To provide proper perspective, it would be wise to state the law prevailing at the time the
subject transaction took place. Section 43 of the National Internal Revenue Code (now
Section 50, Republic Act No. 8424, Tax Reform Act of 1997) provides:
"In any case of two or more organizations, trades or businesses, whether or not incorporated
and whether or not organized in the Philippines, owned or controlled directly or indirectly by
the same interests, the Commissioner of Internal Revenue is authorized to distribute,
apportion, or allocate gross income or deductions between or among such organizations,
trades or business, if he determines that such distribution, apportionment, or allocation is
necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such
organizations, trade or businesses."
Section 43 empowers the Commissioner of Internal Revenue to rectify abnormalities and
distortions in income brought about by common control through the adoption of standards
considered fair, reasonable or at arm's-length. 16 According to Revenue Memorandum Order
No. 63-99 17, Section 43 does not apply to alleged indebtedness which was in fact a
contribution of capital. In the instance case, the subject transaction from which deficiency
income tax was assessed involves cash advances made by petitioner to its affiliates. A perusal
of the record at hand reveals that petitioner borrows money from a bank with interest and
later re-lends (or advances) the same to its affiliates without payment of interest. 18 In the
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course of the trial, it was proven that such advances were extended by FDC to its affiliates
and subsidiaries to give the latter financial assistance for operational and capital
expenditures. 19 Such advances are evidence by instructional letters or cash vouchers issued
by the petitioner. Hence, this Court is of the considered opinion that Section 43 of the old Tax
Code finds no application in the case at bar, for the reason that the subject transaction
distinctly relates to cash advances made by petitioner (mother company) in favor of its
affiliates to enable the latter to sustain its operational and capital expenditures. Respondent
Commissioner of Internal Revenue miserably failed to controvert this fact.
Further, the peculiar feature of the subject transaction, in no wise, indicates a loan
agreement between petitioner and its affiliates. In fact, the cancellation of the deficiency
documentary stamp tax assessment against petitioner was premised on the absence of a
stipulation between the parties requiring one to deliver and the other to re-pay. Notably, the
CTA categorically declared that the instructional letters and cash vouchers containing
petitioner's advances to its affiliates, are not loan agreements. 20 An eminent authority on
Taxation once declared that documentary stamp tax is a privilege tax because it is really
imposed on the transaction rather than on the document. 21 In short, the law taxes the
document because of the transaction. If in the tax court's view, the instructional letters and
cash vouchers issued by petitioner are not taxable because they are not loan agreements, we
find no cogent reason why a tax should now be imposed on the transaction from which these
documents were issued. In view of the foregoing, we agree with petitioner in claiming that
the application of Section 43 of the old Tax Code is misplaced.
Moreover, respondent went beyond its authority and utterly disregarded the evident
purpose of the law when he issued the deficiency tax assessment against petitioner for
interest income allegedly derived by the latter. Concededly, the purpose of Section 43 is to
place a controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining,
according to the standard of an uncontrolled taxpayer, the true net income from the
property and business of a controlled taxpayer. If this has not been done and the taxable net
incomes are thereby understated, the statute grants the CIR the authority to intervene by
making distributions, apportionments or allocations of gross income or deductions among
the controlled taxpayers to determine the true net income of each controlled taxpayer. 22 A
presumption of control arises if income or deductions have been arbitrarily shifted. 23
Emphatically, transactions between the controlled taxpayer and another will be subjected to
special scrutiny to ascertain whether the common control is being used to reduce, avoid or
escape taxes.
Indubitably, an exercise of the Commissioner's power under this statute is premised on
evidence of fraud or evasion in the payment of taxes. Such circumstance is not present in the
case at bar, since there is no evidence that the income of petitioner had been arbitrarily
shifted to evade or avoid the payment of taxes. Otherwise stated, there is no showing that
petitioner's advances to its affiliates are designed to evade the payment of taxes, or that
petitioner deliberately devised a scheme to avoid the payment thereof. the intention to
minimize taxes, when used in the context of fraud, must be proven by clear and convincing
evidence amounting to more than mere preponderance. Mere understatement of tax, in
itself, does not prove fraud. 24 As previously discussed, the grant of advances are considered
legitimate business undertakings intended to give financial assistance to its affiliates.
The non-imposition of interest by petitioner for advance to its affiliates is not an indicia of
fraud. Moreover, the net income of petitioner has not, in any way, been understated as there
is no interest income realized from the advances, which necessitate a declaration in
petitioner's income tax return. As correctly pointed out by petitioner, no interest shall be due
unless it has been expressly stipulated in writing. 25 The right to interest arises only by virtue
of a contract or by virtue of damages for delay and failure to pay the principal on which
interest is demanded. 26 In the present case, respondent failed to show that petitioner and
its affiliates agreed on the payment of interest for its advances. Likewise, we could not
impute the payment of interest on a mere conjecture that petitioner's affiliates would,
eventually, be unable to pay the principal amount on which interest is demanded. Corollarily,
the schedule of interest rates prescribed by the Bangko Sentral ng Pilipinas (BSP) may not be
used in the instant case due to the absence of an "arm's-length" transaction warranting its
imposition.
In its third and fourth assigned errors, petitioner reiterates its previous argument that there
is no implementing revenue regulation authorizing the CIR to impute a theoretical or
imaginary interest income. In the absence of a Philippine Supreme Court decision upholding
the authority of the BIR to collect a deficiency tax on account of a theoretical or imaginary
interest on such advances, petitioner argued that the imputation cannot be sustained. The
tax court's adoption of a foreign rule or regulation allowing the imputation of interest income
on an "arm's-length" or theoretical interest rate, despite the absence of a similar rule or
regulation in this jurisdiction constitutes an amendment to the National Internal Revenue
Code (NIRC) without the benefit of congressional action. Petitioner claimed that the
American regulation clashes with existing Philippine law which disallows interest unless
expressly stipulated in writing. Moreso, there is no basis for the CTA to take cognizance of
the U.S. income tax regulation because respondent failed to adduce evidence to prove the
existence thereof.
We agree.
Foreign laws do not prove themselves in our jurisdiction and our courts are not authorized to
take judicial notice of them. Well-settled is the principle that foreign laws must be alleged
and proved. 27 Nevertheless, respondent did not allege in his Answer, nor did he prove in the
course of the trial, the existence of Section 482 of the Internal Revenue Code of the United
States. Apparently, this American law allows the imputation of interest income based on an
"arm's-length" interest rate. Surprisingly, the CTA took cognizance of the same. This is an
apparent transgression of a settled rule that courts shall consider no evidence which has not
been formally offered. 28 While the absence of local laws and jurisprudence does not per se
prevent our courts from making reference of foreign statutes, this practice must be exercised
with due care and prudence, having in mind the superiority of domestic rules over foreign
statutes.
Finally, petitioner in its ninth assigned error argues that respondent cannot hold it liable to
pay deficiency income tax based on allegedly undeclared interest income. In the formal
demand letter dated January 3, 2000, no provision in the NIRC or regulation issued
thereunder is cited by the BIR as legal basis for the assessment. Also, there is no
jurisprudential basis for the theoretical interest income being imputed to FDC. For these
reasons, petitioner posits that its non-payment of the alleged deficiency income tax was in
good faith and no delinquency interest may be charged against it. Likewise, petitioner
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impugns the CTA decision which used P5,691,972.03 as basis for the imposition of the 20% 17. cited in De Leon, The National Internal Revenue Code Annotated, 2000 Edition,
delinquency interest per annum because the deficiency income tax as computed is only page 362.
P4,164,756.00. 18. Transcript of Stenographic Notes, July 25, 2001, page 11.
19. Transcript of Stenographic Notes, June 26, 2001, page 14.
Petitioner's arguments are partly tenable. 20. Decision promulgated on September 10, 2002, page 537.
21. Hector De Leon, The National Internal Revenue Code Annotated, 2000 Edition,
The law is explicit. Section 228 of the Tax Reform Act (R.A. 8424) provides that the taxpayer page 722.
shall be informed in writing of the law and the facts on which the assessment is made, 22. Sec. 179(b), Rev. Reg. No. 2.
otherwise the assessment shall be void. In the same vein, the demand letter calling for 23. Sec. 179.
payment of the taxpayer's deficiency tax shall state the law, rules and regulations, or 24. Yutivo Sons Hardware Co. vs. CTA, 1 SCRA 160, cited in Dimaampao, Tax Principles
jurisprudence upon which the assessment is made. A perusal of the formal demand letter 29 and Remedies, 1st Edition, 2002, page 119.
dated January 3, 2000 reveals that the complete details covering the discrepancies as found 25. Article 1956, New Civil Code.
by the respondent are shown in an accompanying schedule attached to such letter. However, 26. Baretto vs. Santa Marina, 37 Phil. 568.
for reasons discussed above, we, still, cannot uphold the respondent's view finding the 27. Wildvalley Shipping, Co. Ltd. vs. Court of Appeals, 342 SCRA 213; Llorente vs. Court
petitioner liable for deficiency income tax on undeclared interest income. Consequentially, of Appeals, 345 SCRA 592.
the imposition of delinquency interest has no leg to stand on. 28. Republic vs. Sandiganbayan, 255 SCRA 438; Candido vs. Court of Appeals, 253 SCRA
78.
WHEREFORE, premises considered, the instant petition is hereby GRANTED. The assailed 29. Rollo, page 196-2002.
Decision dated September 10, 2002 rendered by the Court of Tax Appeals in CTA Case No.
6182, directing petitioner Filinvest Development Corporation to pay the amount of
P5,691,972.03, representing deficiency income tax on allegedly undeclared interest income
for the taxable year 1997, plus 20% delinquency interest computed from February 16, 2000
until full payment thereof, is REVERSED and SET ASIDE and, a new one entered annulling
Assessment Notice No. SP-INC-97-00019-2000 imposing deficiency income tax on petitioner
for taxable year 1997. No pronouncement as to costs.

SO ORDERED. HSacEI

Labitoria and Vidallon-Magtolis, * JJ ., concur.

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* In lieu of J. Carandang who inhibited herself.

1. Rollo, page 1516.
2. Rollo, page 191.
3. Rollo, page 103, 111.
4. Rollo, page 196-206.
5. Rollo, page 86.
6. Rollo, page 161.
7. Rollo, page 53.
8. Rollo, page 153.
9. Rollo, page 216.
10. Rollo, page 223.
11. Rollo, page 346.
12. Rollo, page 247.
13. Rollo, page 516.
14. Rollo, page 11.
15. Rollo, page 15-17.
16. Rev. Memo. Order No. 03-99.