G.R. No. L-46644 September 11, 1987

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.ISLAND GARMENT MANUFACTURING CORPORATION and THE COURT OF TAX APPEALS, respondents.

 

PADILLA, J.:

This is a petition for review on certiorari of the decision * of the Court of Tax Appeals, dated 22 June 1977, in CTA Case No. 2070, reversing the decision of the Commissioner of Internal Revenue which found private respondent Island Garment Manufacturing Corporation liable for the payment of advance sales tax, deficiency income tax, surcharges, interest and compromise penalties, totalling P627,189.94.

Private respondent Island Garment Manufacturing Corporation (respondent corporation, for short), a corporation organized and existing under the laws of the Philippines, is duly licensed and operating under Republic Act No.3137, commonly known as the Embroidery Law. 1 It imports raw materials, such as, textile fabrics and cotton piece goods for manufacture into finished garments which it then re-exports back to its foreign suppliers under the supervision of the Embroidery and Apparel Control and Inspection Board (Embroidery Board, for short) and the Bureau of Customs. In turn, it receives from its foreign suppliers an amount representing labor costs, overhead expenses and margin profits. 2

Pursuant to Republic Act No. 3137, all importations of textile fabrics received by respondent corporation are exempt from duties and special import taxes. However, its net income as embroidery contractor consisting of payments received from foreign suppliers is subject to income tax.

On 21 October 1964 and 24 February 1965, petitioner Commissioner of Internal Revenue, through his agents, had the respondent corporation investigated for tax liabilities for the years 1962 and 1963. Respondent corporation was subsequently assessed P335,787.93 representing deficiency income tax for 1962 and 1963, and P291,402.01 representing advance sales tax, for textiles allegedly sold in the local market instead of being re-exported back to respondent corporation's foreign suppliers as finished goods, in accordance with said Rep. Act No. 3137. The assessments were contained in demand letters dated 25 October 1965, and 27 October 1965. 3

Respondent corporation protested the assessments in letters dated 11 November 1965 and 27 September 1966. 4 In view of the said protest, the case was heard by the Appellate Division of the Bureau of Internal Revenue, after which, the Hearing Officer recommended the cancellation of assessments against respondent corporation. The petitioner, however, denied the protests, despite this recommendation, and reiterated

his demand for payment in a letter dated 8 August 1969. 5 The respondent corporation received a copy of said letter on 23 September 1969 and on 9 October 1969, the corporation wrote the petitioner a letter, disputing the letter dated 8 August 1969. 6 Then, on 18 February 1970, the respondent corporation received from the petitioner a Final Notice Before Seizure, dated 20 November 1969, 7 and on 26 February 1970, it filed with the respondent Court of Tax Appeals a petition for review, disputing the petitioner's assessments. After hearing, the respondent court reversed the petitioner's decision and absolved the respondent corporation from liability. 8

Hence, the present recourse. The issues, for resolution, are:

1) whether or not respondent corporation filed its appeal with the Court of Tax Appeals within the thirty-day period prescribed in Section 1 1 of Rep. Act No.1125, the Act Creating the Court of Tax Appeals; and

2) whether or not respondent corporation is liable to pay the sum of P335,787.93 and P291,402.01, or a total of P627,189.94, as deficiency income tax and advance sales tax on importations made in 1962-1963 allegedly not re- exported back totally as finished garments and embroidered goods to its foreign suppliers, as required by law.

As to the first issue —

Sec. 11, Rep. Act No.1125 provides:

Sec. 11. Who may appeal; effect of appeal. — Any person, association or corporation adversely affected by a decision or ruling of the Collector of Internal Revenue, the Collector of Customs or any provincial or city Board of Assessment Appeals may file an appeal in the Court of Tax Appeals within thirty days after the receipt of such decision or ruling.

No appeal taken to the Court of Tax Appeals from the decision of the Collector of Internal Revenue or the Collector of Customs shall suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the satisfaction of his tax liability as provided by existing law: Provided, however, That when in the opinion of the Court the collection by the Bureau of Internal Revenue or the Commissioner of Customs may jeopardize the interest of the Government and/or the taxpayer the court at any stage of the proceeding may suspend the said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court.

The parties do not disagree that the decision of the Commissioner of Internal Revenue from which an appeal can be taken to the Court of Tax Appeals is his letter dated 8 August 1969, received by respondent corporation on 23 September 1969, which denied respondent corporation's protest. They differ, however, as to whether respondent corporation's letter dated 23 September 1969 questioning, among other things, petitioner's use of "mathematical computation" to ascertain respondent corporation's re-exports and justify his assessments, amounted to a motion for reconsideration which interrupted the running of the thirty- day period for appeal. The letter is reproduced, as follows:

September 23, 1969

The Honorable,

The Commissioner, Bureau of Internal Revenue

Manila

Dear Sir:

We have on hand today your letter of August 8th relative to the alleged Income Tax deficiency and penal liabilities inuring to our firm for the years 1962 and 1963 which have been a subject of proceedings in the Bureau of Internal Revenue since June 15, 1967.

The facts of this case have been well stated and the Legal Department of the Bureau of Customs have cleared us of liabilities for our importations during the years 1962 and 1963.

The Examiners of the Bureau of Internal Revenue however, contends that our exportations for those years above mentioned our overstated, it being impossible, based on mathematical computation to export those quantities of raw materials but that on incomplete copies of our export papers which we then have on our office files, those they were able to secure from the Bureau of Customs and from the Embroidery Board, which taken together does not reflect from the complete papers and documents for our exports in the years 1962 and 1963. Their findings was never based on actual physical counting of stocks or occular inspection of representative stocks and its packaging in cartoons and boxes.

There was no question however, that our exportation have been duly and regularly passed upon and have been done in the manner within the requirement of law, rules and regulations of the Embroidery Board, for short, and of the Bureau of Customs, in the course of the proceedings.

The question then that will arise is whether the Bureau of Internal Revenue, its agents or examiners, could question the prerogative and legitimate acts of the Embroidery and Apparel Control & Inspection Board especially as to exports of embroidery firms duly registered with it under the provisions of RA 3137. The last paragraph of Sec. 2, RA 3137 reads and we quote:

The Board shall have the overall control and shall administer the checks and counter checks of consigned textiles, leather gloves raw materials and or supplies to Embroidery and Apparel manufacturers and corresponding checks for liquidate of goods prior to exportation. No other governments instrumentality or agency shall be authorized to qualify or question the validity of license so issued by the Board. Questions of legality and or questions of validity and interpretation of any license so issued shall be decided exclusively by the Board subject to appeal to courts of competent jurisdiction,

and Sec. 1603 of RA 3137 reads and we quote:

Finality of liquidation — When articles have been entered and passed upon free of duty or final adjustment of duties made, with subsequent delivery, such entry and passage free of duty or settlement of duties will, after the expiration of one year will, from date of final payment of duties in the absence of fraud or protest be final and conclusive upon all parties unless the Liquidation of the import entry was merely tentative.

Viewed from the context of those two controlling legal provisions of law, it is clear that nowhere could it be said that the Bureau of Internal Revenue, its agents or examiners, have such authority to question the propriety of actions of the Embroidery Board and the Bureau of Customs, if the same were preceeded within their legitimate powers as in this instant case nor to question the validity of exportation if the same have been made after the expiration within the one year period have been made but which was never done in this instant case.

From the foregoing therefore, with a heavy heart, much to our regret, we can not accede to your request under the rules of law. We have always been most vocal for a plea of developing this infant garment export trade among our national and we do believe as advocated by this administration that we deserve some encouragement, incentives but not harrasment as we are in now.

We close with the hope that you will see our way clear and find this to merit your utmost consideration, we are.

Very truly yours,

(SGD.) ENRIQUEZ G. JOCSON

President 9

The petitioner contends that the afore-quoted letter is pro forma, while the respondent corporation maintains that it was a valid request for the reconsideration of the petitioner's letter dated 8 August 1969 and, therefore, suspended the period for the filing of an appeal.

We find the letter dated 23 September 1969 to the petitioner a valid request for the reconsideration of the letter dated 8 August 1969 since it raises new and valid issues. We quote with approval the following disquisition of the respondent Court of Tax Appeals:

A request for reconsideration of the decision of respondent is pro forma if it merely reiterates the ground already stated in the first request for cancellation or withdrawal of the assessment. (Filipinas Investment and Finance Corporation vs. Commissioner of Internal Revenue, No. L-23501, May 6, 1967, 20 SCRA 50). In the instant case, it will be noted that in requiring petitioner to pay alleged advance sales tax and deficiency income tax for 1962 and 1963, respondent in his original letter-assessments of October 25, 1965 and October 27, 1965 merely stated that upon investigation, the former wilfully failed to export all its finished articles and wilfully neglected to declare the income from the sale thereof. In contesting and disputing the said assessments in his letters of November 11,

1965 and September 24, 1966, petitioner raised the issues of: (1) correctness of the figures or amounts appearing therein; (2) authority of respondent to question the validity or propriety of the official acts of the Bureau of Customs and the Embroidery and Apparel Control and Inspection Board; 13) finality of the cancellation of all the bonds filed to guaranty [sic] exportation of the finished products and liquidation of import entries pursuant to Section 1603 of the Tariff and Customs Code; (4) efficacy of the certification and/or reports of the agents and/or Examiners of respondent that raw materials imported in 1962 and 1963, the years under question, were all accounted for; (5) failure of respondent's examiner to find evidence showing violation of the provisions of the National Internal Revenue Code, after a search of petitioner's premises pursuant to a search warrant issued by Judge Amado G. Roan of the City Court of Manila was conducted, and (6) regularity of petitioner's inventories of raw and finished materials. After a protracted hearing of the case, respondent in his letter of August 8, 1969 rendered a decision denying petitioner's protest and unwrapped for the first time the "mathematical computation" theory as the method employed by his examiners in ascertaining the quantity of finished products manufactured and exported by petitioner. Respondent also adduced for the first time the issue that since the documents presented by petitioner to prove liquidation of its import entries were only photostatic or carbon copies of originals, the same did not constitute evidence to prove actual exportation.

On September 23, 1969 petitioner disputed for the first time the "mathematical computation" theory of respondent on the ground that it "is based merely on incomplete copies of our export papers which we then have on our office files, those they were able to secure from the Bureau of Customs and from the Embroidery Board, which taken together does not reflect the complete papers and documents for our exports in the years 1962 and 1963. Their (examiners of the Bureau of Internal Revenue) findings was (were) never based on actual physical counting of stocks in occular inspection of representative stocks and its packaging in cartons and boxes.

... While petitioner also reiterated in this request for reconsideration the issue it raised in its petition for the cancellation or withdrawal of the original assessments as to whether respondent could still question the prerogative of the Embroidery and Apparel Control and Inspection Board and the Bureau of Customs in clearing petitioner of liabilities for its importations in 1962 and 1963, and the finality of the liquidations of its import entries pursuant to Section 1603 of the Tariff and Customs Code, the same were disregarded, if not completely ignored, by respondent in its decision on the disputed assessments dated August 8, 1969.

Since petitioner's request for reconsideration of September 23, 1969 did not merely reiterate the grounds stated in its first request for cancellation of the assessments but also called attention to those facts or arguments which have been disregarded in the decision of respondent dated August 8, 1969, it can not be considered pro forma. (Filipinas Investment & Finance Corporation vs. Commissioner of Internal Revenue, supra: Surigao Electric Co. Inc. vs. Court of Tax Appeals, No. L-25289, June 28, 1974, 57 SCRA 523.) Consequently, considering that petitioner consumed only a total of twenty four (24) days out of the thirty (30) days prescribed under Sections 7 and 11 of Republic Act No. 1126, the instant petition for review was filed seasonably with this Court.

Being a valid request for reconsideration, the letter of 23 September 1969 suspended the running of the period for the perfection of an appeal. As stated in Section 11 of Rep. Act No.1125, the period for the perfection of an appeal to the Court of Tax Appeals is thirty (30) days from receipt of an adverse decision or ruling of the Commissioner of Internal Revenue, Collector of Customs or any provincial or city Board of Assessment Appeals. In the instant case, the appealable decision is the letter of the petitioner dated

8 August 1969. The respondent corporation received this letter on 23 September 1969, and, on 9 October 1969, or after the lapse of sixteen (16) days, the corporation filed the written request for reconsideration, also dated 23 September 1969. Since the time during which a motion for new trial or reconsideration has been pending, is deducted from the period for perfecting an appeal, the period to appeal began to run again on 18 February 1970, when the respondent corporation received a copy of the Final Notice, Before Seizure, dated 20 November 1969. From 18 February 1970 to 26 February 1970, when the respondent corporation filed its petition for review with the Court of Tax Appeals, only eight (8) days had elapsed. Tacking these eight (8) days to the sixteen (16) days previously used, only twenty four (24) days, out of the thirty (30) days period, had been consumed. The appeal was, therefore, timely filed.

As to the second issue —

The basis of respondent corporation's deficiency income and advance sales taxes for 1962 and 1963 was held by petitioner to be the over declaration of its re-exportation of finished embroidered goods, computed as follows:

(a) Over declared exportations in 1962..... 657,076.66 yds.

(b) Over declared exportations in 1963..... 227,140.76 yds.

(c) Unsupported exportations in 1963..... 494,223.40 yds.

TOTAL DISCREPANCY...... .1,378,440.82 yds. 10

This discrepancy was arrived, at by the petitioner after an inspection of the boxes in which the finished goods were packed and concluding through "mathematical computations" that it was impossible for respondent corporation to re-export back in said boxes the total number of pieces it claims to have manufactured.

In disposing of petitioner's contention, respondent Court held:

By alleging that he employed mathematical computations in ascertaining the quantity of finished products actually manufactured and exported by petitioner, respondent concedes at least that his assessments were based on mere inferences and presumptions. Likewise, by stating that it was physically impossible for such number of cartons with such volume capacity to contain such exportation, or for petitioner to have manufactured and exported such finished garments, respondent admits that his assessments were not based on actual facts but merely on approximations and calculations. And [in averring] that the raw material discrepancies in yards, [were] arrived at by mere inferences and presumptions, [and] subsequently became the basis of the assessments for advance sales tax and for income tax, respondent failed to indicate his nebulous position how the advance sales tax or the undeclared income from sales of embroidery textile materials in pesos and centavos were arrived at. Moreover, since fraud is imputed to petitioner, fraudulent intent was deduced from surmises and conjectures, unsupported by clear and [convincing] proof to this effect.

An assessment fixes and determines the liability of a taxpayer. As soon as it is served, an obligation arises on the part of the taxpayer concerned to pay the amount assessed and

demanded. Hence, assessment should not be based on mere presumptions no matter how reasonable or logical said presumptions may be. The assessment must be based on actual facts. The presumption of correctness of assessment being a mere presumption cannot be made to rest on another presumption. (Collector of Internal Revenue vs. Benipayo, L-13656, January 31, 1962, 4 SCRA 182). ... ."Likewise, it is already a well established doctrine that fraud cannot be presumed but must be proven. (Aznar vs. Court of Tax Appeals, L-20569, August 23, 1974, 58 SCRA 519).

Assuming that it was physically impossible for the 636 cartons with a total volume of only 2,200 cubic feet to contain exportation of 37,973.33 dozens of finished garments, the same does not give rise to the inference, even by mathematical computation, that with the use of said 636 cartons, petitioner has actually manufactured and exported not more than 6,925 dozens of imported textiles, consuming not more than 160,367.44 yards of imported fabrics. Likewise, granting that it was physically impossible for petitioner to have manufactured and exported 13,564.73 dozens of finished garments, using 313,576 yards of imported fabrics and packed them in only 260 cartons with a total volume of only 985 cubic feet, the same does not give rise to the presumption that the 260 cartons could have accommodated not more than 2,573.1 dozens of finished garments requiring not more than 86,435.25 yards of imported fabrics and resulting in a discrepancy of 227,140.75 yards of imported textiles, which is the difference between 313,576 yards, and 86,435.35 yards. And based on these presumptions and inferences, the same will not bring forth the conclusion that the Government was cheated and defrauded of advance sales tax and income tax in the sums of P291,402.01 and P335,787.93, respectively, because petitioner channelled to the local market the discrepancy in yards between what was declared for export and what was presumed to be actually exported as finished products.

Of importance here is the kind and nature of the garments manufactured and exported by petitioner. They consists, among others, of ladies blouses, ladies pajamas, children's dresses, men's and boy's polo shirts and neglegee, of different sizes and, of course, consuming per piece varying number of yards of imported textiles. And by their very nature, these clothing apparels are generally flimsy and can be compressed. The fact that a dozen of the same or similar finished garments consumes so much number of yards of imported textiles and occupies a certain volume of space in a carton does not therefore provide a sufficient inference that a dozen of other or different kind or kinds of finished apparels also consumes the same number of yards of imported textiles and occupies the same volume of space inside the same carton.

At any rate, it bears emphasis that the import entries covering the importations of textiles of petitioner in 1962 and 1963, the years in question, had already been completely and finally liquidated. Petitioner was granted on February 8, 1962 by the Embroidery and Apparel Control and Inspection Board authority to manufacture embroidery apparels and garments for export under Republic Act No. 3137. It made a total of 32 importations in 1962 and 54 importations in 1963 consisting of 1,174,021 yards and 1,423,426.25 yards, respectively, of various textile materials. For these importations, surety bonds were filed by various surety firms in the total amounts of P2,020,563.00 for 1962 and P3,981,008.00 for 1963 to guarantee their exportations. (Exhs. "A" & "B", pp. 134-136 and 137-138 ' CTA, Records; pp. 389- 392, BIR Records) Subsequently, the warehousing entries covering said importations were finally and fully liquidated and cancelled.

In the absence of any showing to the contrary, and none has been presented by respondent there is no valid reason for this Court not to believe that the imported textile materials were all manufactured into embroidery apparels and garments and actually exported to the foreign suppliers as proven by the following evidence presented by petitioner.

We find respondent Court's reasoning to be well-taken. As held in Collector of Internal Revenue vs. Benipayo: 11

An assessment fixes and determines the tax liability of a taxpayer. As soon as it is served, an obligation arises on the part of the taxpayer concerned to pay the amount assessed and demanded. Hence, assessments should not be based on mere presumptions no matter how reasonable or logical said presumptions may be ... ."

In order to stand the test of judicial scrutiny, the assessment must be based on actual facts. The presumption of correctness of assessment being a mere presumption cannot be made to rest on another presumption ...

WHEREFORE, the petition is dismissed. The decision appealed from is hereby affirmed. No costs.

SO ORDERED.

[C.T.A. CASE NO. 5726. December 14, 2001.]

PNZ MARKETING, INCORPORATED, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.

D E C I S I O N

This Petition for Review filed by herein Petitioner on January 29, 1999, seeks for the cancellation and withdrawal of the deficiency income tax assessment issued by the Respondent against Petitioner in the total amount of P678,441.00 for taxable year 1994. cDICaS

The facts of the case are as follows:

Petitioner is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, engaged in business as importer and dealer of powdered and skimmed milk and other related products, with principal office at 415 Arayat Street, Mandaluyong City. 1

On April 8, 1998, Petitioner received formal assessment notice no. 000023 (Exhibit A) and Demand letter no. 41-66 (Exhibit B) from herein Respondent stating therein Petitioner's alleged deficiency income tax liability for the year 1994 in the total amount of P678,441.00. As admitted, the alleged deficiency income tax assessment issued against the Petitioner arose from the following adjustments to Petitioner's income tax return, to wit:

(a) Disallowance of the interest expense in the amount of P1,053,885.00;

(b) Disallowance of the salary expense in the amount of P489,865.35; and

(c) Imputation of unrecorded income in the amount of P394,625.58. 2

The alleged deficiency income tax assessment is computed as follows:

Net Business Income P77,771,848.57

Add: Discrepancies

Interest Expense (no supporting documents) P1,053,885.00

Unrecorded Income

Professional Fees

Per alpha list P491,467.58

Per ITR 96,815.00 394,652.58

—————

Salary Discrepancy

Per F/S P2,097,101.00

Per Alpha List 1,067,235.65 489,865.35 1,938,402.93

————— ————— —————

Total Income 77,710,251.50

Tax Due 27,198,588.00

Less:

Tax withheld at Source 1,546,772.00

Tax Paid per return 24,968,825.00

Tax Paid per investigation 4,550.00 26,520,147.00

—————— ——————

Total Deficiency Tax P678,441.00

===========

On May 7, 1998, Petitioner, through its external auditor, Sycip Gorres Velayo and Company (SGV & Co.), duly filed with the Bureau of Internal Revenue (BIR) an administrative protest letter. 3 On July 6, 1998, Petitioner filed with the BIR a supplemental protest letter, reiterating its disagreement to the subject income tax assessment. 4

As no action was undertaken by the Respondent on the aforesaid protest letters, Petitioner filed an appeal with this Court on January 29, 1999 in order to toll the running of the prescriptive period.

For his part, Respondent, on March 22, 1999 filed his Answer 5 and raised the following Special and Affirmative defense, thus:

1. That he reiterates and repleads the preceding paragraphs of this answer as part of his Special and Affirmative defenses;

2. That investigation of the Petitioner's internal tax liabilities for the year 1994 revealed a tax obligation of P67,441.00 as deficiency income tax;

3. That the subject deficiency income tax assessment no. 000-059-612 dated April 3, 1998 was issued in accordance with law and pertinent regulations;

4. That the disallowance of interest expense in the amount of P1,053,885.00 from gross income for taxable year 1994 was due to the fact of lack of documentation or proof as required under Section 29 of the National Internal Revenue Code;

5. That the disallowance of salary expense in the amount of P489,865.35 was due to the discrepancy between salaries reported per Petitioner's audited financial statements for taxable year 1994 and those reported per alpha list and due to the lack of documentation or proof as required under Section 29 of the National Internal Revenue Code;

6. That Petitioner has unrecorded income in the amount of P394,652.58 as can be seen from the discrepancy arising from the Professional fees reported per Alpha list and that reported per the Petitioner's Income tax return for taxable year 1994;

7. That all presumptions are in favor of the correctness of tax assessments (CIR vs. Construction Resources of Asia, Inc., 145 SCRA 671) and the burden of proof to prove otherwise is upon the Petitioner.

As stipulated by the Parties, the issues brought before this Court for consideration are the following:

1. Whether or not the subject income tax assessment is void for failing to comply with the requirements under Section 228 of the Tax code requiring that the law and the facts upon which the assessment is made should be clearly stated;

2. Whether or not Petitioner's interest expense in the amount of P1,053,885.00 is sufficiently supported to qualify as a valid item of deduction from its gross income for the taxable year 1994;

3. Whether or not salary expense in the amount of P489,865.35 should be disallowed as a deductible expense of Petitioner for taxable year 1994 on the alleged ground that said amount was not subjected to withholding tax on compensation for said taxable year; DSAacC

4. Whether or not Petitioner has unrecorded income for taxable year 1994 in the amount of P394,652.58 which amount represents the difference between the professional fees reported per alpha list for said taxable year and the professional fees reported per the annual corporate Income tax return of Petitioner for said year.

The first issue deals mainly with the sufficiency of the assessment notice insofar as compliance with Section 228 of the Tax Code is concerned. It must be stressed that Section 228 requires the Respondent to inform the taxpayer in writing of the laws and the facts on which the assessment is made, otherwise the assessment shall be void. Simply put, it is incumbent upon the Respondent to show clearly the legal and the factual bases which led him to issue the said deficiency income tax assessment in the first place. The strictness of this rule runs parallel to the due process clause as it obliges the Respondent not only to lay down the law from which the assessment is based but more importantly, the surrounding circumstances supporting the assessment. For it is believed that it is only through a detailed appraisal of its basis that the taxpayer may be able to dispute the imposition or agree with it. (Abbott Laboratories, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 5718, February 16, 2001)

The case at bar is no exception to the rule. A perusal of the records indicates a successful attempt on Respondent's part to comply with the rules. The assessment notice, while vague at first glance is subsequently cured by the demand letter which shows the legal and factual basis relied upon by the Respondent in issuing the assessment The demand letter, as thus worded contains the reasons why a deficiency income tax assessment was issued against the Petitioner. It reflects some notable disallowance on the Business expense of the Petitioner for reasons such as the following:

a) interest income has no supporting document pursuant to Section 29;

b) that the income is unrecorded which is factual; and

c) that there is discrepancy in the declared salary expense as provided in Revenue Regulations No. 4-93.

To our mind, these explanations are sufficient compliance with the requirements of Section 228 of the Tax Code.

With regard to the second issue, we rule in favor of the Petitioner. The question of whether the interest expense is a valid item of expense or not has become moot and academic. It must be noted that the Respondent, at the outset disallowed said items on the ground that they were unsupported by pertinent documents. However, Respondent eventually changed its stance. This is evident from the fact that the Respondent, upon receipt of the protest letter filed by the Petitioner issued a revised deficiency income tax assessment for 1994. (see Exhibits J and L) Said revised assessment notice no longer included the disallowance of the alleged unsupported interest expense. Said revision in the assessment notice made us conclude that Respondent was convinced that Petitioner's interest expense for 1994 was fully substantiated and supported by pertinent documents. As the propriety of the deductibility of the said expense is not being questioned by the Respondent, we have more reason to believe that the interest expense incurred by the Petitioner is indeed a deductible expense. HAcaCS

The third issue involves the discrepancy in the salary expenses declared in the Financial statement vis-a-vis the alpha list. In the case at bar, Respondent disallowed the salary expense in the amount of P489,865.35 for the reason that it doubted the discrepancy between salaries reported per Petitioner's audited financial statements and those reported per alpha list. Respondent, in recommending the said

disallowance, theorized that some of the items of the salary expense were not subjected to withholding tax.

This Court does not agree with the Respondent.

Petitioner explained that the amount which Respondent disallowed as an item of deductible expense were for the following:

SSS, Medicare, & Employees

Compensation P30,046.70

Contractual Services 364,712.87

Medical Expense 11,962.81

13th Month Pay47,680.86

Vacation Leave 35,462.04

—————

TOTAL P489,865.28

=========

Logically, these items of expense cannot be included in the Alpha List of salaries subjected to withholding tax due on compensation because some of the items may be exempt from tax and some are subject to expanded withholding tax, thus:

1) SSS, Medicare & Employees compensation contributions are not subject to withholding tax. They are not considered income to the employees because they correspond to the contributions made by the Employer to the employees. They are however considered deductible expenses on the part of the Employer;

2) The Contractual Services were paid to the contractor JC's Manpower International, Inc., who had the obligation to withhold the tax on the compensation of their workers. It bears stressing that the said amount was not paid to Petitioner's employees but was paid to an employment agency. Petitioner did not pay withholding taxes on employee's compensation but paid corresponding proper expanded withholding tax on contractual services rendered by the agency as evidenced by Exhibits G and G-1;

3) The Medical Expenses are likewise not subjected to withholding tax because of the insignificant amount involved. They are considered falling under Revenue Regulations No. 6-82 which excluded "de minimis" from the coverage of the term compensation; cTAaDC

4) The 13th month pay paid to the employees during taxable year 1994 is likewise not subject to tax pursuant to Republic Act No. 7833;

5) And lastly, the monetized Vacation Leaves were properly subjected by the Petitioner to withholding tax as evidenced by the check voucher submitted to this Court.(Exhibit "Q")

We now proceed to the fourth issue.

Respondent maintains that Petitioner has an unrecorded income in the amount of P394,652.58 as can be seen from the discrepancy arising from the Professional Fees reported per Alpha List and that reported per the Petitioner's Income Tax Return for taxable year 1994. The marked discrepancy between what is contained in the Alpha List in the amount of P491,467.58 and that which is reported in the Income Tax Return of P96,815.00 was treated by Respondent as undeclared income in the amount of P394,652.58 (P491,467.58 - P96,815.00).

We find Respondent's findings as to the alleged undeclared income bereft of merit. HETDAa

First, we would like to point out that there is a big difference between what is considered as an undeclared income from an undeclared expense. The facts of this case clearly show that the professional fees being referred to by Respondent are deductible expense and not income. Petitioner derives its income from importing and selling milk products. It never earned its income from the exercise of profession nor did it render services from which it derived professional fees. Respondent seems to have misconstrued the term expense as being similar to income and this is where his assessment fails. Being considered as an expense and not as income, it would be illogical to conclude that with the underdeclaration of professional fees as business expense, that there would be a corresponding underdeclaration of income. In fact, the Petitioner would even be prejudiced with any reduction to its deductible expense because this would necessarily mean an increase in tax base, and as the tax base increases, the amount of tax payable to the government would likewise increase.

Be that as it may, the question of whether or not the amount of P491,467.58 declared in the Alpha List was also declared in Petitioner's Income Tax Return for taxable year 1994 was answered in the affirmative by the documents submitted as evidence.

The documents disclose that a portion of the P491,467.58 pertained to the professional fees paid to Edna Syquia in the amount of P24,000.00 which was included in the category of "Professional Fees" in the 1994 ITR (Exhibit "R"). The remaining balance of P467.467.58 was included in the ITR under a different category called "Trade Support," the details of which are specified hereunder:

Dina de Jesus (Exhibit W) — P3,600.00

Feliza Idmilao (Exhibit EE) — 28,700.00

Ginger Biscocho (Exhibit CC) — 4,444.45

Manuelita Revilla (Exhibits X, Z & BB) — 50,900.00

Ma. Josefina A. Pacis (Exhibit BB) — 222,222.22

Odette Quesada (Exhibit AA) — 11,111.11

Rosanna M. Marabut (Exhibits V, W & DD) — 13,889.80

Sammy Idmilao (Exhibits X, Z & CC) — 132,600.00

—————

TOTAL — P467,467.58

=========

The imputation of alleged undeclared income is based on a mere presumption that since there were alleged undeclared expenses, there was likewise undeclared income which corresponds to it. While axiomatic is the fact that all presumptions are in favor of the correctness of tax assessments, the assessment in itself should not be based on presumptions no matter how logical the presumption might be. In order to stand the test of judicial scrutiny the assessment must be based on actual facts. In the case at bar, the Court is convinced that the questioned professional fees were validly claimed as expenses.

It seems well-settled that in cases of disputed or contested deficiency assessments, the taxpayer or the Petitioner has the burden of proof to show not only that the assessment issued by the Commissioner of Internal Revenue is wrong but also that he (the taxpayer) is right (Tan Guan vs Court of Tax Appeals, L-23676, April 27, 1967). And if the taxpayer fails to present evidence or proof in support of his allegations in the Petition for Review, the assessment is much likely to be sustained on appeal. Fortunately, in this case, the presumption in favor of the correctness of the assessment has been overcome by the Petitioner. It was able to establish, at least by the preponderance of evidence that the assessment issued by herein Respondent is indeed erroneous. Respondent, for his part miserably failed to support or at least defend the findings of the examiner embodied in the assessment notice and demand letter. Neither did it submit any BIR records, which would sufficiently substantiate the assessment. Gestures of that sort can be construed as lack of interest on their part to pursue the case against the Petitioner.

WHEREFORE, in view of the foregoing, the instant Petition is hereby GRANTED. Accordingly, the questioned Assessment particularly Assessment Notice No. 000023 issued against the Petitioner for the alleged deficiency Income tax of P678,441.00 is deemed CANCELLED and WITHDRAWN. Respondent is hereby ORDERED TO DESIST from collecting the assessed Income Tax Deficiency of Petitioner for taxable year 1994. ITCcAD

SO ORDERED.

G.R. No. L-65045 July 20, 1990

ARTEX DEVELOPMENT CO., INC., petitioner, vs.

NATIONAL LABOR RELATIONS COMMISSION, NORIEL GONZALES and CLARITA BENSON, respondents.

Felipe Fuentes, Jr. for petitioner.

Wilfredo D. Sarabosing for private respondents.

 

GRIÑO-AQUINO, J.:

This petition seeks to reverse and set aside the National Labor Relations Commission resolution dated August 4, 1982 denying petitioner's appeal from the decision of the Labor Arbiter dated May 7, 1981, directing the petitioner to reinstate the two (2) private respondents to their former positions in the company, with full backwages.

On April 2, 1980, the private respondents filed individual complaints against the Artex Development Co., Inc. ("the Company" for brevity) for illegal dismissal, docketed as NCR-STF-42100-80, later NCR Case No. AB-4-5446-80.

Noriel Gonzales who had been employed since 1974 as a doffer in the company's Spinning Department, was dismissed on March 14, 1980, for alleged abandonment of duty and gambling, based on reports from his supervisors, Marciano Ilaya, and a Mr. Escleto without being given an opportunity to refute those charges.

The other complainant, Clarita Benson, a regular worker of the company until December 14, 1980, was laid off because of a pre-announced temporary shut-down of the factory starting December 17, 1979 with assurance that she would be called back upon the resumption of work but on March 17, 1980, she received a letter from the company informing her of the termination of her services for abandonment. Thereupon she filed a complaint for illegal dismissal.

Notification and summons were issued to the parties by the senior labor arbitration analyst, informing them of an initial hearing on May 5, 1980 and that their respective position papers should be filed at least three days prior thereto. The scheduled hearing did not proceed for failure of the company's representative to appear. Another notice of hearing on May 9, 1980 was sent to the company by telegram. Notices by telegram for subsequent hearings scheduled for May 21, 28 and June 10, 1980 were likewise sent to the company, as per bailiff s returns. The company's representative, however, failed to appear at any of the hearings, prompting the complainants to move that the case be submitted for decision. Only the private respondents submitted their position paper.

On May 7, 1980, the Labor Arbiter rendered a decision, the dispositive portion of which reads:

In view of the foregoing circumstances, complainant's charge of illegal dismissal must be sustained in the absence of denial or evidence to the contrary by respondent due to the

failure of its manager and/or representative to appear and submit its position paper and supporting documents.

Accordingly, respondent should reinstate complainants to their respective former positions without loss of seniority rights and with full backwages.

WHEREFORE, PREMISES CONSIDERED, within ten (10) days after receipt of this Decision, respondent ARTEX DEVELOPMENT CO., INC., is hereby directed to reinstate complainants Noriel Gonzales and Clarita Benson to their respective former positions with full backwages from the date of their dismissal until such time that this Decision has been complied with. (pp. 80-81, Rollo.)

The company filed a motion for reconsideration of the decision, claiming that its failure to appear at the scheduled hearings was due to the fact that it did not receive summons nor any notice of hearing. The complainants opposed the company's motion for reconsideration and filed a motion for execution of the judgment.

The existing rule (Rule VII, Section 9 of the National Labor Relations Commission Rules) was that "no motion for reconsideration of the labor arbiter's decision shall be entertained unless in the nature of an appeal to the Commission." Instead of treating respondent's motion for reconsideration as an appeal and elevating it to the Commission, the arbiter set the case for hearing and thereafter issued an Order dated July 30, 1981, denying the motion for lack of merit (p. 53, Rollo).i•t•c-aüsl

On September 16, 1981, the company appealed to the Commission, alleging denial of due process. The NLRC's third division dismissed the appeal in a resolution dated August 4, 1982, stating that:

The records plainly show that the instant case was set for hearing on the following dates: May 5, 9, 21 and 28, 1980 and on June 10, 1980. Notices of the same were duly served to the respondent through telegrams, which telegrams were fully confirmed by the Telegraph Company for the hearings on May 9, 21 and 28, 1980 (pp. 20, 21 and 22 Records). In the face of these strongly convincing evidence, there could be no room for doubt that contrary to its claim, respondent had been accorded all the opportunities that it needed for it to present evidence in its defense. Its refusal to avail of the same cannot be construed otherwise than a plain waiver of its right to do so.

Under the given circumstances, We cannot therefore disturb the decision and order in question. (p. 84, Rollo.)

After the motions for reconsideration were denied by the National Labor Relations Commission's Third Division and by the Commission En Banc, the company filed this petition for certiorari alleging grave abuse of discretion on the part of the labor arbiter and the NLRC for rendering judgment against the petitioner without due process.

There is no merit in the petition for certiorari. The confirmation copies of the telegraphed notices of the various hearings before the Labor Arbiter showed that the telegrams were properly sent and delivered in the ordinary course of business. As the petitioner had not changed its address, nor did the Telegraphic Communication Office advise the senders

(herein respondents) that the telegrams were undelivered, and as petitioner had in fact received all copies of the Labor Ministry's resolutions and decisions sent to its address, the presumption is that it received the notices of hearing.

Even if the petitioner was not heard at the stage of mediation and fact-finding, it may not complain of lack of due process for it was given an opportunity to present its side of the controversy when its motions for reconsideration and appeal were given due course (Maglasang v. Ople et al., 63 SCRA 508; Cuerdo v. Commission on Audit, 166 SCRA 657). What due process abhors is not lack of previous notice, but absolute lack of opportunity to be heard (Tajonera et al v. Lamaroza, 110 SCRA 438; Zoleta v. Drilon, 166 SCRA 548).

Furthermore, when the decision or order of an administrative agency is not tainted with unfairness or arbitrariness, its factual findings are generally accorded not only respect but also finality. The finding of the Commission in this case that the petitioner had been duly notified of the hearings before the Labor Arbiter, and that hence it was not denied due process of law, must be respected since it is supported by substantial evidence.

WHEREFORE, the petition is denied. However, conformably with existing doctrine, * the decision of the Labor Arbiter is hereby modified by limiting the private respondents' backwages to not more than three (3) years. Costs against the petitioner.

SO ORDERED.

G.R. No. 167146             October 31, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.PHILIPPINE GLOBAL COMMUNICATION, INC., respondent.

D E C I S I O N

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari, under Rule 45 of the Rules of Court, seeking to set aside the en banc Decision of the Court of Tax Appeals (CTA) in CTA EB No. 37 dated 22 February 2005,1 ordering the petitioner to withdraw and cancel Assessment Notice No. 000688-80-7333 issued against respondent Philippine Global Communication, Inc. for its 1990 income tax deficiency. The CTA, in its assailed en banc Decision, affirmed the Decision of the First

Division of the CTA dated 9 June 20042 and its Resolution dated 22 September 2004 in C.T.A. Case No. 6568.

Respondent, a corporation engaged in telecommunications, filed its Annual Income Tax Return for taxable year 1990 on 15 April 1991. On 13 April 1992, the Commissioner of Internal Revenue (CIR) issued Letter of Authority No. 0002307, authorizing the appropriate Bureau of Internal Revenue (BIR) officials to examine the books of account and other accounting records of respondent, in connection with the investigation of respondent’s 1990 income tax liability. On 22 April 1992, the BIR sent a letter to respondent requesting the latter to present for examination certain records and documents, but respondent failed to present any document. On 21 April 1994, respondent received a Preliminary Assessment Notice dated 13 April 1994 for deficiency income tax in the amount of P118,271,672.00, inclusive of surcharge, interest, and compromise penalty, arising from deductions that were disallowed for failure to pay the withholding tax and interest expenses that were likewise disallowed. On the following day, 22 April 1994, respondent received a Formal Assessment Notice with Assessment Notice No. 000688-80-7333, dated 14 April 1994, for deficiency income tax in the total amount of P118,271,672.00.3

On 6 May 1994, respondent, through its counsel Ponce Enrile Cayetano Reyes and Manalastas Law Offices, filed a formal protest letter against Assessment Notice No. 000688-80-7333. Respondent filed another protest letter on 23 May 1994, through another counsel Siguion Reyna Montecillo & Ongsiako Law Offices. In both letters, respondent requested for the cancellation of the tax assessment, which they alleged was invalid for lack of factual and legal basis.4

On 16 October 2002, more than eight years after the assessment was presumably issued, the Ponce Enrile Cayetano Reyes and Manalastas Law Offices received from the CIR a Final Decision dated 8 October 2002 denying the respondent’s protest against Assessment Notice No. 000688-80-7333, and affirming the said assessment in toto.5

On 15 November 2002, respondent filed a Petition for Review with the CTA. After due notice and hearing, the CTA rendered a Decision in favor of respondent on 9 June 2004.6 The CTA ruled on the primary issue of prescription and found it unnecessary to decide the issues on the validity and propriety of the assessment. It decided that the protest letters filed by the respondent cannot constitute a request for reinvestigation, hence, they cannot toll the running of the prescriptive period to collect the assessed deficiency income tax.7 Thus, since more than three years had lapsed from the time Assessment Notice No. 000688-80-7333 was issued in 1994, the CIR’s right to collect the same has prescribed in conformity with Section 269 of the National Internal Revenue Code of 19778 (Tax Code of 1977). The dispositive portion of this decision reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the petitioner. Accordingly, respondent’s Final Decision dated October 8, 2002 is hereby REVERSED and SET ASIDE and respondent is hereby ORDERED to WITHDRAW and CANCEL Assessment Notice No. 000688-80-7333 issued against the petitioner for its 1990 income tax deficiency because respondent’s right to collect the same has prescribed.9

The CIR moved for reconsideration of the aforesaid Decision but was denied by the CTA in a Resolution dated 22 September 2004.10 Thereafter, the CIR filed a Petition for Review with the CTA en banc, questioning the aforesaid Decision and Resolution. In its en banc Decision, the CTA affirmed the Decision and Resolution in CTA Case No. 6568. The dispositive part reads:

WHEREFORE, premises considered, the Petition for Review is hereby DISMISSED for lack of merit. Accordingly, the assailed Decision and Resolution in CTA Case No. 6568 are hereby AFFIRMED in toto.11

Hence, this Petition for Review on Certiorari raising the following grounds:

THE COURT OF TAX APPEALS, SITTING EN BANC, COMMITTED REVERSIBLE ERROR IN AFFIRMING THE ASSAILED DECISION AND RESOLUTION IN CTA CASE NO. 6568 DECLARING THAT THE RIGHT OF THE GOVERNMENT TO COLLECT THE DEFICIENCY INCOME TAX FROM RESPONDENT FOR THE YEAR 1990 HAS PRESCRIBED

A. THE PRESCRIPTIVE PERIOD WAS INTERUPTED WHEN RESPONDENT FILED TWO LETTERS OF PROTEST DISPUTING IN DETAIL THE DEFICIENCY ASSESSMENT IN QUESTION AND REQUESTING THE CANCELLATION OF SAID ASSESSMENT. THE TWO LETTERS OF PROTEST ARE, BY NATURE, REQUESTS FOR REINVESTIGATION OF THE DISPUTED ASSESSMENT.

B. THE REQUESTS FOR REINVESTIGATION OF RESPONDENT WERE GRANTED BY THE BUREAU OF INTERNAL REVENUE.12

This Court finds no merit in this Petition.

The main issue in this case is whether or not CIR’s right to collect respondent’s alleged deficiency income tax is barred by prescription under Section 269(c) of the Tax Code of 1977, which reads:

Section 269. Exceptions as to the period of limitation of assessment and collection of taxes. – x x x

x x x x

c. Any internal revenue tax which has been assessed within the period of limitation above-prescribed may be collected by distraint or levy or by a proceeding in court within three years following the assessment of the tax.

The law prescribed a period of three years from the date the return was actually filed or from the last date prescribed by law for the filing of such return, whichever came later, within which the BIR may assess a national internal revenue tax.13 However, the law increased the prescriptive period to assess or to begin a court proceeding for the collection without an assessment to ten

years when a false or fraudulent return was filed with the intent of evading the tax or when no return was filed at all.14 In such cases, the ten-year period began to run only from the date of discovery by the BIR of the falsity, fraud or omission.

If the BIR issued this assessment within the three-year period or the ten-year period, whichever was applicable, the law provided another three years after the assessment for the collection of the tax due thereon through the administrative process of distraint and/or levy or through judicial proceedings.15 The three-year period for collection of the assessed tax began to run on the date the assessment notice had been released, mailed or sent by the BIR.16

The assessment, in this case, was presumably issued on 14 April 1994 since the respondent did not dispute the CIR’s claim. Therefore, the BIR had until 13 April 1997. However, as there was no Warrant of Distraint and/or Levy served on the respondents nor any judicial proceedings initiated by the BIR, the earliest attempt of the BIR to collect the tax due based on this assessment was when it filed its Answer in CTA Case No. 6568 on 9 January 2003, which was several years beyond the three-year prescriptive period. Thus, the CIR is now prescribed from collecting the assessed tax.

The provisions on prescription in the assessment and collection of national internal revenue taxes became law upon the recommendation of the tax commissioner of the Philippines. The report submitted by the tax commission clearly states that these provisions on prescription should be enacted to benefit and protect taxpayers:

Under the former law, the right of the Government to collect the tax does not prescribe. However, in fairness to the taxpayer, the Government should be estopped from collecting the tax where it failed to make the necessary investigation and assessment within 5 years after the filing of the return and where it failed to collect the tax within 5 years from the date of assessment thereof. Just as the government is interested in the stability of its collections, so also are the taxpayers entitled to an assurance that they will not be subjected to further investigation for tax purposes after the expiration of a reasonable period of time. (Vol. II, Report of the Tax Commission of the Philippines, pp. 321-322).17

In a number of cases, this Court has also clarified that the statute of limitations on the collection of taxes should benefit both the Government and the taxpayers. In these cases, the Court further illustrated the harmful effects that the delay in the assessment and collection of taxes inflicts upon taxpayers. In Collector of Internal Revenue v. Suyoc Consolidated Mining Company,18 Justice Montemayor, in his dissenting opinion, identified the potential loss to the taxpayer if the assessment and collection of taxes are not promptly made.

Prescription in the assessment and in the collection of taxes is provided by the Legislature for the benefit of both the Government and the taxpayer; for the Government for the purpose of expediting the collection of taxes, so that the agency charged with the assessment and collection may not tarry too long or indefinitely to the prejudice of the interests of the Government, which needs taxes to run it; and for the taxpayer so that within a reasonable time after filing his return, he may know the amount of the assessment he is required to pay, whether or not such assessment is well founded and

reasonable so that he may either pay the amount of the assessment or contest its validity in court x x x. It would surely be prejudicial to the interest of the taxpayer for the Government collecting agency to unduly delay the assessment and the collection because by the time the collecting agency finally gets around to making the assessment or making the collection, the taxpayer may then have lost his papers and books to support his claim and contest that of the Government, and what is more, the tax is in the meantime accumulating interest which the taxpayer eventually has to pay .

In Republic of the Philippines v. Ablaza,19 this Court emphatically explained that the statute of limitations of actions for the collection of taxes is justified by the need to protect law-abiding citizens from possible harassment:

The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and to its citizens; to the Government because tax officers would be obliged to act promptly in the making of assessment, and to citizens because after the lapse of the period of prescription citizens would have a feeling of security against unscrupulous tax agents who will always find an excuse to inspect the books of taxpayers, not to determine the latter’s real liability, but to take advantage of every opportunity to molest, peaceful, law-abiding citizens. Without such legal defense taxpayers would furthermore be under obligation to always keep their books and keep them open for inspection subject to harassment by unscrupulous tax agents. The law on prescription being a remedial measure should be interpreted in a way conducive to bringing about the beneficient purpose of affording protection to the taxpayer within the contemplation of the Commission which recommended the approval of the law.

And again in the recent case Bank of the Philippine Islands v. Commissioner of Internal Revenue,20 this Court, in confirming these earlier rulings, pronounced that:

Though the statute of limitations on assessment and collection of national internal revenue taxes benefits both the Government and the taxpayer, it principally intends to afford protection to the taxpayer against unreasonable investigation. The indefinite extension of the period for assessment is unreasonable because it deprives the said taxpayer of the assurance that he will no longer be subjected to further investigation for taxes after the expiration of a reasonable period of time.

Thus, in Commissioner of Internal Revenue v. B.F. Goodrich,21 this Court affirmed that the law on prescription should be liberally construed in order to protect taxpayers and that, as a corollary, the exceptions to the law on prescription should be strictly construed.

The Tax Code of 1977, as amended, provides instances when the running of the statute of limitations on the assessment and collection of national internal revenue taxes could be suspended, even in the absence of a waiver, under Section 271 thereof which reads:

Section 224. Suspension of running of statute. – The running of the statute of limitation provided in Sections 268 and 269 on the making of assessments and the beginning of distraint or levy or a proceeding in court for collection in respect of any deficiency, shall be suspended for the period

during which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty days thereafter; when the taxpayer requests for a reinvestigation which is granted by the Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected x x x. (Emphasis supplied.)

Among the exceptions provided by the aforecited section, and invoked by the CIR as a ground for this petition, is the instance when the taxpayer requests for a reinvestigation which is granted by the Commissioner. However, this exception does not apply to this case since the respondent never requested for a reinvestigation. More importantly, the CIR could not have conducted a reinvestigation where, as admitted by the CIR in its Petition, the respondent refused to submit any new evidence.

Revenue Regulations No. 12-85, the Procedure Governing Administrative Protests of Assessment of the Bureau of Internal Revenue, issued on 27 November 1985, defines the two types of protest, the request for reconsideration and the request for reinvestigation, and distinguishes one from the other in this manner:

Section 6. Protest. - The taxpayer may protest administratively an assessment by filing a written request for reconsideration or reinvestigation specifying the following particulars:

x x x x

For the purpose of protest herein—

(a) Request for reconsideration-- refers to a plea for a re-evaluation of an assessment on the basis of existing records without need of additional evidence. It may involve both a question of fact or of law or both.

(b) Request for reinvestigation—refers to a plea for re-evaluation of an assessment on the basis of newly-discovered evidence or additional evidence that a taxpayer intends to present in the investigation. It may also involve a question of fact or law or both.

The main difference between these two types of protests lies in the records or evidence to be examined by internal revenue officers, whether these are existing records or newly discovered or additional evidence. A re-evaluation of existing records which results from a request for reconsideration does not toll the running of the prescription period for the collection of an assessed tax. Section 271 distinctly limits the suspension of the running of the statute of limitations to instances when reinvestigation is requested by a taxpayer and is granted by the CIR. The Court provided a clear-cut rationale in the case of Bank of the Philippine Islands v. Commissioner of Internal Revenue22 explaining why a request for reinvestigation, and not a request for reconsideration, interrupts the running of the statute of limitations on the collection of the assessed tax:

Undoubtedly, a reinvestigation, which entails the reception and evaluation of additional evidence, will take more time than a reconsideration of a tax assessment, which will be

limited to the evidence already at hand; this justifies why the former can suspend the running of the statute of limitations on collection of the assessed tax, while the latter cannot.

In the present case, the separate letters of protest dated 6 May 1994 and 23 May 1994 are requests for reconsideration. The CIR’s allegation that there was a request for reinvestigation is inconceivable since respondent consistently and categorically refused to submit new evidence and cooperate in any reinvestigation proceedings. This much was admitted in the Decision dated 8 October 2002 issued by then CIR Guillermo Payarno, Jr.

In the said conference-hearing, Revenue Officer Alameda basically testified that Philcom, despite repeated demands, failed to submit documentary evidences in support of its claimed deductible expenses. Hence, except for the item of interest expense which was disallowed for being not ordinary and necessary, the rest of the claimed expenses were disallowed for non-withholding. In the same token, Revenue Officer Escober testified that upon his assignment to conduct the re-investigation, he immediately requested the taxpayer to present various accounting records for the year 1990, in addition to other documents in relation to the disallowed items (p.171). This was followed by other requests for submission of documents (pp.199 &217) but these were not heeded by the taxpayer. Essentially, he stated that Philcom did not cooperate in his reinvestigation of the case.

In response to the testimonies of the Revenue Officers, Philcom thru Atty. Consunji, emphasized that it was denied due process because of the issuance of the Pre-Assessment Notice and the Assessment Notice on successive dates. x x x Counsel for the taxpayer even questioned the propriety of the conference-hearing inasmuch as the only question to resolved (sic) is the legality of the issuance of the assessment. On the disallowed items, Philcom thru counsel manifested that it has no intention to present documents and/or evidences allegedly because of the pending legal question on the validity of the assessment.23

Prior to the issuance of Revenue Regulations No. 12-85, which distinguishes a request for reconsideration and a request for reinvestigation, there have been cases wherein these two terms were used interchangeably. But upon closer examination, these cases all involved a reinvestigation that was requested by the taxpayer and granted by the BIR.

In Collector of Internal Revenue v. Suyoc Consolidated Mining Company,24 the Court weighed the considerable time spent by the BIR to actually conduct the reinvestigations requested by the taxpayer in deciding that the prescription period was suspended during this time.

Because of such requests, several reinvestigations were made and a hearing was even held by the Conference Staff organized in the collection office to consider claims of such nature which, as the record shows, lasted for several months. After inducing petitioner to delay collection as he in fact did, it is most unfair for respondent to now take advantage of such desistance to elude his deficiency income tax liability to the prejudice of the Government invoking the technical ground of prescription.

Although the Court used the term "requests for reconsideration" in reference to the letters sent by the taxpayer in the case of Querol v. Collector of Internal Revenue,25 it took into account the reinvestigation conducted soon after these letters were received and the revised assessment that resulted from the reinvestigations.

It is true that the Collector revised the original assessment on February 9, 1955; and appellant avers that this revision was invalid in that it was not made within the five-year prescriptive period provided by law (Collector vs. Pineda, 112 Phil. 321). But that fact is that the revised assessment was merely a result of petitioner Querol’s requests for reconsideration of the original assessment, contained in his letters of December 14, 1951 and May 25, 1953. The records of the Bureau of Internal Revenue show that after receiving the letters, the Bureau conducted a reinvestigation of petitioner’s tax liabilities, and, in fact, sent a tax examiner to San Fernando, La Union, for that purpose; that because of the examiner’s report, the Bureau revised the original assessment, x x x. In other words, the reconsideration was granted in part, and the original assessment was altered. Consequently, the period between the petition for reconsideration and the revised assessment should be subtracted from the total prescriptive period (Republic vs. Ablaza, 108 Phil 1105).

The Court, in Republic v. Lopez,26 even gave a detailed accounting of the time the BIR spent for each reinvestigation in order to deduct it from the five-year period set at that time in the statute of limitations:

It is now a settled ruled in our jurisdiction that the five-year prescriptive period fixed by Section 332(c) of the Internal Revenue Code within which the Government may sue to collect an assessed tax is to be computed from the last revised assessment resulting from a reinvestigation asked for by the taxpayer and (2) that where a taxpayer demands a reinvestigation, the time employed in reinvestigating should be deducted from the total period of limitation.

x x x x

The first reinvestigation was granted, and a reduced assessment issued on 29 May 1954, from which date the Government had five years for bringing an action to collect.

The second reinvestigation was asked on 16 January 1956, and lasted until it was decided on 22 April 1960, or a period of 4 years, 3 months, and 6 days, during which the limitation period was interrupted.

The Court reiterated the ruling in Republic v. Lopez in the case of Commissioner of Internal Revenue v. Sison,27 "that where a taxpayer demands a reinvestigation, the time employed in reinvestigating should be deducted from the total period of limitation." Finally, in Republic v. Arcache,28 the Court enumerated the reasons why the taxpayer is barred from invoking the defense of prescription, one of which was that, "In the first place, it appears obvious that the delay in the collection of his 1946 tax liability was due to his own repeated requests for reinvestigation and similarly repeated requests for extension of time to pay."

In this case, the BIR admitted that there was no new or additional evidence presented. Considering that the BIR issued its Preliminary Assessment Notice on 13 April 1994 and its Formal Assessment Notice on 14 April 1994, just one day before the three-year prescription period for issuing the assessment expired on 15 April 1994, it had ample time to make a factually and legally well-founded assessment. Added to the fact that the Final Decision that the CIR issued on 8 October 2002 merely affirmed its earlier findings, whatever examination that the BIR may have conducted cannot possibly outlast the entire three-year prescriptive period provided by law to collect the assessed tax, not to mention the eight years it actually took the BIR to decide the respondent’s protest. The factual and legal issues involved in the assessment are relatively simple, that is, whether certain income tax deductions should be disallowed, mostly for failure to pay withholding taxes. Thus, there is no reason to suspend the running of the statute of limitations in this case.

The distinction between a request for reconsideration and a request for reinvestigation is significant. It bears repetition that a request for reconsideration, unlike a request for reinvestigation, cannot suspend the statute of limitations on the collection of an assessed tax. If both types of protest can effectively interrupt the running of the statute of limitations, an erroneous assessment may never prescribe. If the taxpayer fails to file a protest, then the erroneous assessment would become final and unappealable.29 On the other hand, if the taxpayer does file the protest on a patently erroneous assessment, the statute of limitations would automatically be suspended and the tax thereon may be collected long after it was assessed. Meanwhile the interest on the deficiencies and the surcharges continue to accumulate. And for an unrestricted number of years, the taxpayers remain uncertain and are burdened with the costs of preserving their books and records. This is the predicament that the law on the statute of limitations seeks to prevent.

The Court, in sustaining for the first time the suspension of the running of the statute of limitations in cases where the taxpayer requested for a reinvestigation, gave this justification:

A taxpayer may be prevented from setting up the defense of prescription even if he has not previously waived it in writing as when by his repeated requests or positive acts the Government has been, for good reasons, persuaded to postpone collection to make him feel that the demand was not unreasonable or that no harassment or injustice is meant by the Government.

x x x x

This case has no precedent in this jurisdiction for it is the first time that such has risen, but there are several precedents that may be invoked in American jurisprudence. As Mr. Justice Cardozo has said: "The applicable principle is fundamental and unquestioned. ‘He who prevents a thing from being done may not avail himself of the nonperformance which he himself occasioned, for the law says to him in effect "this is your own act, and therefore you are not damnified."’ (R.H. Stearns Co. v. U.S., 78 L. ed., 647). (Emphasis supplied.)30

This rationale is not applicable to the present case where the respondent did nothing to prevent the BIR from collecting the tax. It did not present to the BIR any new evidence for its re-evaluation. At the earliest opportunity, respondent insisted that the assessment was invalid and made clear to the BIR its refusal to produce documents that the BIR requested. On the other hand, the BIR also communicated to the respondent its unwavering stance that its assessment is correct. Given that both parties were at a deadlock, the next logical step would have been for the BIR to issue a Decision denying the respondent’s protest and to initiate proceedings for the collection of the assessed tax and, thus, allow the respondent, should it so choose, to contest the assessment before the CTA. Postponing the collection for eight long years could not possibly make the taxpayer feel that the demand was not unreasonable or that no harassment or injustice is meant by the Government. There was no legal, or even a moral, obligation preventing the CIR from collecting the assessed tax. In a similar case, Cordero v. Conda,31 the Court did not suspend the running of the prescription period where the acts of the taxpayer did not prevent the government from collecting the tax.

The government also urges that partial payment is "acknowledgement of the tax obligation", hence a "waiver on the defense of prescription." But partial payment would not prevent the government from suing the taxpayer. Because, by such act of payment, the government is not thereby "persuaded to postpone collection to make him feel that the demand was not unreasonable or that no harassment or injustice is meant." Which, as stated in Collector v. Suyoc Consolidated Mining Co., et al., L-11527, November 25, 1958, is the underlying reason behind the rule that prescriptive period is arrested by the taxpayer’s request for reexamination or reinvestigation – even if "he has not previously waived it [prescription] in writing."

The Court reminds us, in the case of Commissioner of Internal Revenue v. Algue, Inc., 32 of the need to balance the conflicting interests of the government and the taxpayers.

Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interest of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of common good, may be achieved.

Thus, the three-year statute of limitations on the collection of an assessed tax provided under Section 269(c) of the Tax Code of 1977, a law enacted to protect the interests of the taxpayer, must be given effect. In providing for exceptions to such rule in Section 271, the law strictly limits the suspension of the running of the prescription period to, among other instances, protests wherein the taxpayer requests for a reinvestigation. In this case, where the taxpayer merely filed two protest letters requesting for a reconsideration, and where the BIR could not have conducted a reinvestigation because no new or additional evidence was submitted, the running of statute of limitations cannot be interrupted. The tax which is the subject of the Decision issued by the CIR on 8 October 2002 affirming the Formal Assessment issued on 14 April 1994 can no longer be the subject of any proceeding for its collection. Consequently, the right of the government to collect the alleged deficiency tax is barred by prescription.

IN VIEW OF THE FOREGOING, the instant Petition is DENIED. The assailed en banc Decision of the CTA in CTA EB No. 37 dated 22 February 2005, cancelling Assessment Notice No. 000688-80-7333 issued against Philippine Global Communication, Inc. for its 1990 income tax deficiency for the reason that it is barred by prescription, is hereby AFFIRMED. No costs.

SO ORDERED.

C.T.A. CASE NO. 6111. November 3, 2004.]

OCEANIC WIRELESS NETWORK, INC., petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.

D E C I S I O N

Appealed before us for review are the assessments for deficiency income tax and quarterly income taxes issued against petitioner in the amounts of P7,311,036.18 and P1,834,399.78, respectively, for the calendar year ended December 31, 1995.

Petitioner is a corporation organized and existing under the laws of the Republic of the Philippines, with principal office located at 3/F Electra House, 115-117 Esteban St., Legaspi Village, Makati, Metro Manila.

On April 15, 1996, petitioner filed its 1995 Corporation Annual Income Tax Return (Exhibit 5).

On December 12, 1996, petitioner received Letter of Authority No. 137427 issued by Revenue District Officer Hernani S. Arboleda of RDO No. 47, Revenue Region 8, Makati authorizing Revenue Officers Josephine Gaerlan and Julita Batoon to examine petitioner's books of accounts and other accounting records for all internal revenue taxes for the period January to December 1995 (Exhibit 1).

On March 17, 1999, petitioner executed a Waiver of the Defense of Prescription Under the Statute of Limitations of the National Internal Revenue Code extending the period within which respondent may assess petitioner of deficiency taxes up to July 31, 1999 (Exhibit A; 9).

A preliminary report of tax assessment was issued on May 18, 1999 informing petitioner of the result of the investigation of all its internal revenue tax liabilities for the calendar year 1995 (page 428, BIR records). Petitioner was also requested to attend an informal conference to discuss the result of the revenue officer's investigation.

On July 19, 1999, petitioner received another pre-assessment notice (this time) with Details of Discrepancies. Petitioner was also advised to file its written protest or at its option, to request for an office conference to discuss the proposed assessments for deficiency income and quarterly income taxes in the amounts of P7,277,249.49 and P1,834,399.78, respectively (pages 473 to 476, BIR records).

Consequently, petitioner on July 28, 1999, filed its request for an office conference with the Bureau of Internal Revenue (BIR) at the time and place convenient to the respondent's examiners (page 481, BIR

records). However, inasmuch as the authority of respondent to assess was about to prescribe on July 31, 1999, respondent issued final assessment notices, demand letters and details discrepancies on July 30, 1999, which were received by petitioner on the same date, covering the following deficiency income tax and penalties for late payment of quarterly income taxes, to wit: (pages 482 to 491, BIR records)

DEFICIENCY INCOME TAX:

Taxable Income per FS P17,001,348.00

Add: Disallowed Expenses (RR 6-85)

Rent P2,199,151.00

Security 575,595.00

Allowance 456,000.00

Service Fee 6,464,790.57 9,695,536.57

—————— ——————

Taxable Income per Investigation P26,696,884.57

==========

Tax Due P9,343,909.60

Less: Allowable Tax Credit

Tax Credit Per ITR P465,162.00

Unsupported Tax Credit

——————

122,777.00

——————

P342,385.00

Tax Paid 5,485,310.00 5,827,695.00

—————— ——————

Basic Deficiency P3,516,214.60

Surcharge 879,053.65

Interest 2,890,767.93

Compromise penalty 25,000.00

——————

Deficiency Income Tax P7,311,036.18

==========

DEFICIENCY QUARTERLY INCOME TAX

Returns Surcharge InterestCompromise Total

1st Quarter P327,050.86 P285,351.88 P25,000.00 P637,402.74

2nd Quarter 308,849.75 192,258.97 25,000.00 526,108.72

3rd Quarter 470,592.58 175,295.74 25,000.00 670,888.32

—————— —————— —————— ——————

Total P1,106,493.19 P652,906.59 P75,000.00 P1,834,399.78

========== ========== ========== ==========

On August 16, 1999, petitioner filed its protest requesting for the reconsideration of the aforementioned final assessments (pages 524 to 526, BIR records). Petitioner also filed a supplemental protest on April 7, 2000 to further buttress its position that the assessments against it should be cancelled (pages 527–534, BIR records).

On May 12, 2000, petitioner filed the instant Petition for Review.

On September 12, 2000, the Joint Stipulation of Facts and Issues submitted by the parties was approved by the court. However, on March 22, 2002, respondent's new counsel filed a Manifestation and Motion to Amend Joint Stipulation of Facts and Issues which this court resolved to grant (pages 146–153, CTA records). Thus, the jointly stipulated issues are the following:

1. Whether or not the right of the Bureau of Internal Revenue (BIR) to assess Petitioner for alleged deficiency income and quarterly income tax for taxable year 1995 had already prescribed.

2. Whether or not the deficiency income and quarterly income tax assessments issued against Petitioner for taxable year 1995 are void for failure to state the law and the facts on which the assessments were made.

3. Whether or not Petitioner is liable for deficiency income tax.

4. Whether or not the imposition of 25% surcharge on deficiency income and quarterly income tax is valid.

5. Whether or not Petitioner is liable for the amount of P1,834,399.78 as deficiency quarterly income tax for taxable year 1995.

Petitioner averred that the subject assessment notices covering its deficiency income and quarterly income tax assessments for taxable year 1995 are void for having been issued beyond the three-year prescriptive period provided under Section 203 of the 1997 Tax Code [should be Section 203 of the old Tax Code] which provides:

SEC. 203. Period of limitation Upon Assessment and Collection. — Except as provided in Section 222, internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three-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. (Emphasis supplied).

It is undisputed that petitioner filed its 1995 Corporation Annual Income Tax Return on April 15, 1996. Thus, pursuant to the above provision of law, respondent has three (3) years from April 15, 1996 within which to assess petitioner of its 1995 internal revenue taxes. Since the assessment notices were issued only on July 30, 1999, petitioner opined that the same were issued beyond the three-year period allowed by law.

Respondent, on the other hand, argued that the assessment notices were timely issued considering that petitioner on March 17, 1999 executed a "Waiver of Statute of Limitations" extending the period for respondent to assess its 1995 internal revenue tax liabilities up to July 31, 1999 (Exhibit A;9). This is pursuant to Section 222(b) of the 1997 Tax Code [should be Section 223(b) of the 1993 Tax Code, as amended] which provides:

Section 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. —

(a) . . .

(b) If before the expiration of the time prescribed in 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.

From the aforecited law, the assessment notices issued by respondent on July 30, 1999 for 1995 internal revenue taxes liabilities of petitioner were not time-barred.

However, petitioner questioned the validity of the aforementioned waiver on the ground that it failed to state the kind of tax and the amount of tax due as required under Revenue Memorandum Order No. 20-90. There being no valid waiver, the subject assessment notices issued to petitioner are void for having been issued beyond the three-year prescriptive period.

After meticulous scrutiny of the evidence, we rule in favor of the validity of the subject assessment notices.

While it is true that the waiver executed by petitioner does not specify the kind of tax and the amount of tax due as required under Revenue Memorandum Order No. 20-90 1 , petitioner cannot invoke the same in present case. This is because we have noted that as of the time of the execution of the waiver on March 17, 1999, there was no preliminary assessment issued yet against petitioner wherein the kind and amount of tax due could be referred to. Hence, such details cannot be specified in the waiver because the amount and the kind of tax were still unascertainable.

The first report of preliminary assessment was issued on May 18, 1999 and this was received by petitioner on the same date. But since petitioner had already executed a waiver on March 17, 1999, it is justified that the amount and the kind of tax are not reflected therein. The waiver therefore is valid.

Following the rule that the period of respondent to assess was extended up to July 31, 1999 in view of the waiver, the deficiency assessments issued against petitioner on July 30, 1999 are within the period allowed by law.

Anent the second issue, petitioner in its memorandum assailed the validity of the assessment notices, demand letters and details of discrepancies covering the deficiency quarterly income tax for failure to state the law and the facts upon which the assessments were based. Petitioner cited as legal bases Section 228 of the 1997 Tax Code and Section 3.1.4 of Revenue Regulations No. 12-99, to wit:

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 pre-assessment notice shall not be required in the following cases:

xxx xxx xxx

The taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void.

xxx xxx xxx

Section 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 taxpayer’s 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.

While petitioner admitted that the Demand Letter (Exhibit E) accompanying the Assessment Notice shows the computation of the alleged deficiency quarterly income tax and the Details of Discrepancy (page 489, BIR records) contained the explanation —

Penalties were imposed since based on the company's trial balance, it resulted to quarterly taxable income and since an annual payment was effected April 15, 1996, the imposition of penalties for non-payment,

still it maintained that the foregoing computation and explanation failed to satisfy the requirement "that the taxpayers shall be notified in writing of the facts and the law upon which the assessment is based".

We do not agree.

As correctly pointed out by the respondent there was substantial compliance with Section 228 because petitioner was able to protest the assessments intelligently, thereby implying that it had actual knowledge of the factual and legal bases of the assessments.

The fact that petitioner was furnished the computation and brief explanation of the how the assessment for deficiency quarterly income tax was arrived at, the requirement under Section 228 of the 1997 Tax Code is deemed complied with. Petitioner was notified of the specific provision of law on which the assessment was based. This is evident in the Details of Discrepancies wherein Sections 75 and 76 (of the 1997 Tax Code) were written. Likewise, petitioner's witness Ms. Sombilon admitted that the basis of the assessment was due to disallowed sum of the years digit method of depreciation used in computing its quarterly income tax as against the straight line method of depreciation used in its financial statement (pages 20–22, TSN, May 26, 2003). And even if petitioner was not furnished of the detailed computation of the deficiency quarterly income tax, the same was discussed with petitioner during the informal conference. The testimony of respondent's witness, Ms. Gaerlan, during the cross-examination conducted by petitioner's counsel supports this finding, viz:

ATTY. CASTRO

Q. During the course of the hearing, you have narrated to the Court the factual basis for the assessment?

MS. GAERLAN

A. Yes.

ATTY. CASTRO

Q. In the Assessment Notice issued to Oceanic Wireless Network, Inc., covering the taxable year 1995, as well as the Demand Letter, did you cite therein the factual as well as the legal basis you have just mentioned in this Court?

MS. GAERLAN

A. Yes, sir, because by (sic) Narrative Report is actually more concise because attached in the docket is my Preliminary Report which was discussed to the taxpayer. (Emphasis supplied; page 32, TSN, November 14, 2001).

The allegation that petitioner failed to receive copy of the detailed computation of the penalties for the quarterly income tax assessment (Exhibit 8) carries little consideration by the court. It is sufficient that petitioner was informed of the reason why the said assessment was issued. Clearly, petitioner was informed of the factual and legal bases on which the assessment for deficiency quarterly income tax was based. It bears stressing that the purpose of Section 228 of the National Internal Revenue Code of 1997 in requiring that "(t)he taxpayer be informed of the law and facts on which assessment is made" is to give the taxpayer the opportunity to refute the findings of the examiner and give a more accurate and detailed explanation regarding the proposed assessment(s) (Belle Corporation vs. Commissioner of Internal Revenue, CTA Case No. 5930, April 4, 2002). The purpose of the said law having been served in the instant case, Section 228 of the National Internal Revenue Code of 1997 is deemed to have been complied with. Therefore, the assessment for deficiency quarterly income tax is not null and void.

At this point, this court finds it judicious to no longer proceed to the merits of the disputed assessments. For we have noted that the assessments issued against the petitioner were already final, executory and demandable based on Section 228 of the 1997 Tax Code.

Under paragraph 5 of the Joint Stipulation of Facts, the following fact was stipulated:

5. Respondent, as of April 12, 2000, which is the one hundredth and eightieth (180th) day from the date the Petitioner had filed its supporting documents, had not yet arrived at a final decision on the protest filed by Petitioner against the validity of the alleged deficiency tax assessment, as stated in Section 228 of the NIRC, as amended. (Emphasis supplied).

But nowhere in the entire records of the case do we find the supporting documents allegedly submitted by petitioner. On the contrary Ms. Gaerlan, the revenue examiner who conducted the investigation, reported that petitioner did not present documentary evidence (page 523, BIR records). To quote:

December 13, 1999

MEMORANDUM TO:

The Collection Unit

Revenue District No. 47

East Makati, Makati City

Returned to the Collection Unit of this District, Revenue District Office No. 47-East Makati the herein docket relative to the request for reinvestigation of OCEANIC WIRELESS NETWORK, INC. of 3rd Floor Electra House Bld., Esteban St., Legaspi Village, Makati City for the year 1995 with deficiency taxes in the total amount of P9,145,345.96 for the enforcement or collection since subject taxpayer failed to present documentary evidences to protest the said tax deficiencies. (Emphasis supplied).

(SGD.) JOSEPHINE M. GAERLAN

Revenue Officer II

NOTED BY:

(SGD.) EMILIA C. COMBES

Group Supervisor

The above report contradicts the facts stipulated by petitioner and (then) respondent's counsels. To reiterate, we do not find any evidence or letter that will prove said submission of supporting documents by the petitioner. A formal judicial stipulation as to the facts is conclusive between the parties as long as it stands and such facts are not subject to contradiction by showing the facts to be otherwise than as agreed upon. However, the binding effect of the facts applies only to the parties in agreement; it is no more binding on the court than any other evidence in the case (Ireland vs. Stalaum, 162 Neb. 630, 77 N.W. 2d 155 [1956] cited in Ricardo J. Francisco, Evidence Rules of Court in the Philippines, 3rd Edition [1996], page 35). Admissions made by the parties during a pre-trial conference and incorporated in the pre-trial order are binding. This rule, however, is not without exceptions. If, in order to prevent manifest injustice, the admissions made by the parties during the pre-trial may be disregarded by the court (Sese vs. Intermediate Appellate Court, G.R. 66186, July 31, 1987).

Let it be stressed once again that taxes are the lifeblood of the government. Petitioner having failed to comply with the requirement of the law in disputing an assessment, the same became final, executory and demandable. The law is quite clear on this matter:

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 pre-assessment notice shall not be required in the following cases:

xxx xxx xxx

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 appeals 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.

Undoubtedly, a taxpayer has sixty (60) days from the filing of the protest to submit the relevant documents to support its protest, otherwise, the assessment becomes final. Within one hundred eighty (180) days from the submission of the relevant documents, the respondent should act on the protest. If the respondent rendered his decision within the period or failed to act on it, the remedy of the taxpayer is to file within thirty (30) days from the receipt of the decision or from the lapse of one hundred eighty

(180) days, an appeal to this court, otherwise, the assessment will become final, executory and demandable.

In the case at bar, petitioner failed to submit supporting documents contrary to what was jointly stipulated by the parties. Hence, the reckoning of the one hundred eighty (180)-day period would be the day the protest was filed, i.e., on August 16, 1999. However, respondent failed to render his decision within the one hundred eighty (180) days or until February 12, 2000. As already discussed, the remedy of petitioner was to file within thirty (30) days therefrom an appeal with this court which would be until March 14, 2000. But since the Petition for Review was filed only on May 12, 2000, the same was definitely filed beyond the date prescribed by law.

IN VIEW OF THE FOREGOING, the Petition for Review is hereby DISMISSED for being filed out of time.

G.R. No. L-9692             January 6, 1958

COLLECTOR OF INTERNAL REVENUE, petitioner, vs.BATANGAS TRANSPORTATION COMPANY and LAGUNA-TAYABAS BUS COMPANY, respondents.

Office of the Solicitor General Ambrosio Padilla, Solicitor Conrado T. Limcaoco and Zoilo R. Zandoval for petitioner.Ozaeta, Lichauco and Picazo for respondents.

MONTEMAYOR, J.:

This is an appeal from the decision of the Court of Tax Appeals (C.T.A.), which reversed the assessment and decision of petitioner Collector of Internal Revenue, later referred to as Collector, assessing and demanding from the respondents Batangas Transportation Company, later referred to as Batangas Transportation, and Laguna-Tayabas Bus Company, later referred to as Laguna Bus, the amount of P54,143.54, supposed to represent the deficiency income tax and compromise for the years 1946 to 1949, inclusive, which amount, pending appeal in the C.T.A., but before the Collector filed his answer in said court, was increased to P148,890.14.

The following facts are undisputed: Respondent companies are two distinct and separate corporations engaged in the business of land transportation by means of motor buses, and operating distinct and separate lines. Batangas Transportation was organized in 1918, while Laguna Bus was organized in 1928. Each company now has a fully paid up capital of Pl,000,000. Before the last war, each company maintained separate head offices, that of Batangas Transportation in Batangas, Batangas, while the Laguna Bus had its head office in San Pablo Laguna. Each company also kept and maintained separate books, fleets of buses, management, personnel, maintenance and repair shops, and other facilities. Joseph Benedict managed the Batangas Transportation, while Martin Olson was the manager of the Laguna Bus. To show the connection and close relation between the two companies, it should be stated that Max Blouse

was the President of both corporations and owned about 30 per cent of the stock in each company. During the war, the American officials of these two corporations were interned in Santo Tomas, and said companies ceased operations. They also lost their respective properties and equipment. After Liberation, sometime in April, 1945, the two companies were able to acquire 56 auto buses from the United States Army, and the two companies diveded said equipment equally between themselves,registering the same separately in their respective names. In March, 1947, after the resignation of Martin Olson as Manager of the Laguna Bus, Joseph Benedict, who was then managing the Batangas Transportation, was appointed Manager of both companies by their respective Board of Directors. The head office of the Laguna Bus in San Pablo City was made the main office of both corporations. The placing of the two companies under one sole mangement was made by Max Blouse, President of both companies, by virtue of the authority granted him by resolution of the Board of Directors of the Laguna Bus on August 10, 1945, and ratified by the Boards of the two companies in their respective resolutions of October 27, 1947.

According to the testimony of joint Manager Joseph Benedict, the purpose of the joint management, which was called, "Joint Emergency Operation", was to economize in overhead expenses; that by means of said joint operation, both companies had been able to save the salaries of one manager, one assistant manager, fifteen inspectors, special agents, and one set of office of clerical force, the savings in one year amounting to about P200,000 or about P100,000 for each company. At the end of each calendar year, all gross receipts and expenses of both companies were determined and the net profits were divided fifty-fifty, and transferred to the book of accounts of each company, and each company "then prepared its own income tax return from this fifty per centum of the gross receipts and expenditures, assets and liabilities thus transferred to it from the `Joint Emergency Operation' and paid the corresponding income taxes thereon separately".

Under the theory that the two companies had pooled their resources in the establishment of the Joint Emergency Operation, thereby forming a joint venture, the Collector wrote the bus companies that there was due from them the amount of P422,210.89 as deficiency income tax and compromise for the years 1946 to 1949, inclusive. Since the Collector caused to be restrained, seized, and advertized for sale all the rolling stock of the two corporations, respondent companies had to file a surety bond in the same amount of P422,210.89 to guarantee the payment of the income tax assessed by him.

After some exchange of communications between the parties, the Collector, on January 8, 1955, informed the respondents "that after crediting the overpayment made by them of their alleged income tax liabilities for the aforesaid years, pursuant to the doctrine of equitable recoupment, the income tax due from the `Joint Emergency Operation' for the years 1946 to 1949, inclusive, is in the total amount of P54,143.54." The respondent companies appealed from said assessment of P54,143.54 to the Court of Tax Appeals, but before filing his answer, the Collector set aside his original assessment of P54,143.54 and reassessed the alleged income tax liability of respondents of P148,890.14, claiming that he had later discovered that said companies had been "erroneously credited in the last assessment with 100 per cent of their income taxes paid when they should in fact have been credited with only 75 per cent thereof, since under Section 24 of the Tax Code dividends received by them from the Joint Operation as a domestic corporation are

returnable to the extent of 25 per cent". That corrected and increased reassessment was embodied in the answer filed by the Collector with the Court of Tax Appeals.

The theory of the Collector is the Joint Emergency Operation was a corporation distinct from the two respondent companies, as defined in section 84 (b), and so liable to income tax under section 24, both of the National Internal Revenue Code. After hearing, the C.T.A. found and held, citing authorities, that the Joint Emergency Operation or joint management of the two companies "is not a corporation within the contemplation of section 84 (b) of the National Internal Revenue Code much less a partnership, association or insurance company", and therefore was not subject to the income tax under the provisions of section 24 of the same Code, separately and independently of respondent companies; so, it reversed the decision of the Collector assessing and demanding from the two companies the payment of the amount of P54,143.54 and/or the amount of P148,890.14. The Tax Court did not pass upon the question of whether or not in the appeal taken to it by respondent companies, the Collector could change his original assessment by increasing the same from P54,143.14 to P148,890.14, to correct an error committed by him in having credited the Joint Emergency Operation, totally or 100 per cent of the income taxes paid by the respondent companies for the years 1946 to 1949, inclusive, by reason of the principle of equitable recoupment, instead of only 75 per cent.

The two main and most important questions involved in the present appeal are: (1) whether the two transportation companies herein involved are liable to the payment of income tax as a corporation on the theory that the Joint Emergency Operation organized and operated by them is a corporation within the meaning of Section 84 of the Revised Internal Revenue Code, and (2) whether the Collector of Internal Revenue, after the appeal from his decision has been perfected, and after the Court of Tax Appeals has acquired jurisdiction over the same, but before said Collector has filed his answer with that court, may still modify his assessment subject of the appeal by increasing the same, on the ground that he had committed error in good faith in making said appealed assessment.

The first question has already been passed upon and determined by this Tribunal in the case of Eufemia Evangelista et al., vs. Collector of Internal Revenue et al.,* G.R. No. L-9996, promulgated on October 15, 1957. Considering the views and rulings embodied in our decision in that case penned by Mr. Justice Roberto Concepcion, we deem it unnecessary to extensively discuss the point. Briefly, the facts in that case are as follows: The three Evangelista sisters borrowed from their father about P59,000 and adding thereto their own personal funds, bought real properties, such as a lot with improvements for the sum of P100,000 in 1943, parcels of land with a total area of almost P4,000 square meters with improvements thereon for P18,000 in 1944, another lot for P108,000 in the same year, and still another lot for P237,000 in the same year. The relatively large amounts invested may be explained by the fact that purchases were made during the Japanese occupation, apparently in Japanese military notes. In 1945, the sisters appointed their brother to manage their properties, with full power to lease, to collect and receive rents, on default of such payment, to bring suits against the defaulting tenants, to sign all letters and contracts, etc. The properties therein involved were rented to various tenants, and the sisters, through their brother as manager, realized a net rental income of P5,948 in 1945, P7,498 in 1946, and P12,615 in 1948.

In 1954, the Collector of Internal Revenue demanded of them among other things, payment of income tax on corporations from the year 1945 to 1949, in the total amount of P6,157, including surcharge and compromise. Dissatisfied with the said assessment, the three sisters appealed to the Court of Tax Appeals, which court decided in favor of the Collector of Internal Revenue. On appeal to us, we affirmed the decision of the Tax Court. We found and held that considering all the facts and circumstances sorrounding the case, the three sisters had the purpose to engage in real estate transactions for monetary gain and then divide the same among themselves; that they contributed to a common fund which they invested in a series of transactions; that the properties bought with this common fund had been under the management of one person with full power to lease, to collect rents, issue receipts, bring suits, sign letters and contracts, etc., in such a manner that the affairs relative to said properties have been handled as if the same belonged to a corporation or business enterprise operated for profit; and that the said sisters had the intention to constitute a partnership within the meaning of the tax law. Said sisters in their appeal insisted that they were mere co-owners, not co-partners, for the reason that their acts did not create a personality independent of them, and that some of the characteristics of partnerships were absent, but we held that when the Tax Code includes "partnerships" among the entities subject to the tax on corporations, it must refer to organizations which are not necessarily partnerships in the technical sense of the term, and that furthermore, said law defined the term "corporation" as including partnerships no matter how created or organized, thereby indicating that "a joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporations"; that besides, said section 84 (b) provides that the term "corporation" includes "joint accounts" (cuentas en participacion) and "associations", none of which has a legal personality independent of that of its members. The decision cites 7A Merten's Law of Federal Income Taxation.

In the present case, the two companies contributed money to a common fund to pay the sole general manager, the accounts and office personnel attached to the office of said manager, as well as for the maintenance and operation of a common maintenance and repair shop. Said common fund was also used to buy spare parts, and equipment for both companies, including tires. Said common fund was also used to pay all the salaries of the personnel of both companies, such as drivers, conductors, helpers and mechanics, and at the end of each year, the gross income or receipts of both companies were merged, and after deducting therefrom the gross expenses of the two companies, also merged, the net income was determined and divided equally between them, wholly and utterly disregarding the expenses incurred in the maintenance and operation of each company and of the individual income of said companies.

From the standpoint of the income tax law, this procedure and practice of determining the net income of each company was arbitrary and unwarranted, disregarding as it did the real facts in the case. There can be no question that the receipts and gross expenses of two, distinct and separate companies operating different lines and in some cases, different territories, and different equipment and personnel at least in value and in the amount of salaries, can at the end of each year be equal or even approach equality. Those familiar with the operation of the business of land transportation can readily see that there are many factors that enter into said operation. Much depends upon the number of lines operated and the length of each line, including the number of trips made each day. Some lines are profitable, others break above even, while still

others are operated at a loss, at least for a time, depending, of course, upon the volume of traffic, both passenger and freight. In some lines, the operator may enjoy a more or less exclusive exclusive operation, while in others, the competition is intense, sometimes even what they call "cutthroat competition". Sometimes, the operator is involved in litigation, not only as the result of money claims based on physical injuries ar deaths occassioned by accidents or collisions, but litigations before the Public Service Commission, initiated by the operator itself to acquire new lines or additional service and equipment on the lines already existing, or litigations forced upon said operator by its competitors. Said litigation causes expense to the operator. At other times, operator is denounced by competitors before the Public Service Commission for violation of its franchise or franchises, for making unauthorized trips, for temporary abandonement of said lines or of scheduled trips, etc. In view of this, and considering that the Batangas Transportation and the Laguna Bus operated different lines, sometimes in different provinces or territories, under different franchises, with different equipment and personnel, it cannot possibly be true and correct to say that the end of each year, the gross receipts and income in the gross expenses of two companies are exactly the same for purposes of the payment of income tax. What was actually done in this case was that, although no legal personality may have been created by the Joint Emergency Operation, nevertheless, said Joint Emergency Operation joint venture, or joint management operated the business affairs of the two companies as though they constituted a single entity, company or partnership, thereby obtaining substantial economy and profits in the operation.

For the foregoing reasons, and in the light of our ruling in the Evangelista vs. Collector of Internal Revenue case, supra, we believe and hold that the Joint Emergency Operation or sole management or joint venture in this case falls under the provisions of section 84 (b) of the Internal Revenue Code, and consequently, it is liable to income tax provided for in section 24 of the same code.

The second important question to determine is whether or not the Collector of Internal Revenue, after appeal from his decision to the Court of Tax Appeals has been perfected, and after the Tax Court Appeals has acquired jurisdiction over the appeal, but before the Collector has filed his answer with the court, may still modify his assessment, subject of the appeal, by increasing the same. This legal point, interesting and vital to the interests of both the Government and the taxpayer, provoked considerable discussion among the members of this Tribunal, a minority of which the writer of this opinion forms part, maintaining that for the information and guidance of the taxpayer, there should be a definite and final assessment on which he can base his decision whether or not to appeal; that when the assessment is appealed by the taxpayer to the Court of Tax Appeals, the collector loses control and jurisdiction over the same, the jurisdiction being transferred automatically to the Tax Court, which has exclusive appellate jurisdiction over the same; that the jurisdiction of the Tax Court is not revisory but only appellate, and therefore, it can act only upon the amount of assessment subject of the appeal to determine whether it is valid and correct from the standpoint of the taxpayer-appellant; that the Tax Court may only correct errors committed by the Collector against the taxpayer, but not those committed in his favor, unless the Government itself is also an appellant; and that unless this be the rule, the Collector of Internal Revenue and his agents may not exercise due care, prudence and pay too much attention in making tax assessments, knowing that they can at any time correct any error committed by them even when due to negligence, carelessness or gross mistake in the interpretation or

application of the tax law, by increasing the assessment, naturally to the prejudice of the taxpayer who would not know when his tax liability has been completely and definitely met and complied with, this knowledge being necessary for the wise and proper conduct and operation of his business; and that lastly, while in the United States of America, on appeal from the decision of the Commissioner of Internal Revenue to the Board or Court of Tax Appeals, the Commissioner may still amend or modify his assessment, even increasing the same the law in that jurisdiction expressly authorizes the Board or Court of Tax Appeals to redetermine and revise the assessment appealed to it.

The majority, however, holds, not without valid arguments and reasons, that the Government is not bound by the errors committed by its agents and tax collectors in making tax assessments, specially when due to a misinterpretation or application of the tax laws, more so when done in good faith; that the tax laws provide for a prescriptive period within which the tax collectors may make assessments and reassessments in order to collect all the taxes due to the Government, and that if the Collector of Internal Revenue is not allowed to amend his assessment before the Court of Tax Appeals, and since he may make a subsequent reassessment to collect additional sums within the same subject of his original assessment, provided it is done within the prescriptive period, that would lead to multiplicity of suits which the law does not encourage; that since the Collector of Internal Revenue, in modifying his assessment, may not only increase the same, but may also reduce it, if he finds that he has committed an error against the taxpayer, and may even make refunds of amounts erroneously and illegally collected, the taxpayer is not prejudiced; that the hearing before the Court of Tax Appeals partakes of a trial de novo and the Tax Court is authorized to receive evidence, summon witnesses, and give both parties, the Government and the taxpayer, opportunity to present and argue their sides, so that the true and correct amount of the tax to be collected, may be determined and decided, whether resulting in the increase or reduction of the assessment appealed to it. The result is that the ruling and doctrine now being laid by this Court is, that pending appeal before the Court of Tax Appeals, the Collector of Internal Revenue may still amend his appealed assessment, as he has done in the present case.

There is a third question raised in the appeal before the Tax Court and before this Tribunal, namely, the liability of the two respondent transportation companies for 25 per cent surcharge due to their failure to file an income tax return for the Joint Emergency Operation, which we hold to be a corporation within the meaning of the Tax Code. We understand that said 25 per cent surcharge is included in the assessment of P148,890.14. The surcharge is being imposed by the Collector under the provisions of Section 72 of the Tax Code, which read as follows:

The Collector of Internal Revenue shall assess all income taxes. In case of willful neglect to file the return or list within the time prescribed by law, or in case a false or fraudulent return or list is willfully made the collector of internal revenue shall add to the tax or to the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud, a surcharge of fifty per centum of the amount of such tax or deficiency tax. In case of any failure to make and file a return list within the time prescribed by law or by the Collector or other internal revenue officer, not due to willful neglect, the Collector, shall add to the tax twenty-five per centum of its amount, except that, when the return is voluntarily and without notice from the Collector or other officer filed after such time, it is shown that the failure was due to a reasonable cause, no such

addition shall be made to the tax. The amount so added to any tax shall be collected at the same time in the same manner and as part of the tax unless the tax has been paid before the discovery of the neglect, falsity, or fraud, in which case the amount so added shall be collected in the same manner as the tax.

We are satisfied that the failure to file an income tax return for the Joint Emergency Operation was due to a reasonable cause, the honest belief of respondent companies that there was no such corporation within the meaning of the Tax Code, and that their separate income tax return was sufficient compliance with the law. That this belief was not entirely without foundation and that it was entertained in good faith, is shown by the fact that the Court of Tax Appeals itself subscribed to the idea that the Joint Emergency Operation was not a corporation, and so sustained the contention of respondents. Furthermore, there are authorities to the effect that belief in good faith, on advice of reputable tax accountants and attorneys, that a corporation was not a personal holding company taxable as such constitutes "reasonable cause" for failure to file holding company surtax returns, and that in such a case, the imposition of penalties for failure to file holding company surtax returns, and that in such a case, the imposition of penalties for failure to file return is not warranted1

In view of the foregoing, and with the reversal of the appealed decision of the Court of Tax Appeals, judgment is hereby rendered, holding that the Joint Emergency Operation involved in the present is a corporation within the meaning of section 84 (b) of the Internal Revenue Code, and so is liable to incom tax under section 24 of the code; that pending appeal in the Court of Tax Appeals of an assessment made by the Collector of Internal Revenue, the Collector, pending hearing before said court, may amend his appealed assessment and include the amendment in his answer before the court, and the latter may on the basis of the evidence presented before it, redetermine the assessment; that where the failure to file an income tax return for and in behalf of an entity which is later found to be a corporation within the meaning of section 84 (b) of the Tax Code was due to a reasonable cause, such as an honest belief based on the advice of its attorneys and accountants, a penalty in the form of a surcharge should not be imposed and collected. The respondents are therefore ordered to pay the amount of the reassessment made by the Collector of Internal Revenue before the Tax Court, minus the amount of 25 per cent surcharge. No costs.

[C.T.A. CASE NO. 5777. January 4, 2000.]

LASCONA LAND CO., INC., petitioner, vs. COMMISSIONER OF INTERNAL REVENUE and NORBERTO R. ODULIO, Regional Director, Revenue Region No. 8, Makati City, BUREAU OF INTERNAL REVENUE, respondent.

D E C I S I O N

This is an appeal from the letter dated March 3, 1999 of the OIC, Regional Director of Revenue Region No. 8, Makati City, denying Petitioner's request to cancel or set aside the assessment notice issued by

the Bureau of Internal Revenue and demanding payment of the sum of P753,266.56 representing Petitioner's 1993 deficiency income tax liability. LexLib

The facts of the case are not disputed.

On March 27, 1998, the Commissioner issued Assessment Notice No. 0000047-93-407 against Petitioner for alleged deficiency income tax, surcharge, interest and compromise penalty for the year 1993 in the amount of P753,266.56, resulting from the disallowance of certain items claimed by Petitioner as deductions from its gross income specifically taxes and licenses in the amount of P323,600.00 and interest expense in the amount of P618,525.99. Petitioner received a copy of the said assessment on April 1, 1998 and protested the same on April 20, 1998.

Through a letter dated March 3, 1999 and received by Petitioner on March 12, 1999, Respondent informed Petitioner that while they agree with the arguments advanced in the latter's letter of protest, they cannot give due course to its request to cancel or set aside the assessment notice since the case was not elevated to the Court of Tax Appeals as mandated by the provisions of the last paragraph of Section 228 of the Tax Reform Act of 1997. This, according to Respondent, rendered the assessment notice final, executory and demandable. cdlex

On April 12, 1999, the instant Petition for Review was filed.

In his Answer, Respondent raised the following Special and Affirmative Defenses:

"7. The Respondent's letter dated March 3, 1999 considering the 1993 deficiency income tax assessment, dated March 27, 1998, as final, executory and demandable, was issued pursuant to the provision of Section 228 of the NIRC;

8. The pertinent provision of Section 228 provides:

"Section 228. Protesting of Assessment. — . . .

xxx xxx xxx

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 protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. Cdpr

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 said decision, or from the lapse of one hundred eighty (180) day period; otherwise, the decision shall become final, executory and demandable."

9. Applying the foregoing provision of the Tax Code to the undisputed facts of the case at bar, Petitioner has 60 days from April 20, 1998, the date it filed a protest against the subject assessment or until June 19, 1998 within which to submit all relevant documents to support its protest. Thereafter, the BIR has 180 days from June 19, 1998 or until December 17, 1998 within which to rule on the protest.

Petitioner then has 30 days from December 17, 1998 or until January 16, 1999 within which to appeal to the Court of Tax Appeals.

10. Clearly, the subject 1993 deficiency income tax assessments has already become final, executory and demandable. cdphil

11. We find no merit to Petitioner's interpretation of the provision of Section 228 of the NIRC that ". . . a taxpayer has the choice on whether it should appeal or wait for a decision by the Commissioner if the latter fails to act on the protest within the 180-days period . . ." (par. 13 of the petition); and the subsequent phrase ". . . otherwise, the decision shall become final, executory and demandable, which clearly contemplates an actual decision being rendered and become final . . ." (par. 14 of the Petition). To concur with the aforequoted construction would render useless the 180-day rule mandating the BIR to decide on the administrative appeal."

Both parties agree that there is only one issue involved: whether or not the assessment has become final, executory and demandable because of the failure of Petitioner to appeal to this Court within thirty (30) days from the lapse of the one hundred eighty-day period mentioned in Section 228 of the Tax Reform Act of 1997.

For easy reference, the pertinent provisions of the above-mentioned Section 228 are hereby reproduced:

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: . . . cdtai

xxx xxx xxx

The taxpayers 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 affected 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."

Petitioner argues that its failure to appeal to the Court of Tax Appeals within thirty (30) days from the lapse of the 180-day period mentioned in the aforequoted Section 228 did not make the assessment final and executory simply because Respondent did not act upon the protest within the 180-day period. In such a situation, Petitioner contends that it had the option to appeal to the Court of Tax Appeals or to continue with the proceedings on its protest in the administrative level. Petitioner added however that once a decision is rendered by the Commissioner on the protest, the 30-day period to appeal from receipt of the decision is mandatory and this is precisely what Petitioner did. LexLib

In reaching the foregoing conclusion, Petitioner interprets the last paragraph of Section 228 as contemplating two situations. In the first situation, the Commissioner denies, in whole or in part, the protest filed by the taxpayer, while in the second situation, the Commissioner did not act upon the protest of the disputed assessment within one hundred eighty (180) days from the submission of all the documents relative to the protest. Petitioner maintains that if either of these two events occur, Section 228 of the Tax Code provides that the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from the occurrence of any of the two events.

As such, according to Petitioner, the Legislature uses its words "advisedly." It specifically refers to a "decision" as distinguished from the "inaction" of the Commissioner. However, it is only the decision not appealed by the taxpayer that becomes final, executory and demandable and not the fact of the inaction of Respondent on the protest within the 180 day period.

From the foregoing, Petitioner concludes that it is very evident that the precise wording of Section 228 of the Tax Code leaves no room for interpretation beyond the clear and unmistakable language employed in the provision.

On the other hand, Respondent firmly believes that the subject 1993 deficiency income tax assessments dated March 27, 1998, has already become final, executory and demandable for Petitioner's failure to elevate its case to this Court within the period provided for under the said Section 228 of the Tax Code. Respondent disagrees with the Petitioner that a "taxpayer has the choice on whether it should appeal or wait for a decision by the Commissioner if the latter fails to act on the protest within the 180-day period". Such interpretation, according to Respondent, would render useless the 180-day rule mandating the BIR to decide on the administrative appeal.

We rule in favor of the Petitioner. cdtai

The wordings of Section 228 of the Tax Code clearly provide that it is only the decision not appealed by the taxpayer that becomes final, executory and demandable. Otherwise, the authors of the law could have easily included the word assessment as also becoming final, executory and demandable should the

BIR fail to act on the protest within 180 days. As aptly cited by Petitioner, in Commissioner of Internal Revenue vs. Villa, 22 SCRA 3, the Supreme Court held:

"The word 'decisions' in paragraph 1, Section 7 of Republic Act 1125, quoted above, has been interpreted to mean the decisions of the Commissioner of Internal Revenue on the protest of the taxpayer against the assessments. Definitely, said word does not signify the assessment itself. We quote what this Court said aptly in a previous case:

"In the first place, we believe the respondent court erred in holding that the assessment in question is the respondent Collector's decision or ruling appealable to it, and that consequently, the period of thirty days prescribed by section 11 of Republic Act No. 1125 within which petitioner should have appealed to the respondent court must be counted from its receipt of said assessment. Where a taxpayer questions an assessment and asks the Collector to reconsider or cancel the same because he (the taxpayer) believes he is not liable therefor, the assessment becomes a 'disputed assessment' that the Collector must decide, and the taxpayer can appeal to the Court of Tax Appeals only upon receipt of the decision of the Collector on the disputed assessment, . . ." cda

The same interpretation finds support in Section 11 of Republic Act 1125, which states:

"Section 11. Who may appeal; effect of appeal. — Any person, association or corporation adversely affected by a decision or ruling of the Collector of Internal Revenue, the Collector of Customs or any provincial or city Board of Assessment Appeals may file an appeal in the Court of Tax Appeals within thirty days after the receipt of such decision or ruling."

Note that the law uses the word 'decisions', not 'assessments', thus further indicating the legislative intention to subject to judicial review the decision of the Commissioner on the protest against an assessment but not the assessment itself."

Verily, in cases of inaction, Section 228 of the Tax Code merely gave the taxpayer an option: first, he may appeal to the Court of Tax Appeals within thirty (30) days from the lapse of the one hundred eighty (180) day period provided for under the said section, or second, he may wait until the Commissioner decides on his protest before he elevates his case. This Court believes that the taxpayer was given this option so that in case his protest is not acted upon within the 180-day period, he may be able to seek immediate relief and need not wait for an indefinite period of time for the Commissioner to decide. But if he chooses to wait for a positive action on the part of the Commissioner, then the same could not result in the assessment becoming final, executory and demandable. cdrep

We agree with Petitioner that to adopt the interpretation of Respondent will not only sanction inefficiency, but will likewise condone the Bureau's inaction. This is especially true in the instant case when despite the fact that Respondent found Petitioner's arguments to be in order, the assessment will become final, executory and demandable for Petitioner's failure to appeal before Us within the thirty (30) day period.

WHEREFORE, in the light of all the foregoing, the Court finds the instant petition meritorious. ACCORDINGLY, the collection letter issued by the Respondent dated March 3, 1999 ordering Petitioner to pay its 1993 deficiency income tax liability in the amount of P753,266.56 is considered WITHDRAWN and of NO EFFECT.

SO ORDERED.

G.R. No. 168498             April 24, 2007

RIZAL COMMERCIAL BANKING CORPORATION, Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

R E S O L U T I O N

YNARES-SANTIAGO, J.:

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.

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 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.

In our Decision, we held that:

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 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:

Sec. 7. Jurisdiction. — The CTA shall exercise:

(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 Appeals6 state:

RULE 4Jurisdiction of the Court

x x x 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 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;

x x x x

RULE 8Procedure in Civil Cases

x x x x

SECTION 3. Who May Appeal; Period to File Petition. — (a) A party adversely affected 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 180-day 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 offensive to the basic rules of fair play, justice and due process.9 This last ditch effort 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.

G.R. No. L-21731             March 31, 1966

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant, vs.LIM TIAN TENG SONS and CO., INC., defendant-appellant.

Office of the Solicitor General for the plaintiff-appellant.P. B. Uy Calderon for the defendant-appellee.

BENGZON, J.P., J.:

Lim Tian Teng Sons & Co., Inc., a domestic corporation with principal office in Cebu City, engaged in 1951 and 1952, among others, in the exportation of copra. The copra was weighed before shipment in the port of departure and upon arrival in the port of destination. The weight before shipment was called copra outturn. To allow for lose in weight due to shrinkage, said exporter collected only 95% of the amount appearing in the letter of credit covering every copra outturn. The 5% balance remained outstanding until final liquidation and adjustment.

On March 30, 1953 Lim Tian Teng Sons & Co., Inc. filed its income tax return for 1952 based on accrued income and expenses. Its return showed a loss of P56,109.98. It took up as part of the beginning inventory for 1952 the copra outturn shipped in 1951 in the sum of P95,500.00 already partially collected, as part of its outstanding stock as of December 31, 1951.

In the audit and examination of taxpayer's 1952 income tax return, the Collector of Internal Revenue eliminated the P95,500.00 outturn from the beginning inventory for 1952 and considered it as accrued income for 1951. This increased taxpayer's 1952 net income by P95,500.00 which, considering disallowances in the sum of P9,980.85, raised the taxpayer's net taxable income for 1952 to P50,370.87. Accordingly, in a letter dated January 16, 1957 (Exhibit C), received by Lim Tian Teng Sons & Co., Inc. on January 30, 1957, the Collector of Internal Revenue assessed a deficiency income tax of P10,074.00 and 50% surcharge thereon amounting to P5,037.00 and demanded payment thereof not later than February 15, 1957.

On January 31, 1957 Lim Tian Teng Sons & Co., Inc. requested reinvestigation of its 1952 income tax liability. The Collector of Internal Revenue did not reply; instead, he referred the case to the Solicitor General for collection by judicial action.

On September 20, 1957 the Solicitor General demanded from Lim Tian Teng Sons & Co., Inc. the payment of P15,111.50 within five days, stating that otherwise judicial action would be instituted without further notice. In a letter dated October 5, 1957, received by the Collector of Internal Revenue on October 7, 1957, Lim Tian Teng Sons & Co., Inc. reiterated its request for reinvestigation. It also wrote the Solicitor General on October 8, 1957 requesting that it be allowed to present its explanation together with supporting papers relative to its income tax liability. The Solicitor General transmitted the letter to the Collection of Internal Revenue. Thereupon, the Deputy Collector of Internal Revenue, by his letter dated October 16, 1957, informed the taxpayer that its request for reinvestigation would be granted provided it executed within ten days a waiver of the statute of limitations as required in General Circular V-258 dated August 20, 1957. In his letter dated December 10, 1957, the Deputy Collector of Internal Revenue extended the period within which to execute and file with him the waiver of the statute of limitations to December 31, 1957, but advised that if no waiver is forthcoming on or before said date, judicial action for collection would be instituted without further notice. Receipt of this letter is denied by appellant company.

As Lim Tian Teng Sons & Co., Inc. failed to file a waiver of the statute of limitations, the Collector of Internal Revenue instituted eight months after, specifically on September 2, 1958, an action in the Court of First Instance of Cebu for the collection of deficiency income tax.

After hearing the parties, the court below rendered the following judgment.

IN VIEW OF THE FOREGOING, judgment is hereby rendered, declaring the assessment (Exh. D, D-1) of income tax in the sum of P15,111.00 due from the defendant to the plaintiff for the year 1952 valid, final and executory; condemning the defendant to pay the same to the plaintiff with interest at one (1) per centum monthly from October 28, 1957 until fully paid.

With costs against the defendant.

IT IS SO ORDERED.

Not satisfied with the decision, the Collector of Internal Revenue moved for its reconsideration on the ground that it did not include the 5% surcharge for late payment of tax. The motion was denied for the reason that the taxpayer has already been ordered to pay a surcharge of 50%.

Both parties appealed, raising only questions of law.

Plaintiff cites as errors the non-imposition of the 5% surcharge for the late payment of tax and the computation of delinquency interest from October 8, 1957.

Defendant, on the other hand, assails the jurisdiction of the lower court, its finding that the assessment in question has become final and executory, the correctness of the assessment and the imposition of the 50% surcharge.1äwphï1.ñët

We will discuss first the taxpayer's appeal. It maintains that the lower court has no jurisdiction to entertain this case on the ground that the Collector of Internal Revenue has not yet issued his final decision on its requests for reinvestigation. The taxpayer's stand is that final decision of the Collector of Internal Revenue on the disputed assessment is a condition precedent to the filing of an action in the Court of First Instance for the collection of a tax. This argument has no merit. The Collector of Internal Revenue is authorized to collect delinquent internal revenue taxes either by distraint and levy or by judicial action or both simultaneously.1 The only requisite before he can collect the tax is that he must first assess the same within the time fixed by law.2 And in the case of a false or fraudulent return with intent to evade the tax or of a failure to file a return, a proceeding in court for the collection of such tax may be begun without assessment.3

Nowhere in the Tax Code is the Collector of Internal Revenue required to rule first on a taxpayer's request for reinvestigation before he can go to court for the purpose of collecting the tax assessed. On the contrary, Section 305 of the same Code withholds from all courts, except the Court of Tax Appeals under Section 11 of Republic Act 1125, the authority to restrain the collection of any national internal-revenue tax, fee or charge, thereby indicating the legislative policy to allow the Collector of Internal Revenue much latitude in the speedy and prompt collection of taxes. The reason is obvious. It is upon taxation that the government chiefly relies to obtain the means the carry on its operations, and it is of the utmost importance that the modes adopted to enforce collection of taxes levied should be summary and interfered with as little as possible. No government could exist if all litigants were permitted to delay the collection of its taxes.4

Moreover, before the creation of the Court of Tax Appeals the remedy of a taxpayer who desired to contest an assessment issued, by the Collector of Internal Revenue was to pay the tax and bring an action in the ordinary courts for its recovery pursuant to Section 306 of the Code.5 Collection or payment of the tax was not made, to, wait until after the Collector of Internal Revenue has resolved all issues raised by the taxpayer against an assessment. Republic Act 1125 creating the Court of Appeals allows the taxpayer to dispute the correctness legality of an assessment both in the purely administrative level and in said court, but it does not stop the Collector of Internal Revenue from collecting the tax through any of the means provided for in Section 316 of the Tax Code, except when enjoined by said Court of Tax Appeals. Section 11 of Republic Act 1125 states in part:

No appeal taken to the Court of Tax Appeals from the decision of the Collector of Internal Revenue ... shall suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the satisfaction of his tax liability as provided by existing law: Provided, however, That when in the opinion of the Court the collection by the Bureau of Internal Revenue or the Commissioner of Customs may jeopardize the interest of the Government and/or the taxpayer the Court at any stage of the proceeding may suspend the said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court.

We will now resolve the issue of whether or not the court a quo erred in considering as final and executory the assessment contained in the letter of the Collector of Internal Revenue dated January 16, 1957. As stated, defendant received said assessment on January 30, 1957 and on the following day requested reinvestigation of its tax liability. The Collector of Internal Revenue however did not reply to the request for reinvestigation. Instead, he referred the case to the Solicitor General for collection of the tax. The lower court interpreted this action of the Collector of Internal Revenue as a denial of defendant's request for reinvestigation.

Said court, to our mind, committed no error. For what is more indicative of the Collector's decision against reinvestigation than his insistence to collect the tax? This decision was communicated to defendant in a letter dated September 20, 1957 of the office of the Solicitor General which must have been received by defendant not later than October 8, 1957 for on said date it acknowledged receipt thereof. It had thirty days from October 8, 1957 within which to appeal to the Court of Tax Appeals pursuant to Section 11 of Republic Act 1125.6 Instead of appealing to the Tax Court, however, the defendant herein in a letter dated October 8, 1957 reiterated its request for reinvestigation.

On October 15, 1957 the Collector of Internal Revenue wrote defendant that its "request for a reinvestigation will be granted only upon compliance with General Circular No. V-258 dated August 20, 1957, which requires as a prerequisite to the grant of a reinvestigation the execution of a waiver of the statute of limitations". In a subsequent letter, he extended the period within which to submit the aforesaid waiver to December 31, 1957.

In effect, the Collector of Internal Revenue placed in the hands of the defendant the holding of a reinvestigation. However, no such reinvestigation was made inasmuch as taxpayer failed to submit a written waiver of the statute of limitations on or before December 31, 1957. Such omission automatically brought about the denial of the request for reinvestigation.

Taxpayer however questions the legality of requiring waiver of the statute of limitations before the grant of reinvestigation as provided for in General Circular No. V-258. This question was not raised in the Bureau of Internal Revenue. Suffice it to say in this connection that General Circular No. V-258 was promulgated pursuant to Section 338 of the Tax Code. The authority thereunder of the Secretary of Finance to issue rules and regulations for the effective enforcement of the provisions of the Tax Code has been sustained by this Court in previous cases.7

Even if we do not count the period from October 8, 1957 (the date when taxpayer received notice of the denial of its request for reinvestigation) to December 31, 1957 (the deadline for the submission of the written waiver of the statute of limitations) in reckoning the 30-day period within which the taxpayer may appeal to the Court of Tax Appeals, said period had long lapsed when the Collector of Internal Revenue filed the complaint in this case on September 2, 1958.

Taxpayer failure to appeal to the Court of Tax Appeals in due time made the assessment in question final, executory and demandable.8 And when the action was instituted on September 2, 1958 to enforce the deficiency assessment in question, it was already barred from disputing the correctness of the assessment or invoking any defense that would reopen the question of his tax

liability on merits.9 Otherwise, the period of thirty days for appeal to the Court of Tax Appeals would make little sense. 10

In a proceeding like this the taxpayer's defenses are similar to those of the defendant in a case for the enforcement of a judgment by judicial action under Section 6 of Rule 39 of the Rules of Court. No inquiry can be made therein as to the merits of the original case or the justness of the judgment relied upon, other than by evidence of want of jurisdiction, of collusion between the parties, or of fraud in the party offering the record with respect to the proceedings. 11 As held by this Court in Insular Government vs. Nico 12 the taxpayer may raise only the questions whether or not the Collector of Internal Revenue had jurisdiction to do the particular act, and whether any fraud was committed in the doing of the act. In that case, Doroteo Nico was fined by the Collector of Internal Revenue for violation of subparagraphs (d), (e) and (g) of Section 28 as well as Sections 36, 101 and 107 of Act 1189. Under Section 54 of the same Act the taxpayer was given the right to appeal from the decision of the Collector of Internal Revenue to the Court of First Instance within a period of ten days from notice of imposition of the fine. Nico did not appeal, neither did he pay the fine. Pursuant to Section 33 of the Act, the Collector of Internal Revenue filed an action in the Court of First Instance to enforce his decision and collect the fine. The decision of the Collector of Internal Revenue having become final, this Court, on appeal, allowed no further inquiry into the merits of the same.

For the satisfaction of defendant, however, it may be worth stating that on its merits, the assessment in question is correct. It is not controverted that, as appearing from its 1952 income tax return Lim Tian Teng Sons & Co., Inc. employs the "accrual" method of accounting. Following such accounting method the copra outturn in the amount of P95,500.00 outstanding as of December 31, 1951, should have been treated as accrued income for 1951, instead of as stock on hand on January 1, 1952.

Defendant took up the copra outturn in question as copra on hand in the beginning inventory for 1952. Said beginning inventory, together with expenses, copra purchased during the year and copra on hand as of December 31, 1952 were deducted as "cost of goods sold" from the total gross sales for the purpose of determining the net sales. Since the P95,500.00 copra outturn formed part of the "cost of goods sold", it diminished the net sales by P95,500.00, thereby also decreasing defendant's net taxable income by the same amount. This procedure of treating the copra outturn in question is inconsistent with defendants accounting method.

From the record, then, there is every indication that taxpayer's 1952 income tax return is fraudulent, as alleged in paragraph (7) of the complaint in this case. Firstly, taxpayer's beginning inventory for 1952 did not state the truth in considering the copra outturn as copra on hand, for on December 31, 1951 such copra was not any more in taxpayer's bodega. It was in transit to a foreign port. And the taxpayer no longer owned the copra. As a matter of fact, it already received payment for the same. Secondly, by observing regularly its own system of accounting, taxpayer had no choice but to account the copra outturn as accrued income. This it did not do. For such deviation, we see no other purpose than to lessen, if not obliterate as in fact it did, its income tax liability per its return. The lower court therefore did not err in imposing the 50% surcharge.

We now come to the appeal of the Government. It maintains that the lower court erred in not imposing on defendant's tax liability a surcharge of 5% for late payment. Subsection (c), Section 51 of the Tax Code states:

SEC. 51. Assessment and payment of income tax. —

x x x           x x x           x x x

(c) Surcharge and interest in case of delinquency. - To any sum or sums due and unpaid after the dates prescribed in subsections (b), (c) and (d) for the payment of the same, there shall be added the sum of five per centum on the amount of tax unpaid and interest at the rate of one per centum a month upon said tax from the time the same became due . . . . (Emphasis supplied)

As may be gleaned from the above-quoted provision, the 5% surcharge is mandatory and automatically due, once the tax is not paid on time. "Shall" is the word that law uses a word normally imperative and a "language of demand". 13 Applicable herein is what has been said of a similar provision — the present Section 183 of the Tax Code — stating that:

If the percentage tax on any business is not paid within the time prescribed above the amount of the tax shall be increased by twenty-five per centum, the increment to be part of the tax. (Emphasis supplied)

Said this Court in Lim Co Chui vs. Posadas 14:

This provision is mandatory. It provides a plan which works out automatically. It confers no discretion on the Collector of Internal Revenue. That, official may not disregard the law and substitute therefor his own personal judgment.

Finally, the Government questions the computation of the delinquency interest, due on the deficiency tax, from October 8, 1957. It insists that payment of such interest should commence from February 15, 1957. Such contention is well-founded. Pursuant to Section 51(d), "the assessment made by the Collector of Internal Revenue shall be paid ... immediately upon notification of the amount of such assessment." Now, the income tax assessment notice gave defendant up to February 15, 1957 to pay the deficiency tax in question. No payment was made. Hence, pursuant to Section 51 (e), quoted earlier, interest on the unpaid tax fell due starting February 16, 1957 and continues to accrue until full payment of the tax.

Wherefore, the decision appealed from is modified. Lim Tian Teng Sons & Co., Inc. is hereby ordered to pay the sum of P10,074.00 as deficiency income tax for 1952 plus 50% and 5% surcharges thereon for fraud and late payment, respectively, and 1% monthly interest upon said tax of P10,074.00, computed from February 16, 1957 until the tax is fully paid. With costs against defendant-appellant. So ordered.

G.R. No. L-23534             May 16, 1967

JOSE A. ARCHES, petitioner-appellant, vs.ANACLETO I. BELLOSILLO and JAIME ARANETA, respondents-appellees.

Jose A. Arches for petitioner-appellant.Office of the Solicitor General Arturo A. Alafriz, Solicitor A.B. Afurong and Atty. S.S. Soriano for respondents-appellees.

BENGZON, J.P., J.:

Petitioner-appellant Jose Arches filed on February 27, 1954 his income tax return for 1953. Within five years thereafter, or on February 26, 1959, deficiency income tax and residence tax assessments were issued against him.

Said assessments not having been disputed, the Republic represented by the Bureau of Internal Revenue Regional, Director, filed suit on December 29, 1960, in the municipal court of Roxas City, to recover from petitioner-appellant the sum of P4,441.25 as deficiency income tax and additional residence tax for 1953. Arches then moved to dismiss the complaint on the ground that it did not expressly show the approval of the Revenue Commissioner, as required by Section 308 of the Tax Code, and on the further ground of prescription of the action. 1äwphï1.ñët

The municipal court denied the motion. Petitioner-appellant, his motion to reconsider having been denied also, resorted to the Court of First Instance of Capiz on a petition for certiorari and prohibition assailing the order denying his motion to dismiss. The trial court dismissed the petition. Hence, this appeal.

The only question here is the correctness of dismissal of the petition by the Court of First Instance. The order was predicated upon the impropriety of the writ. We find no error committed by said court.

The municipal court had jurisdiction over the parties and over the subject matter, the amount demanded being less than P5,000.00.1 The suit below instituted by the Republic, based on an uncontested assessment, was one merely for the recovery of a sum of money where the amount demanded constitutes the jurisdictional test.2

Petitioner-appellant would make much of the lack of approval of the Revenue Commissioner. First of all, in this case, such requisite is not jurisdictional, but one relating to capacity to sue or affecting the cause of action only.3 So, in ruling on said question, whatever error — if any — the municipal court committed, was merely an error of judgment, not correctible by certiorari.4

Neither was there grave abuse of the discretion on the part of the municipal court in ruling that the express approval of the Revenue Commissioner himself was not necessary. The court relied

upon Memorandum Order No. V-634 of the Revenue Commissioner, approved by the Finance Secretary of July 1, 1956, wherein the former's functions regarding the administration and enforcement of revenue laws and regulations — powers broad enough to cover the approval of court actions as required in Section 308 of the Tax Code — were expressly delegated to the Regional Directors. This regulation, the issuance of which was authorized by statute, has the force and effect of law.5 To rely upon it, hence, would not be tantamount to whimsical, capricious and arbitrary exercise of judgment.

The verification by the Regional Director of the complaint constitutes sufficient approval thereof already. It states, inter alia, that said Director has caused the preparation of the complaint and that he has read the allegations thereof and they are true and correct to the best of his knowledge and belief. Pleadings are to be liberally construed.6

Assuming, therefore, in gratia argumenti, that the suit is being erroneously — but not invalidly — entertained, for lack of express approval of the Commissioner or the Regional Director, certiorari would still not lie. An order denying a motion to dismiss is interlocutory and the remedy of the unsuccessful movant is to await the judgment on the merits and then appeal therefrom.7 And, as the Court of First Instance rightly observed, there was no showing of a special reason or urgent need to stop the proceedings at such early stage in the municipal court.

Petitioner-appellant would also raise the question of prescription. Again, this is not jurisdictional. And, We have already ruled8 that the proper prescriptive period for bringing civil actions is five years from the date of the assessment, under Section 332 of the Tax Code. The three-year period urged by petitioner-appellant under Section 51 (d) refers only to the summary remedies of distraint and levy. Here, the action was commenced one year, ten months and three days after the assessments were made; hence, well within the period.

Wherefore, the dismissal of appellant's petition for certiorari by the Court of First Instance is hereby affirmed. Costs against petitioner-appellant. So ordered.

G.R. No. 130430 December 13, 1999

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

 

MENDOZA, J.:

This is a petition for review of the decision 1 of the Regional Trial Court, Branch 44, San Fernando, Pampanga, dismissing the suit filed by the Bureau of Internal Revenue for collection of tax.

The facts are as follows:

On July 18, 1986, the BIR issued to respondent Salud V. Hizon a deficiency income tax assessment of P1,113,359.68 covering the fiscal year 1981-1982. Respondent not having contested the assessment, petitioner, on January 12, 1989, served warrants of distraint and levy to collect the tax deficiency. However, for reasons not known, it did not proceed to dispose of the attached properties.

More than three years later, or on November 3, 1992, respondent wrote the BIR requesting a reconsideration of her tax deficiency assessment. The BIR, in a letter dated August 11, 1994, denied the request. On January 1, 1997, it filed a case with the Regional Trial Court, Branch 44, San Fernando, Pampanga to collect the tax deficiency. The complaint was signed by Norberto Salud, Chief of the Legal Division, BIR Region 4, and verified by Amancio Saga, the Bureau's Regional Director in Pampanga.

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

I. WHETHER OR NOT THE INSTITUTION OF THE CIVIL CASE FOR COLLECTION OF TAXES WAS WITHOUT THE APPROVAL OF THE COMMISSIONER IN VIOLATION OF SECTION 221 OF THE NATIONAL INTERNAL REVENUE CODE.

II. WHETHER OR NOT THE ACTION FOR COLLECTION OF TAXES FILED AGAINST RESPONDENT HAD ALREADY BEEN BARRED BY THE STATUTE OF LIMITATIONS.

First. In sustaining respondent's contention that petitioner's complaint was filed without the authority of the BIR Commissioner, the trial court stated: 4

There is no question that the National Internal Revenue Code explicitly provides that in the matter of filing cases in Court, civil or criminal, for the collection of taxes, etc., the approval of the commissioner must first be secured. . . . [A]n action will not prosper in the absence of the commissioner's approval. Thus, in the instant case, the absence of the approval of the commissioner in the institution of the action is fatal to the cause of the plaintiff . . . .

The trial court arrived at this conclusion because the complaint filed by the BIR was not signed by then Commissioner Liwayway Chato.

Sec. 221 of the NIRC provides:

Form and mode of proceeding in actions arising under this Code. — Civil and criminal actions and proceedings instituted in behalf of the Government under the authority of this Code or other law enforced by the Bureau of Internal Revenue shall be brought in the name of the Government of the Philippines and shall be conducted by the provincial or city fiscal, or the Solicitor General, or by the legal officers of the Bureau of Internal Revenue deputized by the Secretary of Justice, but no civil and criminal actions for the

recovery of taxes or the enforcement of any fine, penalty or forfeiture under this Code shall begun without the approval of the Commissioner. (Emphasis supplied)

To implement this provision Revenue Administrative Order No. 5-83 of the BIR provides in pertinent portions:

The following civil and criminal cases are to be handled by Special Attorneys and Special Counsels assigned in the Legal Branches of Revenues Regions:

xxx xxx xxx

II. Civil Cases

1. Complaints for collection on cases falling within the jurisdiction of the Region . . . .

In all the abovementioned cases, the Regional Director is authorized to sign all pleadings filed in connection therewith which, otherwise, requires the signature of the Commissioner.

xxx xxx xxx

Revenue Administrative Order No. 10-95 specifically authorizes the Litigation and Prosecution Section of the Legal Division of regional district offices to institute the necessary civil and criminal actions for tax collection. As the complaint filed in this case was signed by the BIR's Chief of Legal Division for Region 4 and verified by the Regional Director, there was, therefore, compliance with the law.

However, the lower court refused to recognize RAO No. 10-95 and, by implication, RAO No. 5-83. It held:

[M]emorand[a], circulars and orders emanating from bureaus and agencies whether in the purely public or quasi-public corporations are mere guidelines for the internal functioning of the said offices. They are not laws which courts can take judicial notice of. As such, they have no binding effect upon the courts for such memorand[a] and circulars are not the official acts of the legislative, executive and judicial departments of the Philippines. . . . 5

This is erroneous. The rule is that as long as administrative issuances relate solely to carrying into effect the provisions of the law, they are valid and have the force of law. 6 The governing statutory provision in this case is §4(d) of the NIRC which provides:

Specific provisions to be contained in regulations. — The regulations of the Bureau of Internal Revenue shall, among other things, contain provisions specifying, prescribing, or defining:

xxx xxx xxx

(d) The conditions to be observed by revenue officers, provincial fiscals and other officials respecting the institution and conduct of legal actions and proceedings.

RAO Nos. 5-83 and 10-95 are in harmony with this statutory mandate.

As amended by R.A. No. 8424, the NIRC is now even more categorical. Sec. 7 of the present Code authorizes the BIR Commissioner to delegate the powers vested in him under the pertinent provisions of the Code to any subordinate official with the rank equivalent to a division chief or higher, except the following:

(a) The power to recommend the promulgation of rules and regulations by the Secretary of Finance;

(b) The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau;

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

(d) The power to assign or reassign internal revenue officers to establishments where articles subject to excise tax are produced or kept.

None of the exceptions relates to the Commissioner's power to approve the filing of tax collection cases.

Second. With regard to the issue that the case filed by petitioner for the collection of respondent's tax deficiency is barred by prescription, §223(c) of the NIRC provides:

Any internal revenue tax which has been assessed within the period of limitation above-prescribed may be collected by distraint or levy or by a proceeding in court within three years 7 following the assessment of the tax.

The running of the three-year prescriptive period is suspended 8 —

for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty days thereafter; when the taxpayer requests for a reinvestigation which is granted by the Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon which the tax is being assessed or collected; provided, that, if the taxpayer informs the Commissioner of any change in address, the running of the statute of limitations will not be suspended; when the warrant of distraint or levy is duly served upon the taxpayer, his authorized representative or a member of his household with sufficient discretion, and no property could be located; and when the taxpayer is out of the Philippines.

Petitioner argues that, in accordance with this provision, respondent's request for reinvestigation of her tax deficiency assessment on November 3, 1992 effectively

suspended the running of the period of prescription such that the government could still file a case for tax collection. 9

The contention has no merit. Sec. 229 10 of the Code mandates that a request for reconsideration must be made within 30 days from the taxpayer's receipt of the tax deficiency assessment, otherwise the assessment becomes final, unappealable and, therefore, demandable. 11 The notice of assessment for respondent's tax deficiency was issued by petitioner on July 18, 1986. On the other hand, respondent made her request for reconsideration thereof only on November 3, 1992, without stating when she received the notice of tax assessment. She explained that she was constrained to ask for a reconsideration in order to avoid the harassment of BIR collectors. 12 In all likelihood, she must have been referring to the distraint and levy of her properties by petitioner's agents which took place on January 12, 1989. Even assuming that she first learned of the deficiency assessment on this date, her request for reconsideration was nonetheless filed late since she made it more than 30 days thereafter. Hence, her request for reconsideration did not suspend the running of the prescriptive period provided under §223(c). Although the Commissioner acted on her request by eventually denying it on August 11, 1994, this is of no moment and does not detract from the fact that the assessment had long become demandable.

Nonetheless, it is contended that the running of the prescriptive period under §223(c) was suspended when the BIR timely served the warrants of distraint and levy on respondent on January 12, 1989. 13 Petitioner cites for this purpose our ruling in Advertising Associates Inc., v. Court of Appeals. 14 Because of the suspension, it is argued that the BIR could still avail of the other remedy under §223(c) of filing a case in court for collection of the tax deficiency, as the BIR in fact did on January 1, 1997.

Petitioner's reliance on the Court's ruling in Advertising Associates Inc. v. Court of Appeals is misplaced. What the Court stated in that case and, indeed, in the earlier case of Palanca v. Commissioner of Internal Revenue, 15 is that the timely service of a warrant of distraint or levy suspends the running of the period to collect the tax deficiency in the sense that the disposition of the attached properties might well take time to accomplish, extending even after the lapse of the statutory period for collection. In those cases, the BIR did not file any collection case but merely relied on the summary remedy of distraint and levy to collect the tax deficiency. The importance of this fact was not lost on the Court. Thus, in Advertising Associates, it was held: 16 "It should be noted that the Commissioner did not institute any judicial proceeding to collect the tax. He relied on the warrants of distraint and levy to interrupt the running of the statute of limitations.

Moreover, if, as petitioner in effect says, the prescriptive period was suspended twice, i.e., when the warrants of distraint and levy were served on respondent on January 12, 1989 and then when respondent made her request for reinvestigation of the tax deficiency assessment on November 3, 1992, the three-year prescriptive period must have commenced running again sometime after the service of the warrants of distraint and levy. Petitioner, however, does not state when or why this took place and, indeed,

there appears to be no reason for such. It is noteworthy that petitioner raised this point before the lower court apparently as an alternative theory, which, however, is untenable.

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

WHEREFORE, the petition is DENIED.

G.R. No. L-41919-24 May 30, 1980

QUIRICO P. UNGAB, petitioner, vs.HON. VICENTE N. CUSI, JR., in his capacity as Judge of the Court of First Instance, Branch 1, 16TH Judicial District, Davao City, THE COMMISSIONER OF INTERNAL REVENUE, and JESUS N. ACEBES, in his capacity as State Prosecutor, respondents.

 

CONCEPCION JR., J:

Petition for certiorari and prohibition with preliminary injunction and restraining order to annul and set aside the informations filed in Criminal Case Nos. 1960, 1961, 1962, 1963, 1964, and 1965 of the Court of First Instance of Davao, all entitled: "People of the Philippines, plaintiff, versus Quirico Ungab, accused;" and to restrain the respondent Judge from further proceeding with the hearing and trial of the said cases.

It is not disputed that sometime in July, 1974, BIR Examiner Ben Garcia examined the income tax returns filed by the herein petitioner, Quirico P. Ungab, for the calendar year ending December 31, 1973. In the course of his examination, he discovered that the petitioner failed to report his income derived from sales of banana saplings. As a result, the BIR District Revenue Officer at Davao City sent a "Notice of Taxpayer" to the petitioner informing him that there is due from him (petitioner) the amount of P104,980.81, representing income, business tax and forest charges for the year 1973 and inviting petitioner to an informal conference where the petitioner, duly assisted by counsel, may present his objections to the findings of the BIR Examiner. 1 Upon receipt of the notice, the petitioner wrote the BIR District Revenue Officer protesting the

assessment, claiming that he was only a dealer or agent on commission basis in the banana sapling business and that his income, as reported in his income tax returns for the said year, was accurately stated. BIR Examiner Ben Garcia, however, was fully convinced that the petitioner had filed a fraudulent income tax return so that he submitted a "Fraud Referral Report," to the Tax Fraud Unit of the Bureau of Internal Revenue. After examining the records of the case, the Special Investigation Division of the Bureau of Internal Revenue found sufficient proof that the herein petitioner is guilty of tax evasion for the taxable year 1973 and recommended his prosecution: têñ.£îhqwâ£

(1) For having filed a false or fraudulent income tax return for 1973 with intent to evade his just taxes due the government under Section 45 in relation to Section 72 of the National Internal Revenue Code;

(2) For failure to pay a fixed annual tax of P50.00 a year in 1973 and 1974, or a total of unpaid fixed taxes of P100.00 plus penalties of 175.00 or a total of P175.00, in accordance with Section 183 of the National Internal Revenue Code;

(3) For failure to pay the 7% percentage tax, as a producer of banana poles or saplings, on the total sales of P129,580.35 to the Davao Fruit Corporation, depriving thereby the government of its due revenue in the amount of P15,872.59, inclusive of surcharge. 2

In a second indorsement to the Chief of the Prosecution Division, dated December 12, 1974, the Commissioner of Internal Revenue approved the prosecution of the petitioner. 3

Thereafter, State Prosecutor Jesus Acebes who had been designated to assist all Provincial and City Fiscals throughout the Philippines in the investigation and prosecution, if the evidence warrants, of all violations of the National Internal Revenue Code, as amended, and other related laws, in Administrative Order No. 116 dated December 5, 1974, and to whom the case was assigned, conducted a preliminary investigation of the case, and finding probable cause, filed six (6) informations against the petitioner with the Court of First Instance of Davao City, to wit: têñ.£îhqwâ£

(1) Criminal Case No. 1960 — Violation of Sec. 45, in relation to Sec. 72 of the National Internal-Revenue Code, for filing a fraudulent income tax return for the calendar year ending December 31, 1973; 4

(2) Criminal Case No. 1961 — Violation of Sec. 182 (a), in relation to Secs. 178, 186, and 208 of the National Internal Revenue Code, for engaging in business as producer of saplings, from January, 1973 to December, 1973, without first paying the annual fixed or privilege tax thereof; 5

(3) Criminal Case No. 1962 — Violation of Sec. 183 (a), in relation to Secs. 186 and 209 of the National Internal Revenue Code, for failure to render a true and complete return on the gross quarterly sales, receipts and earnings in his business as producer of banana saplings and to pay the percentage tax due thereon, for the quarter ending December 31, 1973; 6

(4) Criminal Case No. 1963 — Violation of Sec. 183 (a), in relation to Secs. 186 and 209 of the National Internal Revenue Code, for failure to render a true and complete return on the gross quarterly sales receipts and earnings in his business as producer of saplings, and to pay the percentage tax due thereon, for the quarter ending on March 31, 1973; 7

(5) Criminal Case No. 1964 — Violation of Sec. 183 (a), in relation to Secs. 186 and 209 of the National Internal Revenue Code, for failure to render a true and complete return on the gross quarterly sales, receipts and earnings in his business as producer of banana saplings for the quarter ending on June 30, 1973, and to pay the percentage tax due thereon; 8

(6) Criminal Case No. 1965 — Violation of Sec. 183 (a), in relation to Secs. 186 and 209 of the National Internal Revenue Code, for failure to render a true and complete return on the gross quarterly sales, receipts and earnings as producer of banana saplings, for the quarter ending on September 30, 1973, and to pay the percentage tax due thereon. 9

On September 16, 1975, the petitioner filed a motion to quash the informations upon the grounds that: (1) the informations are null and void for want of authority on the part of the State Prosecutor to initiate and prosecute the said cases; and (2) the trial court has no jurisdiction to take cognizance of the above-entitled cases in view of his pending protest against the assessment made by the BIR Examiner. 10 However, the trial court denied the motion on October 22, 1975. 11 Whereupon, the petitioner filed the instant recourse. As prayed for, a temporary restraining order was issued by the Court, ordering the respondent Judge from further proceeding with the trial and hearing of Criminal Case Nos. 1960, 1961, 1962, 1963, 1964, and 1965 of the Court of First Instance of Davao, all entitled: "People of the Philippines, plaintiff, versus Quirico Ungab, accused."

The petitioner seeks the annulment of the informations filed against him on the ground that the respondent State Prosecutor is allegedly without authority to do so. The petitioner argues that while the respondent State Prosecutor may initiate the investigation of and prosecute crimes and violations of penal laws when duly authorized, certain requisites, enumerated by this Court in its decision in the case of Estrella vs. Orendain, 12 should be observed before such authority may be exercised; otherwise, the provisions of the Charter of Davao City on the functions and powers of the City Fiscal will be meaningless because according to said charter he has charge of the prosecution of all crimes committed within his jurisdiction; and since "appropriate circumstances are not extant to warrant the intervention of the State Prosecution to initiate the investigation, sign the informations and prosecute these cases, said informations are null and void." The ruling adverted to by the petitioner reads, as follows: têñ.£îhqwâ£

In view of all the foregoing considerations, it is the ruling of this Court that under Sections 1679 and 1686 of the Revised Administrative Code, in any instance where a provincial or city fiscal fails, refuses or is unable, for any reason, to investigate or prosecute a case and, in the opinion of the Secretary of Justice it is advisable in the public interest to take a different course of action, the Secretary of Justice may either appoint as acting provincial or city fiscal to handle the investigation or prosecution exclusively and only of such case, any practicing attorney or some competent officer of the Department of Justice or office of any city or provincial fiscal, with complete authority to act therein in all respects as if he

were the provincial or city fiscal himself, or appoint any lawyer in the government service, temporarily to assist such city of provincial fiscal in the discharge of his duties, with the same complete authority to act independently of and for such city or provincial fiscal provided that no such appointment may be made without first hearing the fiscal concerned and never after the corresponding information has already been filed with the court by the corresponding city or provincial fiscal without the conformity of the latter, except when it can be patently shown to the court having cognizance of the case that said fiscal is intent on prejudicing the interests of justice. The same sphere of authority is true with the prosecutor directed and authorized under Section 3 of Republic Act 3783, as amended and/or inserted by Republic Act 5184. The observation in Salcedo vs. Liwag, supra, regarding the nature of the power of the Secretary of Justice over fiscals as being purely over administrative matters only was not really necessary, as indicated in the above relation of the facts and discussion of the legal issues of said case, for the resolution thereof. In any event, to any extent that the opinion therein may be inconsistent herewith the same is hereby modified.

The contention is without merit. Contrary to the petitioner's claim, the rule therein established had not been violated. The respondent State Prosecutor, although believing that he can proceed independently of the City Fiscal in the investigation and prosecution of these cases, first sought permission from the City Fiscal of Davao City before he started the preliminary investigation of these cases, and the City Fiscal, after being shown Administrative Order No. 116, dated December 5, 1974, designating the said State Prosecutor to assist all Provincial and City fiscals throughout the Philippines in the investigation and prosecution of all violations of the National Internal Revenue Code, as amended, and other related laws, graciously allowed the respondent State Prosecutor to conduct the investigation of said cases, and in fact, said investigation was conducted in the office of the City Fiscal. 13

The petitioner also claims that the filing of the informations was precipitate and premature since the Commissioner of Internal Revenue has not yet resolved his protests against the assessment of the Revenue District Officer; and that he was denied recourse to the Court of Tax Appeals.

The contention is without merit. What is involved here is not the collection of taxes where the assessment of the Commissioner of Internal Revenue may be reviewed by the Court of Tax Appeals, but a criminal prosecution for violations of the National Internal Revenue Code which is within the cognizance of courts of first instance. While there can be no civil action to enforce collection before the assessment procedures provided in the Code have been followed, there is no requirement for the precise computation and assessment of the tax before there can be a criminal prosecution under the Code. têñ.£îhqwâ£

The contention is made, and is here rejected, that an assessment of the deficiency tax due is necessary before the taxpayer can be prosecuted criminally for the charges preferred. The crime is complete when the violator has, as in this case, knowingly and willfully filed fraudulent returns with intent to evade and defeat a part or all of the tax. 14

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 willfuly 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 government's failure to discover the error and promptly to assess has no connections with the commission of the crime. 15

Besides, it has been ruled that a petition for reconsideration of an assessment may affect the suspension of the prescriptive period for the collection of taxes, but not the prescriptive period of a criminal action for violation of law. 16 Obviously, the protest of the petitioner against the assessment of the District Revenue Officer cannot stop his prosecution for violation of the National Internal Revenue Code. Accordingly, the respondent Judge did not abuse his discretion in denying the motion to quash filed by the petitioner.

WHEREFORE, the petition should be, as it is hereby dismissed. The temporary restraining order heretofore issued is hereby set aside. With costs against the petitioner.

G.R. No. L-22356             July 21, 1967

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant, vs.PEDRO B. PATANAO, defendant-appellee.

Office of the Solicitor General Arturo A. Alafriz, Solicitor A. B. Afurong and L. O. Gal-lang for plaintiff-appellant.Tranquilino O. Calo, Jr. for defendant-appellee.

ANGELES, J.:

This is an appeal from an order of the Court of First Instance of Agusan in civil case No. 925, dismissing plaintiff's complaint so far as concerns the collection of deficiency income taxes for the years 1951, 1953 and 1954 and additional residence taxes for 1951 and 1952, and requiring the defendant to file his answer with respect to deficiency income tax for 1955 and residence taxes for 1953-1955.

In the complaint filed by the Republic of the Philippines, through the Solicitor General, against Pedro B. Patanao, it is alleged that defendant was the holder of an ordinary timber license with concession at Esperanza, Agusan, and as such was engaged in the business of producing logs and lumber for sale during the years 1951-1955; that defendant failed to file income tax returns for 1953 and 1954, and although he filed income tax returns for 1951, 1952 and 1955, the same were false and fraudulent because he did not report substantial income earned by him from his business; that in an examination conducted by the Bureau of Internal Revenue on defendant's income and expenses for 1951-1955, it was ascertained that the sum of P79,892.75, representing deficiency; income taxes and additional residence taxes for the aforesaid years, is due from defendant; that on February 14, 1958, plaintiff, through the Deputy Commissioner of Internal Revenue, sent a letter of demand with enclosed income tax assessment to the defendant requiring him to pay the said amount; that notwithstanding repeated demands the defendant refused, failed

and neglected to pay said taxes; and that the assessment for the payment of the taxes in question has become final, executory and demandable, because it was not contested before the Court of Tax Appeals in accordance with the provisions of section 11 of Republic Act No. 1125.

Defendant moved to dismiss the complaint on two grounds, namely: (1) that the action is barred by prior judgment, defendant having been acquitted in criminal cases Nos. 2089 and 2090 of the same court, which were prosecutions for failure to file income tax returns and for non-payment of income taxes; and (2) that the action has prescribed.

After considering the motion to dismiss, the opposition thereto and the rejoinder to the opposition, the lower court entered the order appealed from, holding that the only cause of action left to the plaintiff in its complaint is the collection of the income tax due for the taxable year 1955 and the residence tax (Class B) for 1953, 1954 and 1955. A motion to reconsider said order was denied, whereupon plaintiff interposed the instant appeal, which was brought directly to this Court, the questions involved being purely legal.

The conclusion of the trial court, that the present action is barred by prior judgment, is anchored on the following rationale:

There is no question that the defendant herein has been accused in Criminal Cases Nos. 2089 and 2090 of this Court for not filing his income tax returns and for non-payment of income taxes for the years 1953 and 1954. In both cases, he was acquitted. The rule in this jurisdiction is that the accused once acquitted is exempt from both criminal and civil responsibility because when a criminal action is instituted, civil action arising from the same offense is impliedly instituted unless the offended party expressly waives the civil action or reserves the right to file it separately. In the criminal cases abovementioned wherein the defendant was completely exonerated, there was no waiver or reservation to file a separate civil case so that the failure to obtain conviction on a charge of non-payment of income taxes is fatal to any civil action to collect the payment of said taxes.1äwphï1.ñët

Plaintiff-appellant assails the ruling as erroneous. Defendant-appellee on his part urges that it should be maintained.

In applying the principle underlying the civil liability of an offender under the Penal Code to a case involving the collection of taxes, the court a quo fell into error. The two cases are circumscribed by factual premises which are diametrically opposed to each either, and are founded on entirely different philosophies. Under the Penal Code the civil liability is incurred by reason of the offender's criminal act. Stated differently, the criminal liability gives birth to the civil obligation such that generally, if one is not criminally liable under the Penal Code, he cannot become civilly liable thereunder. The situation under the income tax law is the exact opposite. Civil liability to pay taxes arises from the fact, for instance, that one has engaged himself in business, and not because of any criminal act committed by him. The criminal liability arises upon failure of the debtor to satisfy his civil obligation. The incongruity of the factual premises and foundation principles of the two cases is one of the reasons for not imposing civil indemnity on the criminal infractor of the income tax law. Another reason, of course, is found in

the fact that while section 73 of the National Internal Revenue Code has provided the imposition of the penalty of imprisonment or fine, or both, for refusal or neglect to pay income tax or to make a return thereof, it failed to provide the collection of said tax in criminal proceedings. The only civil remedies provided, for the collection of income tax, in Chapters I and II, Title IX of the Code and section 316 thereof, are distraint of goods, chattels, etc. or by judicial action, which remedies are generally exclusive in the absence of a contrary intent from the legislator. (People vs. Arnault, G.R. No. L-4288, November 20, 1952; People vs. Tierra, G.R. Nos. L-17177-17180, December 28, 1964) Considering that the Government cannot seek satisfaction of the taxpayer's civil liability in a criminal proceeding under the tax law or, otherwise stated, since the said civil liability is not deemed included in the criminal action, acquittal of the taxpayer in the criminal proceeding does not necessarily entail exoneration from his liability to pay the taxes. It is error to hold, as the lower court has held, that the judgment in the criminal cases Nos. 2089 and 2090 bars the action in the present case. The acquittal in the said criminal cases cannot operate to discharge defendant appellee from the duty of paying the taxes which the law requires to be paid, since that duty is imposed by statute prior to and independently of any attempts by the taxpayer to evade payment. Said obligation is not a consequence of the felonious acts charged in the criminal proceeding, nor is it a mere civil liability arising from crime that could be wiped out by the judicial declaration of non-existence of the criminal acts charged. (Castro vs. The Collector of Internal Revenue, G.R. No. L-12174, April 20, 1962).

Regarding prescription of action, the lower court held that the cause of action on the deficiency income tax and residence tax for 1951 is barred because appellee's income tax return for 1951 was assessed by the Bureau of Internal Revenue only on February 14, 1958, or beyond the five year period of limitation for assessment as provided in section 331 of the National Internal Revenue Code. Appellant contends that the applicable law is section 332 (a) of the same Code under which a proceeding in court for the collection of the tax may be commenced without assessment at any time within 10 years from the discovery of the falsity, fraud or omission.

The complaint filed on December 7, 1962, alleges that the fraud in the appellee's income tax return for 1951, was discovered on February 14, 1958. By filing a motion to dismiss, appellee hypothetically admitted this allegation as all the other averments in the complaint were so admitted. Hence, section 332 (a) and not section 331 of the National Internal Revenue Code should determine whether or not the cause of action of deficiency income tax and residence tax for 1951 has prescribed. Applying the provision of section 332 (a), the appellant's action instituted in court on December 7, 1962 has not prescribed.

Wherefore, the order appealed from is hereby set aside. Let the records of this case be remanded to the court of origin for further proceedings. No pronouncement as to costs.

G.R. No. 119322 June 4, 1996

COMMISSIONER ON INTERNAL REVENUE, SENIOR STATE PROSECUTOR AURORA S. LAGMAN, SENIOR STATE PROSECUTOR BERNELITO R. FERNANDEZ, SENIOR STATE PROSECUTOR HENRICK P. GINGOYON, ROGELIO

F. VISTA, STATE PROSECUTOR ALFREDO AGCAOILI, PROSECUTING ATTORNEY EMMANUEL VELASCO, CITY PROSECUTOR CANDIDO V. RIVERA, AND ASSISTANT CITY PROSECUTOR LEOPOLDO E. BARAQUIA, petitioners, vs.THE HONORABLE COURT OF APPEALS, THE HONORABLE TIRSO D'C VELASCO, PRESIDING JUDGE, REGIONAL TRIAL COURT OF QUEZON CITY, BRANCH 88, FORTUNE TOBACCO CORPORATION, LUCIO TAN, HARRY C. TAN, CARMEN KAO TAN, FLORENCIO SANTOS, SALVADOR MISON, CHUNG POE KEE, ROJAS CHUA, MARIANO TANENGLIAN, JUANITA LEE AND ANTONIO P. ABAYA, respondents.

DAGUPAN COMBINED COMMODITIES, INC., TOWNSMAN COMMERCIALS, INC., LANDMARK SALES AND MARKETING INC., CRIMSON CROCKER DISTRIBUTORS, INC., MOUNT MATUTUM MARKETING CORP., FIRST UNION TRADING CORP., CARLSBURG AND SONS, INC., OMAR ALI DISTRIBUTORS, INC., ORIEL AND COMPANY, NEMESIO TAN, QUINTIN CALLEJA, YOLANDA MANALILI, CARLOS CHAN, ROMEO TAN, VICENTE CO, WILLIAM YU, LETICIA LIM, GLORIA LOPEZ, ROBERT TANTAMCO, FELIPE LOY, ROLANDO CHUA, HONORINA TAN, WILLIE TANTAMCO, HENRY WEECHEE, JESUS LIM, TEODORO TAN, ANTONIO APOSTOL, DOMINGO TENG, CANDELARIO LI, ERLINDA CRUZ, CARLOS TUMPALAN, LARRY JOHN SY, ERNESTO ONG, WILFREDO MACROHON, ANTONIO TIU, ROSARIO LESTER, WILFREDO ONG, BONIFACIO CHUA, GO CHING CHUAN, HENRY CHUA, LOPE LIM GUAN, EMILIO TAN, FELIPE TAN SEH CHUAN, ANDRES CO, FELIPE KEE, HENRY GO CO, NARCISO GO, ADOLFO LIM, CO SHU, DANIEL YAO CABIGUN, GABRIELLE. QUINTELA, NELSON TE, EMILLIO GO, EDWIN LEE, CESAR LEDESMA, JR., JAO CHEP SENG, ARNULFO TAN, BENJAMIN T. HONG, PHILIP JAO, JOSE P. YU, AND DAVID R. CORTES, respondents-intervenors.

 

KAPUNAN, J.:p

The pivotal issue in this petition for review is whether or not respondent Court of Appeals in its decision 1 in CA-G.R. SP No. 33599 correctly ruled that the Regional Trial Court of Quezon City (Branch 88) in Civil Case No. Q-94- 18790 did not commit grave abuse of discretion amounting to lack of jurisdiction in issuing four (4) orders directing the issuance of writs of preliminary injunction restraining petitioner prosecutors from continuing with the preliminary injunction of I.S. Nos. 93-508 and 93-584 in the Department of Justice and I.S. No. 93-17942 in the Office of the City Prosecutors of Quezon City wherein private respondents were respondents and denying petitioners' Motion to Dismiss said Civil Case No. 94-18790. 2

In resolving the issue raised in the petition, the Court may be guided by its definition of what constitutes grave abuse of discretion. By grave abuse of discretion is meant such capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction.

The abuse of discretion must be patent and gross as to amount to an evasion of positive duty or a virtual refusal to perform a duty enjoined by law, or to act at all in contemplation of law as where the power is exercised in an arbitrary and despotic manner by reason of passion and hostility. 3

On June 1, 1993, the President issued a Memorandum creating a Task Force to investigate the tax liabilities of manufacturers engaged in tax evasion scheme, such as selling products through dummy marketing corporations to avoid payment of correct internal revenue tax, to collect from them any tax liabilities discovered from such investigation, and to file the necessary criminal actions against those who may have violated the tax code. The task force was composed of the Commissioner of Internal Revenue as Chairman, a representative of the Department of Justice and a representative of the Executive Secretary.

On July 1, 1993, the Commissioner of Internal Revenue issued a Revenue Memorandum Circular No. 37-93 reclassifying best selling cigarettes bearing the brands "Hope," "More," and "Champion" as cigarettes of foreign brands subject to a higher rate of tax.

On August 3, 1993, respondent Fortune Tobacco Corporation (Fortune) questioned the validity of the reclassification of said brands of cigarettes as violative of its right to due process and equal protection of law. Parenthetically, on September 8, 1993, the Court of Tax Appeals by resolution ruled that the reclassification made by the Commissioner "is of doubtful legality" and enjoined its enforcement.

In a letter of August 13, 1993 which was received by Fortune on August 24, 1993, the Commissioner assessed against Fortune the total amount of P7,685,942,221.66 representing deficiency income, ad valorem and value-added tax for the year 1992 with the request that the said amount be paid within thirty (30) days upon receipt thereof. 4 Fortune on September 17, 1993 moved for reconsideration of the assessments.

On September 7, 1993, the Commissioner of Internal Revenue filed a complaint with the Department of Justice against respondent Fortune, its corporate officers, nine (9) other corporations and their respective corporate officers for alleged fraudulent tax evasion for supposed non-payment by Fortune of the correct amount of income tax, ad valorem tax and value-added tax for the year 1992. The complaint alleged, among others, that:

In the said income tax return, the taxpayer declared a net taxable income of P183,613,408.00 and an income tax due of P64,264,693.00. Based mainly on documentary evidence submitted by the taxpayer itself, these declarations are false and fraudulent because the correct taxable income of the corporation for the said year is P1,282,959,399.25.

This underdeclaration which resulted in the evasion of the amount of P723,773,759.79 as deficiency income tax for the year 1992 is a violation of Section 45 of the Tax Code, penalized under Section 253 in relation to Sections 252(b) and (d) and 253 thereof, thus: . . .

xxx xxx xxx

Fortune Tobacco Corporation, through its Vice-President for Finance, Roxas Chua, likewise filed value-added tax returns for the 1st, 2nd, 3rd and 4th quarters of 1992 with the Rev. District Office of Marikina, Metro Manila, declaring therein gross taxable sales, as follows:

1st Qtr. P 2,924,418,055.00

2nd Qtr. 2,980,335,235.00

3rd Qtr. 2,839,519,325.00

4th Qtr. 2,992,386,005.00

However, contrary to what have been reported in the said value- added tax returns, and based on documentary evidence obtained from the taxpayer, the total actual taxable sales of the corporation for the year 1992 amounted to P16,158,575,035.00 instead of P11,929,322,334.52 as declared by the corporation in the said VAT returns.

These fraudulent underdeclarations which resulted in the evasion of value-added taxes in the aggregate amount of P1,169,688,645.63 for the entire year 1992 are violations of Section 110 in relation to Section 100 of the Tax Code, which are likewise penalized under the aforequoted Section 253, in relation to Section 252, thereof. Sections 110 and 100 provide:

xxx xxx xxx

Furthermore, based on the corporation's VAT returns, the corporation reported its taxable sales for 1992 in the amount of P11,736,658,580. This declaration is likewise false and fraudulent because, based on the daily manufacturer's sworn statements submitted to the BIR by the taxpayer, its total taxable sales during the year 1992 is P16,686,372,295.00. As a result thereof, the corporation was able to evade the payment of ad valorem taxes in the aggregate amount of P5,792,479,816.24 in violation of Section 127 in relation to Section 142, as amended by R.A. 6956, penalized under the aforequoted Section 253, in relation to Section 252, all of the Tax Code. Sections 127 and 142, as amended by R.A. 6956, are quoted as follows: . . .

The complaint docketed as I.S. No. 93-508, was referred to the Department of Justice Task Force on revenue cases which found sufficient basis to further investigate the allegations that Fortune, through fraudulent means, evaded payment of income tax, ad valorem tax, and value-added tax for the year 1992 thus, depriving the government of revenues in the amount of Seven and One-half (P7.5) Billion Pesos.

The fraudulent scheme allegedly adopted by private respondents consisted of making fictitious and simulated sales of Fortune's cigarette products to non-existing individuals and to entities incorporated and existing only for the purpose of such fictitious sales by declaring registered wholesale prices with the BIR lower than Fortune's actual wholesale prices which are required for determination of Fortune's correct income, ad valorem, and value-added tax liabilities. The "ghosts wholesale buyers" then ostensibly sold the products to customers and other wholesalers/retailers at higher wholesale

prices determined by Fortune. The tax returns and manufacturer's sworn statements filed by Fortune would then declare the fictitious sales it made to the conduit corporators and non-existing individual buyers as its gross sales. 5

On September 8, 1993, the Department of Justice Task Force issued a subpoena directing private respondents to submit their counter-affidavits not later than September 20, 1993. 6

Instead of filing their counter-affidavits, the private respondents on October 15, 1993 filed a Verified Motion to Dismiss; Alternatively Motion to Suspend, 7 based principally on the following grounds:

1. The complaint of petitioner Commissioner follows a pattern of prosecution against private respondents in violation of their right to due process and equal protection of the law.

2. Petitioner Commissioner and the Court of Tax Appeals have still to determine Fortune's tax liability for 1992 in question; without any tax liability, there can be no tax evasion.

3. Exclusive jurisdiction to determine tax liability is vested in the Court of Tax Appeals; therefore, the DOJ is without jurisdiction to conduct preliminary investigation.

4. The complaint of petitioner Commissioner is not supported by any evidence to serve as adequate basis for the issuance of subpoena to private respondents and to put them to their defense.

At the scheduled preliminary investigation on October 15, 1993, private respondents were asked by the panel of prosecutors to inform it of the aspects of the Verified Motion to Dismiss which counsel for private respondents did so briefly. Counsel for the Commissioner of Internal Revenue asked for fifteen (15) days within which to file a reply in writing to private respondents' Verified Motion to Dismiss. Thereupon, the panel of prosecutors declared a recess. Upon reconvening, the panel of prosecutors denied the motion to dismiss and treated the same as private respondents' counter-affidavits. 8

On October 20, 1993, private respondents filed a motion for reconsideration of the order of October 15, 1993. 9 On October 21, 1993, private respondents filed a motion to require the submission by the Bureau of Internal Revenue of certain documents in further support of their Verified Motion to Dismiss. Among the documents sought to be produced are the "Daily Manufacturer's Sworn Statements" which according to petitioner Commissioner in her complaint were submitted by Fortune to the BIR and which were the basis of her conclusion that Fortune's tax declarations were false and fraudulent. Fortune claimed that without the "Daily Manufacturer's Sworn Statements," there is no evidence to support the complaint, hence, warranting its outright dismissal.

On October 26, 1993, private respondents moved for the inhibition of the State prosecutors assigned to the case for alleged lack of impartiality. 10 Private respondents also sought the production of the "Daily Manufacturer's Sworn Statements" submitted by

certain cigarette companies similarly situated as Fortune but were not proceeded against, thus, private respondents charged that Fortune and its officers were being singled out for criminal prosecution which is discriminatory and in violation of the equal protection clause of the Constitution.

On December 20, 1993, the panel of prosecutors issued an Omnibus Order 11 denying private respondents' motion for reconsideration, motion for suspension of investigation, motion to inhibit the State Prosecutors, and motion to require submission by the BIR of certain documents to further support private respondents' motion to dismiss.

On January 4, 1994, private respondents filed a petition for certiorari and prohibition with prayer for preliminary injunction with the Regional Trial Court, Branch 88, Quezon City, docketed as Q-94-18790, praying that the complaint of the Commissioner of Internal Revenue and the orders of the prosecutors in I.S. No. 93-508 be dismissed or set aside, alternatively, the proceedings on the preliminary investigation be suspended pending final determination by the Commissioner of Fortune's motion for reconsideration/ reinvestigation of the August 13, 1993 assessment of the taxes due. 12

On January 17, 1994, petitioners filed a motion to dismiss the petition 13 on the grounds that (a) the trial court is bereft of jurisdiction to enjoin a criminal prosecution under preliminary investigation; (b) a criminal prosecution for tax fraud can proceed independently of criminal or administrative action; (c) there is no prejudicial question to justify suspension of the preliminary investigation; (d) private respondents' rights to due process was not violated; and (e) selective prosecution is not a valid defense in this jurisdiction.

On January 19, 1994, at the hearing of the incident for the issuance of a writ of preliminary injunction in the petition, private respondents offered in evidence their verified petition for certiorari and prohibition and its annexes. Petitioners responded by praying that their motion to dismiss the petition for certiorari and prohibition be considered as their opposition to private respondents' application for the issuance of a writ of preliminary injunction.

On January 25, 1994, the trial court issued an order granting the prayer for the issuance of a preliminary injunction. 14 The trial court rationalized its order in this wise:

a) It is private respondents' claim that the ad valorem tax for the year 1992 was levied, assessed and collected by the BIR under Section 142(c) of the Tax Code on the basis of the "manufacturer's registered wholesale price" duly approved by the BIR. Fortune's taxable sales for 1992 was in the amount of P11,736,658,580.00.

b) On the other hand, it is petitioners' contention that Fortune's declaration was false and fraudulent because, based on its daily manufacturer's sworn statements submitted to the BIR, its taxable sales in 1992 were P16,686,372,295.00, as a result of which, Fortune was able to evade the payment of ad valorem tax in the aggregate amount of P5,792,479,816.24.

c) At the hearing for preliminary investigation, the "Daily Manufacturer's Sworn Statements" which, according to petitioners, were submitted to the BIR by private respondents and made the basis of petitioner Commissioner's complaint that the total taxable sales of Fortune in 1992 amounted to P16,686,372, 295.00 were not produced as part of the evidence for petitioners. In fact, private respondents had filed a motion to require petitioner Commissioner to submit the aforesaid daily manufacturer's sworn statements before the DOJ panel of prosecutors to show that Fortune's actual taxable sales totaled P16,686,373,295.00, but the motion was denied.

d) There is nothing on record in the preliminary investigation before the panel of investigators which supports the allegation that Fortune made a fraudulent declaration of its 1992 taxable sales.

e) Since, as alleged by private respondents, the ad valorem tax for the year 1992 should be based on the "manufacturer's registered wholesale price" while, as claimed by petitioners, the ad valorem taxes should be based on the wholesale price at which the manufacturer sold the cigarettes, which is a legal issue as admitted by a BIR lawyer during the hearing for preliminary injunction, the correct interpretation of the law involved, which is Section 142(c) of the Tax Code, constitutes a prejudicial question which must first be resolved before criminal proceedings for tax evasion may be pursued. In other words, the BIR must first make a final determination, which it has not, of Fortune's tax liability relative to its 1992 ad valorem, value-added and income taxes before the taxpayer can be made liable for tax evasion.

f) There was a precipitate issuance by the panel of prosecutors of subpoenas to private respondents, on the very day following the filing of the complaint with the DOJ consisting of about 600 pages, and the precipitate denial by the panel of prosecutors, after a recess of about twenty (20) minutes, of private respondents' motion to dismiss, consisting of one hundred and thirty five (135) pages.

g) Private respondents had been especially targeted by the government for prosecution. Prior to the filing of the complaint in I.S. No. 93-508, petitioner Commissioner issued Revenue Memorandum Circular No. 37-93 reclassifying Fortune's best selling cigarettes, namely "Hope," "More," and "Champion" as cigarettes bearing a foreign brand, thereby imposing upon them a higher rate of tax that would price them out of the market.

h) While in petitioner Commissioner's letter of August 13, 1993, she gave Fortune a period of thirty (30) days from receipt thereof within which to pay the alleged tax deficiency assessments, she filed the criminal complaint for tax evasion before the period lapsed.

i) Based on the foregoing, the criminal complaint against private respondents was filed prematurely and in violation of their constitutional right to equal protection of the laws.

On January 26, 1994, private respondents filed with the trial court a Motion to Admit Supplemental Petition and sought the issuance of a writ of preliminary injunction to enjoin the State Prosecutors from continuing with the preliminary investigation filed by them against private respondents with the Quezon City Prosecutor's Office, docketed as I.S. 93-17942, for alleged fraudulent tax evasion, committed by private respondents for the taxable year 1990. Private respondents averred in their motion that no supporting documents or copies of the complaint were attached to the subpoena in I.S. 93-17942; that the subpoena violates private respondents' constitutional right to due process, equal protection and presumption of innocence; that I.S. 93-17942 is substantially the

same as I.S. 93-508; that no tax assessment has been issued by the Commission of Internal Revenue and considering that taxes paid have not been challenged, no tax liability exists; and that since Assistant City Prosecutor Baraquia was a former classmate of Presidential Legal Counsel Antonio T. Carpio, the former cannot conduct the preliminary investigation in an impartial manner.

On January 28, 1994, private respondents filed with the trial court a second supplemental petition, 15 also seeking to stay the preliminary investigation in I.S. 93-584, which was the third complaint filed against private respondents with the DOJ for alleged fraudulent tax evasion for the taxable year 1991.

On January 31, 1994, the lower court admitted the two (2) supplemental petitions and issued a temporary restraining order in I.S. 93-17942 and I.S. 93-584. 16 Also, on the same day, petitioners filed an Urgent Motion for Immediate Resolution of petitioners' motion to dismiss.

On February 7, 1994, the trial court issued an order denying petitioners' motion to dismiss private respondents' petition seeking to stay preliminary investigation in I.S. 93-508, ruling that the issue of whether Sec. 127(b) of the National Tax Revenue Code should be the basis of private respondents' tax liability as contended by the Bureau of Internal Revenue, or whether it is Section 142(c) of the same Code that applies, as argued by herein private respondents, should first be settled before any complaint for fraudulent tax evasion can be initiated. 17

On February 14, 1994, the trial court issued an order granting private respondents' petition for a supplemental writ of preliminary injunction, likewise enjoining the preliminary investigation of the two (2) other complaints filed with the Quezon City Prosecutor's Office and the DOJ for fraudulent tax evasion, I.S. 93-17942 and I.S. 93-584, for alleged tax evasion for the taxable years 1990 and 1991 respectively. 18 In granting the supplemental writ, the trial court stated that the two other complaints are the same as in I.S. 93-508, except that the former refer to the taxable years 1990 and 1991.

On March 7, 1994, petitioners filed a petition for certiorari and prohibition with prayer for preliminary injunction before this Court. However, the petition was referred to the Court of Appeals for disposition by virtue of its original concurrent jurisdiction over the petition.

On December 19, 1994, the Court of Appeals in CA-G.R No. SP-33599 rendered a decision denying the petition. The Court of Appeals ruled that the trial court committed no grave abuse of discretion in ordering the issuance of writs of preliminary injunction and in denying petitioners' motion to dismiss. In upholding the reasons and conclusions given by the trial court in its orders for the issuance of the questioned writs, the Court of Appeals said in part:

In making such conclusion the respondent Court must have understood from herein petitioner Commissioner's letter-complaint of 14 pages (pp. 477-490, rollo of this case) and the joint affidavit of eight revenue officers of 17 pages attached thereto (pp. 491-507,

supra) and its annexes (pp. 508-1077, supra), that the charge against herein respondents is for tax evasion for non-payment by herein respondent Fortune of the correct amounts of income tax, ad valorem tax and value added tax, not necessarily "fraudulent tax evasion." Hence, the need for previous assessment of the correct amount by herein petitioner Commissioner before herein respondents may be charged criminally. Certiorari will not be issued to cure errors in proceedings or correct erroneous conclusions of law or fact. As long as a Court acts within its jurisdictions, any alleged error committed in the exercise of its jurisdiction, will amount to nothing more than errors of judgment which are reviewable by timely appeal and not by a special civil action of certiorari (Santos, Jr. vs. Court of Appeals, 152 SCRA 378; Gold City Integrated Port Services, Inc. vs. Intermediate Appellate Court, 171 SCRA 579).

The questioned orders issued after hearing (Annexes A, B, C and D, petition) being but interlocutory, review thereof by this Court is inappropriate until final judgment is rendered, absent a showing of grave abuse of discretion on the part of the issuing court (See Van Dorn vs. Romillo, 139 SCRA 139, 141; Newsweek, Inc. vs. IAC, 171, 177; Mendoza vs. Court of Appeals, 201 SCRA 343, 352). The factual and legal issues involved in the main case still before the respondent Court are best resolved after trial. Petitioners, therefore, instead of resorting to this petition for certiorari and prohibition should have filed an answer to the petition as ordained in Section 4, Rule 16, in connection with Rule 11 of the Revised Rules of Court, interposing as defense or defenses the objection or objections raised in their motion to dismiss, then proceed to trial in order that thereafter the case may be decided on the merits by the respondent Court. In case of an adverse decision, they may appeal therefrom by which the entire record of the case would be elevated for review (See Mendoza vs. Court of Appeals, supra). Therefore, certiorari and prohibition resorted to by herein petitioners will not lie in view of the remedy open to them. Thus, the resulting delay in the final disposition of the case before the respondent Court would not have been incurred.

Grave abuse of discretion as a ground for issuance of writs of certiorari and prohibition implies capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction, or where the power is exercised in an arbitrary or despotic manner by reason of passion, prejudice, or personal hostility, amounting to an evasion of positive duty or to a virtual refusal to perform the duty enjoined, or to act at all in contemplation of law (Confederation of Citizens Labor Union vs. NLRC, 60 SCRA 84; Bustamante vs. Commission on Audit, 216 SCRA 134). For such writs to lie, there must be capricious, arbitrary and whimsical exercise of power, the very antithesis of the judicial prerogative in accordance with centuries of both civil law and common law traditions (Young vs. Sulit, 162 SCRA 659, 664; FCC vs. IAC, 166 SCRA 155; Purefoods Corp. vs. NLRC, 171 SCRA 45). Certiorari and prohibition are remedies narrow in scope and inflexible in character. They are not general utility tools in the legal workshop (Vda. de Guia vs. Veloso, 158 SCRA 340, 344). Their function is but limited to correction of defects of jurisdiction solely, not to be used for any other purpose (Garcia vs. Ranada, 166 SCRA 9), such as to cure errors in. proceedings or to correct erroneous conclusions of law or fact (Gold City Integrated Ports Services vs. IAC, 171 SCRA 579). Due regard for the foregoing teachings enunciated in the decisions cited can not bring about a decision other than what has been reached herein.

Needless to say, the case before the respondent court involving those against herein respondents for alleged non-payment of the correct amounts due as income tax, ad valorem tax and value added tax for the years 1990, 1991 and 1992 (Civil Case No. Q-94-18790) is not ended by this decision. The respondent Court is still to try the case and decide it on the merits. All that is decided here is but the validity of the orders of the respondent Court granting herein respondents' application for preliminary injunction and denying herein petitioners' motion to dismiss. If upon the facts established after trial and

the applicable law, dissolution of the writ of preliminary injunction allowed to be issued by the respondent Court is called for and a judgment favorable to herein petitioners is demanded, the respondent Court is duty bound to render judgment accordingly.

WHEREFORE, the instant petition for certiorari and prohibition with application for issuance of restraining order and writ of preliminary injunction is DISMISSED. Costs de oficio. 19

Their motion for reconsideration having been denied by respondent appellate court on February 23, 1995, petitioners filed the present petition for review based on the following grounds:

THE RESPONDENT COURTS COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN HOLDING THAT:

I. THERE IS A PREJUDICIAL AND/OR LEGAL QUESTION TO JUSTIFY THE SUSPENSION OF THE PRELIMINARY INVESTIGATION.

II. PRIVATE RESPONDENTS' RIGHTS TO DUE PROCESS, EQUAL PROTECTION AND PRESUMPTION OF INNOCENCE WERE VIOLATED; ON THE CONTRARY, THE STATE ITSELF WAS DEPRIVED OF DUE PROCESS.

III. THE ADMISSION OF PRIVATE RESPONDENTS' SUPPLEMENTAL PETITIONS WERE PROPER.

IV. THERE WAS SELECTIVE PROSECUTION.

V. THE FACTUAL ALLEGATIONS IN THE PETITION ARE HYPOTHETICALLY ADMITTED IN A MOTION TO DISMISS BASED ON JURISDICTIONAL GROUNDS.

VI. THE ISSUANCE OF THE WRITS OF INJUNCTION IS NOT A DECISION ON THE MERITS OF THE PETITION BEFORE THE LOWER COURT. 20

The petition is bereft of merit.

In essence, the complaints in I.S. Nos. 93-508, 93-584 and 93-17942 charged private respondents with fraudulent tax evasion or wilfully attempting to evade or defeat payment of income tax, ad valorem tax and value-added tax for the year 1992, as well as for the years 1990-1991.

The pertinent provisions of law involved are Sections 127(b) and 142(c) of the National Internal Revenue Code which state:

Sec. 127. . . .

(b) Determination of gross selling price of goods subject to ad valorem tax. -- Unless otherwise provided, the price, excluding the value-added tax, at which the goods are sold at wholesale in the place of production or through their sales agents to the public shall constitute the gross selling price. If the manufacturer also sells or allows such goods to be sold at wholesale price in another establishment of which he is the owner or in the profits at which he has an interest, the wholesale price in such establishment shall

constitute the gross selling price. Should such price be less than the costs of manufacture plus expenses incurred until the goods are finally sold, then a proportionate margin of profit, not less than 10% of such manufacturing costs and expenses, shall be added to constitute the gross selling price.

Sec. 142. . . .

(c) Cigarettes packed in twenties. -- There shall be levied, assessed and collected on cigarettes packed in twenties an ad valorem tax at the rates prescribed below based on the manufacturer's registered wholesale price.

xxx xxx xxx

Private respondents contend that per Fortune's VAT returns, correct taxable sales for 1992 was in the amount of P11,736,658,580.00 which was the "manufacturer's registered wholesale price" in accordance with Section 142(c) of the Tax Code and paid the amount of P4,805,254,523 as ad valorem tax.

On the other hand, petitioners allege, as specifically worded in the complaint in I.S. No. 93-508, that "based on the daily manufacturer's sworn statements submitted to the BIR by the Taxpayer (Fortune's) total taxable sales during the year 1992 is P16,686,372,295.00," as result of which Fortune "was able to evade the payment of ad valorem taxes in the aggregate amount of P5,792,479,816.24 . . ."

Petitioners now argue that Section 127(b) lays down the rule that in determining the gross selling price of goods subject to ad valorem tax, it is the price, excluding the value-added tax, at which the goods are sold at wholesale price in the place of production or through their sales agents to the public. The registered wholesale price shall then be used for computing the ad valorem tax which is imposable upon removal of the taxable goods from the place of production. However, petitioners claim that Fortune used the "manufacturer's registered wholesale price" in selling the goods to alleged fictitious individuals and dummy corporations for the purpose of evading the payment of the correct ad valorem tax.

There can be no question that under Section 127(b), the ad valorem tax should be based on the correct price excluding the value-added tax, at which goods are sold at wholesale in the place of production. It is significant to note that among the goods subject to ad valorem tax, the law -- specifically Section 142(c) -- requires that the corresponding tax on cigarettes shall be levied, assessed and collected at the rates based on the "manufacturer's registered wholesale price." Why does the wholesale price need to be registered and what is the purpose of the registration? The reason is self-evident, which is to ensure the payment of the correct taxes by the manufacturers of cigarettes through close supervision, monitoring and checking of the business operations of the cigarette companies. As pointed out by private respondents, no industry is as intensely supervised by the BIR and also by the National Tobacco Administration (NTA). Thus, the purchase and use of raw materials are subject to prior authorization and approval by the NTA. Importations of bobbins or cigarette paper, the

manufacture, sale, and utilization of the same, are subject to BIR supervision and approval. 21

Moreover, as pointed to by private respondents, for purposes of closer supervision by the BIR over the production of cigarettes, Revenue Enforcement Officers are detailed on a 24-hour basis in the premises of the manufacturer to secure production and removal of finished products. Composite Mobile Teams conduct counter-security on the business operations as well as the performance of the Revenue Enforcement Officers detailed thereat. Every transfer of any raw material is not allowed unless, in addition to the required permits, accompanied by Revenue Enforcement Officer. For the purpose of determining the "Manufacturer's Registered Wholesale Price" a cigarette manufacturer is required to file a Manufacturer's Declaration (BIR Form No. 31.03) for each brand of cigarette manufactured, stating: a) Materials, b) Labor; c) Overhead; d) Tax Burden and the Wholesale Price by Case. The data submitted therewith is verified by the Revenue Officers and approved by the Commission of Internal Revenue. Any change in the manufacturer's registered wholesale price of any brand cannot be effected without submitting the corresponding Sworn Manufacturer's Declaration and verified by the Revenue Officer and approved by the Commissioner on Internal Revenue. 22 The amount of ad valorem tax payments together with the Payment Order and Confirmation Receipt Nos. must be indicated in the sales and delivery invoices and together with the Manufacturer's Sworn Declarations on (a) the quantity of raw materials used during the day's operations; (b) the total quantity produced according to brand; and (c) the corresponding quantity removed during the day, the corresponding wholesale price thereof, and the VAT paid thereon must be presented to the corresponding BIR representative for authentication before removal.

Thus, as observed by the trial court in its order of January 25, 1994 granting private respondents' prayer for the issuance of a writ of preliminary injunction, Fortune's registered wholesale price (was) duly approved by the BIR, which fact is not disputed by petitioners. 23

Now, if every step in the production of cigarettes was closely monitored and supervised by the BIR personnel specifically assigned to Fortune's premises, and considering that the Manufacturer's Sworn Declarations on the data required to be submitted by the manufacturer were scrutinized and verified by the BIR and, further, since the manufacturer's wholesale price was duly approved by the BIR, then it is presumed that such registered wholesale price is the same as, or approximates "the price, excluding the value-added tax, at which the goods are sold at wholesale in the place production," otherwise, the BIR would not have approved the registered wholesale price of the goods for purposes of imposing the ad valorem tax due. In such case, and in the absence of contrary evidence, it was precipitate and premature to conclude that private respondents made fraudulent returns or wilfully attempted to evade payment of taxes due. "Wilful" means "premeditated; malicious; done with intent, or with bad motive or purpose, or with indifference to the natural consequence . . ." 24 "Fraud" in its general sense, "is deemed to comprise anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal or equitable duty, trust or

confidence justly reposed, resulting in the damage to another, or by which an undue and unconscionable advantage taken of another. 25

Fraud cannot be presumed. If there was fraud or wilful attempt to evade payment of ad valorem taxes by private respondents through the manipulation of the registered wholesale price of the cigarettes, it must have been with the connivance or cooperation of certain BIR officials and employees who supervised and monitored Fortune's production activities to see to it that the correct taxes were paid. But there is no allegation, much less evidence, of BIR personnel's malfeasance. In the very least, there is the presumption that the BIR personnel performed their duties in the regular course in ensuing the correct taxes were paid by Fortune. 26

It is the opinion of both the trial court and respondent Court of Appeals, that before Fortune and the other private respondents could be prosecuted for tax evasion under Sections 253 and 255 of the Tax Code, the fact that the deficiency income, ad valorem and value-added taxes were due from Fortune for the year 1992 should first be established. Fortune received form the Commissioner of Internal Revenue the deficiency assessment notices in the total amount of P7,685,942,221.06 on August 24, 1993. However, under Section 229 of the Tax Code, the taxpayer has the right to move for reconsideration of the assessment issued by the Commissioner of Internal Revenue within thirty (30) days from receipt of the assessment; and if the motion for reconsideration is denied, it may appeal to the Court of Appeals within thirty (30) days from receipt of the Commissioner's decision. Here, Fortune received the Commissioner's assessment notice dated August 13, 1993 on August 24, 1993 asking for the payment of the deficiency taxes. Within thirty (30) days from receipt thereof, Fortune moved for reconsideration. The Commissioner has not resolved the request for reconsideration up to the present.

We share with the view of both the trial court and court of Appeals that before the tax liabilities of Fortune are first finally determined, it cannot be correctly asserted that private respondents have wilfully attempted to evade or defeat the taxes sought to be collected from Fortune. In plain words, before one is prosecuted for wilful attempt to evade or defeat any tax under Sections 253 and 255 of the Tax code, the fact that a tax is due must first be proved.

Suppose the Commissioner eventually resolves Fortune's motion for reconsideration of the assessments by pronouncing that the taxpayer is not liable for any deficiency assessment, then, the criminal complaints filed against private respondents will have no leg to stand on.

In view of the foregoing reasons, we cannot subscribe to the petitioners' thesis citing Ungad v. Cusi, 27 that the lack of a final determination of Fortune's exact or correct tax liability is not a bar to criminal prosecution, and that while a precise computation and assessment is required for a civil action to collect tax deficiencies, the Tax Code does not require such computation and assessment prior to criminal prosecution.

Reading Ungad carefully, the pronouncement therein that deficiency assessment is not necessary prior to prosecution is pointedly and deliberately qualified by the Court with following statement quoted from Guzik v. U.S.: 28 "The crime is complete when the violator has knowingly and wilfully filed a fraudulent return with intent to evade and defeat apart or all of the tax." In plain words, for criminal prosecution to proceed before assessment, there must be a prima facie showing of a wilful attempt to evade taxes. There was a wilful attempt to evade tax in Ungad because of the taxpayer's failure to declare in his income tax return "his income derived from banana sapplings." In the mind of the trial court and the Court of Appeals, Fortune's situation is quite apart factually since the registered wholesale price of the goods, approved by the BIR, is presumed to be the actual wholesale price, therefore, not fraudulent and unless and until the BIR has made a final determination of what is supposed to be the correct taxes, the taxpayer should not be placed in the crucible of criminal prosecution. Herein lies a whale of difference between Ungad and the case at bar.

This brings us to the erroneous disquisition that private respondents' recourse to the trial court by way of special civil action of certiorari and prohibition was improper because: a) the proceedings before the state prosecutors (preliminary injunction) were far from terminated -- private respondents were merely subpoenaed and asked to submit counter affidavits, matters that they should have appealed to the Secretary of Justice; b) it is only after the submission of private respondents' counter affidavits that the prosecutors will determine whether or not there is enough evidence to file in court criminal charges for fraudulent tax evasion against private respondents; and c) the proper procedure is to allow the prosecutors to conduct and finish the preliminary investigation and to render a resolution, after which the aggrieved party can appeal the resolution to the Secretary of Justice.

We disagree.

As a general rule, criminal prosecutions cannot be enjoined. However, there are recognized exceptions which, as summarized in Brocka v. Enrile 29 are:

a. To afford adequate protection to the constitutional rights of the accused (Hernandez vs. Albano, et al., L-19272, January 25, 1967, 19 SCRA 95);

b. When necessary for the orderly administration of justice or to avoid oppression or multiplicity of actions (Dimayuga, et al. vs. Fernandez, 43 Phil. 304; Hernandez vs. Albano, supra; Fortun vs. Labang, et al., L-38383, May 27, 1981, 104 SCRA 607);

c. When there is a prejudicial question which is sub judice (De Leon vs. Mabanag, 70 Phil 202);

d. When the acts of the officer are without or in excess of authority (Planas vs. Gil, 67 Phil 62);

e. Where the prosecution is under an invalid law, ordinance or regulation (Young vs. Rafferty, 33 Phil. 556; Yu Cong Eng vs. Trinidad, 47 Phil. 385, 389);

f. When double jeopardy is clearly apparent (Sangalang vs. People and Alvendia, 109 Phil. 1140);

g. Where the court had no jurisdiction over the offense (Lopez vs. City Judge, L-25795, October 29, 1966, 18 SCRA 616);

h. Where it is a case of persecution rather than prosecution (Rustia vs. Ocampo, CA-G.R. No. 4760, March 25, 1960);

i. Where the charges are manifestly false and motivated by the lust for vengeance (Recto vs. Castelo, 18 L.J. [1953], cited in Rano vs. Alvenia, CA-G.R. No. 30720-R, October 8, 1962; Cf. Guingona, et al. vs. City Fiscal, L-60033, April 4, 1984, 128 SCRA 577); and

j. When there is clearly no prima facie case against the accused and a motion to quash on that ground has been denied (Salonga vs. Pane, et al., L-59524, February 18, 1985, 134 SCRA 438).

In issuing the questioned orders granting the issuance of a writ of preliminary injunction, the trial court believed that said orders were warranted to afford private respondents adequate protection of their constitutional rights, particularly in reference to presumption of innocence, due process and equal protection of the laws. The trial court also found merit in private respondents' contention that preliminary injunction should be issued to avoid oppression and because the acts of the state prosecutors were without or in excess of authority and for the reason that there was a prejudicial question.

Contrary to petitioners' submission, preliminary investigation may be enjoined where exceptional circumstances so warrant. In Hernandez v. Albano 30 and Fortun v. Labang,

31 injunction was issued to enjoin a preliminary investigation. In the case at bar, private respondents filed a motion to dismiss the complaint against them before the prosecution and alternatively, to suspend the preliminary investigation on the grounds cited hereinbefore, one of which is that the complaint of the Commissioner is not supported by any evidence to serve as adequate basis for the issuance of the subpoena to them and put them to their defense.

Indeed, the purpose of a preliminary injunction is to secure the innocent against hasty, malicious and oppressive prosecution and to protect him from an open and public accusation of crime, from the trouble, expense and anxiety of a public trial and also to protect the state from useless and expensive trials. 32 Thus, the pertinent provisions of Rule 112 of the Rules of Court state:

Sec. 3. Procedure. -- Except as provided for in Section 7 hereof, no complaint or information for an offense cognizable by the Regional Trial Court shall be filed without a preliminary investigation having been first conducted in the following manner:

(a) The complaint shall state the known address of the respondent and be accompanied by affidavits of the complainant and his witnesses as well as other supporting documents, in such number of copies as there are respondents, plus two (2) copies for the official file. The said affidavits shall be sworn to before any fiscal, state prosecutor or government official authorized to administer oath, or, in their absence or unavailability, a notary public,

who must certify that he personally examined the affiants and that he is satisfied that they voluntarily executed and understood their affidavits.

(b) Within ten (10) days after the filing of the complaint, the investigating officer shall either dismiss the same if he finds no ground to continue with the inquiry, or issue a subpoena to the respondent, attaching thereto a copy of the complaint, affidavits and other supporting documents. Within ten (10) days from receipt thereof, the respondent shall submit counter-affidavits and other supporting documents. He shall have the right to examine all other evidence submitted by the complainant.

(c) Such counter-affidavits and other supporting evidence submitted by the respondent shall also be sworn to and certified as prescribed in paragraph (a) hereof and copies thereof shall be furnished by him to the complainant.

(d) If the respondent cannot be subpoenaed, or if subpoenaed, does not submit counter-affidavits within the ten (10) day period, the investigating officer shall base his resolution on the evidence presented by the complainant.

(e) If the investigating officer believes that there are matters to be clarified, he may set a hearing to propound clarificatory questions to the parties or their witnesses, during which the parties shall be afforded an opportunity to be present but without the right to examine or cross-examine. If the parties so desire, they may submit questions to the investigating officer which the latter may propound to the parties or witnesses concerned.

(f) Thereafter, the investigation shall be deemed concluded, and the investigating officer shall resolve the case within ten (10) days therefrom. Upon the evidence thus adduced, the investigating officer shall determine whether or not there is sufficient ground to hold the respondent for trial.

As found by the Court of Appeals, there was obvious haste by which the subpoena was issued to private respondents, just the day after the complaint was filed, hence, without the investigating prosecutors being afforded material time to examine and study the voluminous documents appended to the complaint for them to determine if preliminary investigation should be conducted. The Court of Appeals further added that the precipitate haste in the issuance of the subpoena justified private respondents' misgivings regarding the objectivity and neutrality of the prosecutors in the conduct of the preliminary investigation and so, the appellate court concluded, the grant of preliminary investigation by the trial court to afford adequate protection to private respondents' constitutional rights and to avoid oppression does not constitute grave abuse of discretion amounting to lack of jurisdiction.

The complaint filed by the Commissioner on Internal Revenue states itself that the primary evidence establishing the falsity of the declared taxable sales in 1992 in the amount of P11,736,658,580.00 were the "daily Manufacturer's Sworn Statements" submitted by the taxpayer which would show that the total taxable sales in 1992 are in the amount of P16,686,372,295.00. However, the Commissioner did not present the "Daily Manufacturer's Sworn Statements" supposedly submitted to the BIR by the taxpayer, prompting private respondents to move for their production in order to verify the basis of petitioners' computation. Still, the Commissioner failed to produce the declarations. In Borja v. Moreno, 33 it was held that the act of the investigator in

proceeding with the hearing without first acting on respondents' motion to dismiss is a manifest disregard of the requirement of due process. Implicit in the opinion of the trial court and the Court of Appeals is that, if upon the examination of the complaint, it was clear that there was no ground to continue, with the inquiry, the investigating prosecutor was duty bound to dismiss the case. On this point, the trial court stressed that the prosecutor conducting the preliminary investigation should have allowed the production of the "Daily Manufacturer's Sworn Statements" submitted by Fortune without which there was no valid basis for the allegation that private respondents wilfully attempted to evade payment of the correct taxes. The prosecutors should also have produced the "Daily Manufacturer's Sworn Statements" by other cigarette companies, as sought by private respondents, to show that these companies which had paid the ad valorem taxes on the same basis and in the same manner as Fortune were not similarly criminally charged. But the investigating prosecutors denied private respondents' motion, thus, indicating that only Fortune was singled out for prosecution. The trial court and the Court of Appeals maintained that at that stage of the preliminary investigation, where the complaint and the accompanying affidavits and supporting documents did not show any violation of the Tax Code providing penal sanctions, the prosecutors should have dismissed the complaint outright because of total lack of evidence, instead of requiring private respondents to submit their counter affidavits under Section 3(b) of Rule 112.

We believe that the trial court in issuing its questioned orders, which are interlocutory in nature, committed no grave abuse of discretion amounting to lack of jurisdiction. There are factual and legal bases for the assailed orders. On the other hand, the burden is upon the petitioners to demonstrate that the questioned orders constitute a whimsical and capricious exercise of judgment, which they have not. For certiorari will not be issued to cure errors in proceedings or correct erroneous conclusions of law or fact. As long as a court acts within its jurisdiction, any alleged errors committed in the exercise of its jurisdiction will amount to nothing more than errors of judgment which are reviewable by timely appeal and not by a special civil action of certiorari. 34 Consequently, the Regional Trial Court acted correctly and judiciously, and as demanded by the facts and the law, in issuing the orders granting the writs of preliminary injunction, in denying petitioners' motion to dismiss and in admitting the supplemental petitions. What petitioners should have done was to file an answer to the petition filed in the trial court, proceed to the hearing and appeal the decision of the court if adverse to them.

WHEREFORE, the instant petition is hereby DISMISSED.

G.R. No. 120880 June 5, 1997

FERDINAND R. MARCOS II, petitioner, vs.

COURT OF APPEALS, THE COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE and HERMINIA D. DE GUZMAN, respondents.

 

TORRES, JR., J.:

In this Petition for Review on Certiorari, Government action is once again assailed as precipitate and unfair, suffering the basic and oftly implored requisites of due process of law. Specifically, the petition assails the Decision 1 of the Court of Appeals dated November 29, 1994 in CA-G.R. SP No. 31363, where the said court held:

In view of all the foregoing, we rule that the deficiency income tax assessments and estate tax assessment, are already final and (u)nappealable-and-the subsequent levy of real properties is a tax remedy resorted to by the government, sanctioned by Section 213 and 218 of the National Internal Revenue Code. This summary tax remedy is distinct and separate from the other tax remedies (such as Judicial Civil actions and Criminal actions), and is not affected or precluded by the pendency of any other tax remedies instituted by the government.

WHEREFORE, premises considered, judgment is hereby rendered DISMISSING the petition for certiorari with prayer for Restraining Order and Injunction.

No pronouncements as to costs.

SO ORDERED.

More than seven years since the demise of the late Ferdinand E. Marcos, the former President of the Republic of the Philippines, the matter of the settlement of his estate, and its dues to the government in estate taxes, are still unresolved, the latter issue being now before this Court for resolution. Specifically, petitioner Ferdinand R. Marcos II, the eldest son of the decedent, questions the actuations of the respondent Commissioner of Internal Revenue in assessing, and collecting through the summary remedy of Levy on Real Properties, estate and income tax delinquencies upon the estate and properties of his father, despite the pendency of the proceedings on probate of the will of the late president, which is docketed as Sp. Proc. No. 10279 in the Regional Trial Court of Pasig, Branch 156.

Petitioner had filed with the respondent Court of Appeals a Petition for Certiorari and Prohibition with an application for writ of preliminary injunction and/or temporary restraining order on June 28, 1993, seeking to —

I. Annul and set aside the Notices of Levy on real property dated February 22, 1993 and May 20, 1993, issued by respondent Commissioner of Internal Revenue;

II. Annul and set aside the Notices of Sale dated May 26, 1993;

III. Enjoin the Head Revenue Executive Assistant Director II (Collection Service), from proceeding with the Auction of the real properties covered by Notices of Sale.

After the parties had pleaded their case, the Court of Appeals rendered its Decision 2 on November 29, 1994, ruling that the deficiency assessments for estate and income tax made upon the petitioner and the estate of the deceased President Marcos have already become final and unappealable, and may thus be enforced by the summary remedy of levying upon the properties of the late President, as was done by the respondent Commissioner of Internal Revenue.

WHEREFORE, premises considered judgment is hereby rendered DISMISSING the petition for Certiorari with prayer for Restraining Order and Injunction.

No pronouncements as to cost.

SO ORDERED.

Unperturbed, petitioner is now before us assailing the validity of the appellate court's decision, assigning the following as errors:

A. RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT THE SUMMARY TAX REMEDIES RESORTED TO BY THE GOVERNMENT ARE NOT AFFECTED AND PRECLUDED BY THE PENDENCY OF THE SPECIAL PROCEEDING FOR THE ALLOWANCE OF THE LATE PRESIDENT'S ALLEGED WILL. TO THE CONTRARY, THIS PROBATE PROCEEDING PRECISELY PLACED ALL PROPERTIES WHICH FORM PART OF THE LATE PRESIDENT'S ESTATE IN CUSTODIA LEGIS OF THE PROBATE COURT TO THE EXCLUSION OF ALL OTHER COURTS AND ADMINISTRATIVE AGENCIES.

B. RESPONDENT COURT ARBITRARILY ERRED IN SWEEPINGLY DECIDING THAT SINCE THE TAX ASSESSMENTS OF PETITIONER AND HIS PARENTS HAD ALREADY BECOME FINAL AND UNAPPEALABLE, THERE WAS NO NEED TO GO INTO THE MERITS OF THE GROUNDS CITED IN THE PETITION. INDEPENDENT OF WHETHER THE TAX ASSESSMENTS HAD ALREADY BECOME FINAL, HOWEVER, PETITIONER HAS THE RIGHT TO QUESTION THE UNLAWFUL MANNER AND METHOD IN WHICH TAX COLLECTION IS SOUGHT TO BE ENFORCED BY RESPONDENTS COMMISSIONER AND DE GUZMAN. THUS, RESPONDENT COURT SHOULD HAVE FAVORABLY CONSIDERED THE MERITS OF THE FOLLOWING GROUNDS IN THE PETITION:

(1) The Notices of Levy on Real Property were issued beyond the period provided in the Revenue Memorandum Circular No. 38-68.

(2) [a] The numerous pending court cases questioning the late President's ownership or interests in several properties (both personal and real) make the total value of his estate, and the consequent estate tax due, incapable of exact pecuniary determination at this time. Thus, respondents' assessment of the estate tax and their issuance of the Notices of Levy and Sale are premature, confiscatory and oppressive.

[b] Petitioner, as one of the late President's compulsory heirs, was never notified, much less served with copies of the Notices of Levy, contrary to the mandate of Section 213 of the NIRC. As such, petitioner was never given an opportunity to contest the Notices in violation of his right to due process of law.

C. ON ACCOUNT OF THE CLEAR MERIT OF THE PETITION, RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT IT HAD NO POWER TO GRANT INJUNCTIVE RELIEF TO PETITIONER. SECTION 219 OF THE NIRC NOTWITHSTANDING, COURTS POSSESS THE POWER TO ISSUE A WRIT OF PRELIMINARY INJUNCTION TO RESTRAIN RESPONDENTS COMMISSIONER'S AND DE GUZMAN'S ARBITRARY METHOD OF COLLECTING THE ALLEGED DEFICIENCY ESTATE AND INCOME TAXES BY MEANS OF LEVY.

The facts as found by the appellate court are undisputed, and are hereby adopted:

On September 29, 1989, former President Ferdinand Marcos died in Honolulu, Hawaii, USA.

On June 27, 1990, a Special Tax Audit Team was created to conduct investigations and examinations of the tax liabilities and obligations of the late president, as well as that of his family, associates and "cronies". Said audit team concluded its investigation with a Memorandum dated July 26, 1991. The investigation disclosed that the Marcoses failed to file a written notice of the death of the decedent, an estate tax returns [sic], as well as several income tax returns covering the years 1982 to 1986, — all in violation of the National Internal Revenue Code (NIRC).

Subsequently, criminal charges were filed against Mrs. Imelda R. Marcos before the Regional Trial of Quezon City for violations of Sections 82, 83 and 84 (has penalized under Sections 253 and 254 in relation to Section 252 — a & b) of the National Internal Revenue Code (NIRC).

The Commissioner of Internal Revenue thereby caused the preparation and filing of the Estate Tax Return for the estate of the late president, the Income Tax Returns of the Spouses Marcos for the years 1985 to 1986, and the Income Tax Returns of petitioner Ferdinand "Bongbong" Marcos II for the years 1982 to 1985.

On July 26, 1991, the BIR issued the following: (1) Deficiency estate tax assessment no. FAC-2-89-91-002464 (against the estate of the late president Ferdinand Marcos in the amount of P23,293,607,638.00 Pesos); (2) Deficiency income tax assessment no. FAC-1-85-91-002452 and Deficiency income tax assessment no. FAC-1-86-91-002451 (against the Spouses Ferdinand and Imelda Marcos in the amounts of P149,551.70 and P184,009,737.40 representing deficiency income tax for the years 1985 and 1986); (3) Deficiency income tax assessment nos. FAC-1-82-91-002460 to FAC-1-85-91-002463 (against petitioner Ferdinand "Bongbong" Marcos II in the amounts of P258.70 pesos; P9,386.40 Pesos; P4,388.30 Pesos; and P6,376.60 Pesos representing his deficiency income taxes for the years 1982 to 1985).

The Commissioner of Internal Revenue avers that copies of the deficiency estate and income tax assessments were all personally and constructively served on August 26, 1991 and September 12, 1991 upon Mrs. Imelda Marcos (through her caretaker Mr. Martinez) at her last known address at No. 204 Ortega St., San Juan, M.M. (Annexes "D" and "E" of the Petition). Likewise, copies of the deficiency tax assessments issued against petitioner Ferdinand "Bongbong" Marcos II were also personally and constructively served upon him (through his caretaker) on September 12, 1991, at his last known address at Don Mariano Marcos St. corner P. Guevarra St., San Juan, M.M. (Annexes "J" and "J-1" of the Petition). Thereafter, Formal Assessment notices were served on October 20, 1992, upon Mrs. Marcos c/o petitioner, at his office, House of Representatives, Batasan Pambansa, Quezon City. Moreover, a notice to Taxpayer

inviting Mrs. Marcos (or her duly authorized representative or counsel), to a conference, was furnished the counsel of Mrs. Marcos, Dean Antonio Coronel — but to no avail.

The deficiency tax assessments were not protested administratively, by Mrs. Marcos and the other heirs of the late president, within 30 days from service of said assessments.

On February 22, 1993, the BIR Commissioner issued twenty-two notices of levy on real property against certain parcels of land owned by the Marcoses — to satisfy the alleged estate tax and deficiency income taxes of Spouses Marcos.

On May 20, 1993, four more Notices of Levy on real property were issued for the purpose of satisfying the deficiency income taxes.

On May 26, 1993, additional four (4) notices of Levy on real property were again issued. The foregoing tax remedies were resorted to pursuant to Sections 205 and 213 of the National Internal Revenue Code (NIRC).

In response to a letter dated March 12, 1993 sent by Atty. Loreto Ata (counsel of herein petitioner) calling the attention of the BIR and requesting that they be duly notified of any action taken by the BIR affecting the interest of their client Ferdinand "Bongbong" Marcos II, as well as the interest of the late president — copies of the aforesaid notices were, served on April 7, 1993 and on June 10, 1993, upon Mrs. Imelda Marcos, the petitioner, and their counsel of record, "De Borja, Medialdea, Ata, Bello, Guevarra and Serapio Law Office".

Notices of sale at public auction were posted on May 26, 1993, at the lobby of the City Hall of Tacloban City. The public auction for the sale of the eleven (11) parcels of land took place on July 5, 1993. There being no bidder, the lots were declared forfeited in favor of the government.

On June 25, 1993, petitioner Ferdinand "Bongbong" Marcos II filed the instant petition for certiorari and prohibition under Rule 65 of the Rules of Court, with prayer for temporary restraining order and/or writ of preliminary injunction.

It has been repeatedly observed, and not without merit, that the enforcement of tax laws and the collection of taxes, is of paramount importance for the sustenance of government. Taxes are the lifeblood of the government and should be collected without unnecessary hindrance. However, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. 3

Whether or not the proper avenues of assessment and collection of the said tax obligations were taken by the respondent Bureau is now the subject of the Court's inquiry.

Petitioner posits that notices of levy, notices of sale, and subsequent sale of properties of the late President Marcos effected by the BIR are null and void for disregarding the established procedure for the enforcement of taxes due upon the estate of the deceased. The case of Domingo vs. Garlitos 4 is specifically cited to bolster the

argument that "the ordinary procedure by which to settle claims of indebtedness against the estate of a deceased, person, as in an inheritance (estate) tax, is for the claimant to present a claim before the probate court so that said court may order the administrator to pay the amount therefor." This remedy is allegedly, exclusive, and cannot be effected through any other means.

Petitioner goes further, submitting that the probate court is not precluded from denying a request by the government for the immediate payment of taxes, and should order the payment of the same only within the period fixed by the probate court for the payment of all the debts of the decedent. In this regard, petitioner cites the case of Collector of Internal Revenue vs. The Administratrix of the Estate of Echarri (67 Phil 502), where it was held that:

The case of Pineda vs. Court of First Instance of Tayabas and Collector of Internal Revenue (52 Phil 803), relied upon by the petitioner-appellant is good authority on the proposition that the court having control over the administration proceedings has jurisdiction to entertain the claim presented by the government for taxes due and to order the administrator to pay the tax should it find that the assessment was proper, and that the tax was legal, due and collectible. And the rule laid down in that case must be understood in relation to the case of Collector of Customs vs. Haygood, supra., as to the procedure to be followed in a given case by the government to effectuate the collection of the tax. Categorically stated, where during the pendency of judicial administration over the estate of a deceased person a claim for taxes is presented by the government, the court has the authority to order payment by the administrator; but, in the same way that it has authority to order payment or satisfaction, it also has the negative authority to deny the same. While there are cases where courts are required to perform certain duties mandatory and ministerial in character, the function of the court in a case of the present character is not one of them; and here, the court cannot be an organism endowed with latitude of judgment in one direction, and converted into a mere mechanical contrivance in another direction.

On the other hand, it is argued by the BIR, that the state's authority to collect internal revenue taxes is paramount. Thus, the pendency of probate proceedings over the estate of the deceased does not preclude the assessment and collection, through summary remedies, of estate taxes over the same. According to the respondent, claims for payment of estate and income taxes due and assessed after the death of the decedent need not be presented in the form of a claim against the estate. These can and should be paid immediately. The probate court is not the government agency to decide whether an estate is liable for payment of estate of income taxes. Well-settled is the rule that the probate court is a court with special and limited jurisdiction.

Concededly, the authority of the Regional Trial Court, sitting, albeit with limited jurisdiction, as a probate court over estate of deceased individual, is not a trifling thing. The court's jurisdiction, once invoked, and made effective, cannot be treated with indifference nor should it be ignored with impunity by the very parties invoking its authority.

In testament to this, it has been held that it is within the jurisdiction of the probate court to approve the sale of properties of a deceased person by his prospective heirs before

final adjudication; 5 to determine who are the heirs of the decedent; 6 the recognition of a natural child; 7 the status of a woman claiming to be the legal wife of the decedent; 8 the legality of disinheritance of an heir by the testator; 9 and to pass upon the validity of a waiver of hereditary rights. 10

The pivotal question the court is tasked to resolve refers to the authority of the Bureau of Internal Revenue to collect by the summary remedy of levying upon, and sale of real properties of the decedent, estate tax deficiencies, without the cognition and authority of the court sitting in probate over the supposed will of the deceased.

The nature of the process of estate tax collection has been described as follows:

Strictly speaking, the assessment of an inheritance tax does not directly involve the administration of a decedent's estate, although it may be viewed as an incident to the complete settlement of an estate, and, under some statutes, it is made the duty of the probate court to make the amount of the inheritance tax a part of the final decree of distribution of the estate. It is not against the property of decedent, nor is it a claim against the estate as such, but it is against the interest or property right which the heir, legatee, devisee, etc., has in the property formerly held by decedent. Further, under some statutes, it has been held that it is not a suit or controversy between the parties, nor is it an adversary proceeding between the state and the person who owes the tax on the inheritance. However, under other statutes it has been held that the hearing and determination of the cash value of the assets and the determination of the tax are adversary proceedings. The proceeding has been held to be necessarily a proceeding in rem. 11

In the Philippine experience, the enforcement and collection of estate tax, is executive in character, as the legislature has seen it fit to ascribe this task to the Bureau of Internal Revenue. Section 3 of the National Internal Revenue Code attests to this:

Sec. 3. Powers and duties of the Bureau. — The powers and duties of the Bureau of Internal Revenue shall comprehend the assessment and collection of all national internal revenue taxes, fees, and charges, and the enforcement of all forfeitures, penalties, and fines connected therewith, including the execution of judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts. Said Bureau shall also give effect to and administer the supervisory and police power conferred to it by this Code or other laws.

Thus, it was in Vera vs. Fernandez 12 that the court recognized the liberal treatment of claims for taxes charged against the estate of the decedent. Such taxes, we said, were exempted from the application of the statute of non-claims, and this is justified by the necessity of government funding, immortalized in the maxim that taxes are the lifeblood of the government. Vectigalia nervi sunt rei publicae — taxes are the sinews of the state.

Taxes assessed against the estate of a deceased person, after administration is opened, need not be submitted to the committee on claims in the ordinary course of administration. In the exercise of its control over the administrator, the court may direct the payment of such taxes upon motion showing that the taxes have been assessed against the estate.

Such liberal treatment of internal revenue taxes in the probate proceedings extends so far, even to allowing the enforcement of tax obligations against the heirs of the decedent, even after distribution of the estate's properties.

Claims for taxes, whether assessed before or after the death of the deceased, can be collected from the heirs even after the distribution of the properties of the decedent. They are exempted from the application of the statute of non-claims. The heirs shall be liable therefor, in proportion to their share in the inheritance. 13

Thus, the Government has two ways of collecting the taxes in question. One, by going after all the heirs and collecting from each one of them the amount of the tax proportionate to the inheritance received. Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all property and rights to property belong to the taxpayer for unpaid income tax, is by subjecting said property of the estate which is in the hands of an heir or transferee to the payment of the tax due the estate. (Commissioner of Internal Revenue vs. Pineda, 21 SCRA 105, September 15, 1967.)

From the foregoing, it is discernible that the approval of the court, sitting in probate, or as a settlement tribunal over the deceased is not a mandatory requirement in the collection of estate taxes. It cannot therefore be argued that the Tax Bureau erred in proceeding with the levying and sale of the properties allegedly owned by the late President, on the ground that it was required to seek first the probate court's sanction. There is nothing in the Tax Code, and in the pertinent remedial laws that implies the necessity of the probate or estate settlement court's approval of the state's claim for estate taxes, before the same can be enforced and collected.

On the contrary, under Section 87 of the NIRC, it is the probate or settlement court which is bidden not to authorize the executor or judicial administrator of the decedent's estate to deliver any distributive share to any party interested in the estate, unless it is shown a Certification by the Commissioner of Internal Revenue that the estate taxes have been paid. This provision disproves the petitioner's contention that it is the probate court which approves the assessment and collection of the estate tax.

If there is any issue as to the validity of the BIR's decision to assess the estate taxes, this should have been pursued through the proper administrative and judicial avenues provided for by law.

Section 229 of the NIRC tells us how:

Sec. 229. Protesting of assessment. — When the Commissioner of Internal Revenue or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings. Within a period to be prescribed by implementing regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner shall issue an assessment based on his findings.

Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation in such form and manner as may be prescribed by implementing regulations within (30) days from receipt of the assessment; otherwise, the assessment shall become final and unappealable.

If the protest is denied in whole or in part, the individual, association or corporation adversely affected by the decision on the protest may appeal to the Court of Tax Appeals within thirty (30) days from receipt of said decision; otherwise, the decision shall become final, executory and demandable. (As inserted by P.D. 1773)

Apart from failing to file the required estate tax return within the time required for the filing of the same, petitioner, and the other heirs never questioned the assessments served upon them, allowing the same to lapse into finality, and prompting the BIR to collect the said taxes by levying upon the properties left by President Marcos.

Petitioner submits, however, that "while the assessment of taxes may have been validly undertaken by the Government, collection thereof may have been done in violation of the law. Thus, the manner and method in which the latter is enforced may be questioned separately, and irrespective of the finality of the former, because the Government does not have the unbridled discretion to enforce collection without regard to the clear provision of law." 14

Petitioner specifically points out that applying Memorandum Circular No. 38-68, implementing Sections 318 and 324 of the old tax code (Republic Act 5203), the BIR's Notices of Levy on the Marcos properties, were issued beyond the allowed period, and are therefore null and void:

. . . the Notices of Levy on Real Property (Annexes O to NN of Annex C of this Petition) in satisfaction of said assessments were still issued by respondents well beyond the period mandated in Revenue Memorandum Circular No. 38-68. These Notices of Levy were issued only on 22 February 1993 and 20 May 1993 when at least seventeen (17) months had already lapsed from the last service of tax assessment on 12 September 1991. As no notices of distraint of personal property were first issued by respondents, the latter should have complied with Revenue Memorandum Circular No. 38-68 and issued these Notices of Levy not earlier than three (3) months nor later than six (6) months from 12 September 1991. In accordance with the Circular, respondents only had until 12 March 1992 (the last day of the sixth month) within which to issue these Notices of Levy. The Notices of Levy, having been issued beyond the period allowed by law, are thus void and of no effect. 15

We hold otherwise. The Notices of Levy upon real property were issued within the prescriptive period and in accordance with the provisions of the present Tax Code. The deficiency tax assessment, having already become final, executory, and demandable, the same can now be collected through the summary remedy of distraint or levy pursuant to Section 205 of the NIRC.

The applicable provision in regard to the prescriptive period for the assessment and collection of tax deficiency in this instance is Article 223 of the NIRC, which pertinently provides:

Sec. 223. Exceptions as to a 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 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 (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.

xxx xxx xxx

(c) Any internal revenue tax which has been assessed within the period of limitation above prescribed, may be collected by distraint or levy or by a proceeding in court within three years following the assessment of the tax.

xxx xxx xxx

The omission to file an estate tax return, and the subsequent failure to contest or appeal the assessment made by the BIR is fatal to the petitioner's cause, as under the above-cited provision, in case of failure to file a return, the tax may be assessed at any time within ten years after the omission, and any tax so assessed may be collected by levy upon real property within three years following the assessment of the tax. Since the estate tax assessment had become final and unappealable by the petitioner's default as regards protesting the validity of the said assessment, there is now no reason why the BIR cannot continue with the collection of the said tax. Any objection against the assessment should have been pursued following the avenue paved in Section 229 of the NIRC on protests on assessments of internal revenue taxes.

Petitioner further argues that "the numerous pending court cases questioning the late president's ownership or interests in several properties (both real and personal) make the total value of his estate, and the consequent estate tax due, incapable of exact pecuniary determination at this time. Thus, respondents' assessment of the estate tax and their issuance of the Notices of Levy and sale are premature and oppressive." He points out the pendency of Sandiganbayan Civil Case Nos. 0001-0034 and 0141, which were filed by the government to question the ownership and interests of the late President in real and personal properties located within and outside the Philippines. Petitioner, however, omits to allege whether the properties levied upon by the BIR in the collection of estate taxes upon the decedent's estate were among those involved in the said cases pending in the Sandiganbayan. Indeed, the court is at a loss as to how these cases are relevant to the matter at issue. The mere fact that the decedent has pending cases involving ill-gotten wealth does not affect the enforcement of tax assessments over the properties indubitably included in his estate.

Petitioner also expresses his reservation as to the propriety of the BIR's total assessment of P23,292,607,638.00, stating that this amount deviates from the findings of the Department of Justice's Panel of Prosecutors as per its resolution of 20 September 1991. Allegedly, this is clear evidence of the uncertainty on the part of the Government as to the total value of the estate of the late President.

This is, to our mind, the petitioner's last ditch effort to assail the assessment of estate tax which had already become final and unappealable.

It is not the Department of Justice which is the government agency tasked to determine the amount of taxes due upon the subject estate, but the Bureau of Internal Revenue, 16

whose determinations and assessments are presumed correct and made in good faith. 17 The taxpayer has the duty of proving otherwise. In the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. Even an assessment based on estimates is prima facie valid and lawful where it does not appear to have been arrived at arbitrarily or capriciously. The burden of proof is upon the complaining party to show clearly that the assessment is erroneous. Failure to present proof of error in the assessment will justify the judicial affirmance of said assessment. 18 In this instance, petitioner has not pointed out one single provision in the Memorandum of the Special Audit Team which gave rise to the questioned assessment, which bears a trace of falsity. Indeed, the petitioner's attack on the assessment bears mainly on the alleged improbable and unconscionable amount of the taxes charged. But mere rhetoric cannot supply the basis for the charge of impropriety of the assessments made.

Moreover, these objections to the assessments should have been raised, considering the ample remedies afforded the taxpayer by the Tax Code, with the Bureau of Internal Revenue and the Court of Tax Appeals, as described earlier, and cannot be raised now via Petition for Certiorari, under the pretext of grave abuse of discretion. The course of action taken by the petitioner reflects his disregard or even repugnance of the established institutions for governance in the scheme of a well-ordered society. The subject tax assessments having become final, executory and enforceable, the same can no longer be contested by means of a disguised protest. In the main, Certiorari may not be used as a substitute for a lost appeal or remedy. 19 This judicial policy becomes more pronounced in view of the absence of sufficient attack against the actuations of government.

On the matter of sufficiency of service of Notices of Assessment to the petitioner, we find the respondent appellate court's pronouncements sound and resilient to petitioner's attacks.

Anent grounds 3(b) and (B) — both alleging/claiming lack of notice — We find, after considering the facts and circumstances, as well as evidences, that there was sufficient, constructive and/or actual notice of assessments, levy and sale, sent to herein petitioner Ferdinand "Bongbong" Marcos as well as to his mother Mrs. Imelda Marcos.

Even if we are to rule out the notices of assessments personally given to the caretaker of Mrs. Marcos at the latter's last known address, on August 26, 1991 and September 12, 1991, as well as the notices of assessment personally given to the caretaker of petitioner also at his last known address on September 12, 1991 — the subsequent notices given thereafter could no longer be ignored as they were sent at a time when petitioner was already here in the Philippines, and at a place where said notices would surely be called to petitioner's attention, and received by responsible persons of sufficient age and discretion.

Thus, on October 20, 1992, formal assessment notices were served upon Mrs. Marcos c/o the petitioner, at his office, House of Representatives, Batasan Pambansa, Q.C. (Annexes "A", "A-1", "A-2", "A-3"; pp. 207-210, Comment/Memorandum of OSG). Moreover, a notice to taxpayer dated October 8, 1992 inviting Mrs. Marcos to a conference relative to her tax liabilities, was furnished the counsel of Mrs. Marcos —

Dean Antonio Coronel (Annex "B", p. 211, ibid). Thereafter, copies of Notices were also served upon Mrs. Imelda Marcos, the petitioner and their counsel "De Borja, Medialdea, Ata, Bello, Guevarra and Serapio Law Office", on April 7, 1993 and June 10, 1993. Despite all of these Notices, petitioner never lifted a finger to protest the assessments, (upon which the Levy and sale of properties were based), nor appealed the same to the Court of Tax Appeals.

There being sufficient service of Notices to herein petitioner (and his mother) and it appearing that petitioner continuously ignored said Notices despite several opportunities given him to file a protest and to thereafter appeal to the Court of Tax Appeals, — the tax assessments subject of this case, upon which the levy and sale of properties were based, could no longer be contested (directly or indirectly) via this instant petition for certiorari. 20

Petitioner argues that all the questioned Notices of Levy, however, must be nullified for having been issued without validly serving copies thereof to the petitioner. As a mandatory heir of the decedent, petitioner avers that he has an interest in the subject estate, and notices of levy upon its properties should have been served upon him.

We do not agree. In the case of notices of levy issued to satisfy the delinquent estate tax, the delinquent taxpayer is the Estate of the decedent, and not necessarily, and exclusively, the petitioner as heir of the deceased. In the same vein, in the matter of income tax delinquency of the late president and his spouse, petitioner is not the taxpayer liable. Thus, it follows that service of notices of levy in satisfaction of these tax delinquencies upon the petitioner is not required by law, as under Section 213 of the NIRC, which pertinently states:

xxx xxx xxx

. . . Levy shall be effected by writing upon said certificate a description of the property upon which levy is made. At the same time, written notice of the levy shall be mailed to or served upon the Register of Deeds of the province or city where the property is located and upon the delinquent taxpayer, or if he be absent from the Philippines, to his agent or the manager of the business in respect to which the liability arose, or if there be none, to the occupant of the property in question.

xxx xxx xxx

The foregoing notwithstanding, the record shows that notices of warrants of distraint and levy of sale were furnished the counsel of petitioner on April 7, 1993, and June 10, 1993, and the petitioner himself on April 12, 1993 at his office at the Batasang Pambansa. 21 We cannot therefore, countenance petitioner's insistence that he was denied due process. Where there was an opportunity to raise objections to government action, and such opportunity was disregarded, for no justifiable reason, the party claiming oppression then becomes the oppressor of the orderly functions of government. He who comes to court must come with clean hands. Otherwise, he not only taints his name, but ridicules the very structure of established authority.

IN VIEW WHEREOF, the Court RESOLVED to DENY the present petition. The Decision of the Court of Appeals dated November 29, 1994 is hereby AFFIRMED in all respects.

SO ORDERED.

G.R. No. 78391 October 21, 1988

REPUBLIC OF THE PHILIPPINES, petitioner, vs.RAMON G. ENRIQUEZ, Deputy Sheriff of Manila, respondent.

The Solicitor General for petitioner.

Sison, Ortiz & Associates for petitioner.

 

PADILLA, J.:

Appeal by way of certiorari from the decision * of the Court of Appeals in CA-G.R. SP. No. 09582, dated 30 April 1987, dismissing the petition for prohibition with preliminary injunction, filed by petitioner Republic of the Philippines against respondent Ramon G. Enriquez, Deputy Sheriff of Manila.

On 28 January 1985, the petitioner, through the Commissioner of Internal Revenue, served a Warrant of Distraint of Personal Property on the Maritime Company of the. Philippines to satisfy various deficiency taxes of said company in the total amount of P17,284,882.45, pursuant to unappealed and final tax assessments. 1 On 16 April 1985, a Receipt for Goods, and Things Seized Under Authority of the National Internal Revenue Code was executed, wherein Headquarters, First Coast Guard District, Farola Compound, Binondo, Manila, acknowledged receipt from the Commissioner of Internal Revenue of several barges, vehicles and two (2) bodegas of spare parts belonging to the taxpayer (Maritime Company of the Philippines). 2 On 4 October 1985, the corresponding Notice of Seizure of Personal Property, a copy of which was received by a respresentative of the Maritime Company of the Philippines, was issued by the Commissioner of Internal Revenue. 3 Among the properties seized were six (6) barges, Barge MCP-1 to BargeMCP-6.

On 11 June 1986, respondent sheriff levied on two (2) barges of the Maritime Company of the Philippines, pursuant to a writ of execution issued on 19 February 1986 by the Regional Trial Court of Manila, Branch 31, in Civil Case No. 85-30134, entitled "Genstar Container Corporation vs. Maritime Company of the Philippines", in favor of the plaintiff therein. Respondent sheriff scheduled a public auction sale, of the levied barges on 23 June 1986. The barges, particularly Barge MCP-1 and Barge MCP-4, were among the

aforementioned properties distrained and seized by petitioner, through the Commissioner of Internal Revenue.

On 18 June 1986, the Commissioner of Internal Revenue wrote respondent sheriff informing the latter that Barge MCP-1 and Barge MCP-4 were no longer owned by the Maritime Company of the Philippines as said barges had been distrained and seized by the Bureau of Internal Revenue in satisfaction of various deficiency taxes of Maritime Company of the Philippines, thereby registering its adverse claim over said barges. The letter, together with the affidavit of adverse claim and other supporting papers, was filed on 19 June 1986 at the office of respondent deputy sheriff and was received by one Zenriquez, 6-19-86, Staff II." 4

On 23 June 1986, respondent deputy sheriff sold at public auction the two (2) barges, MCP-1 and MCP-4, and issued the corresponding sheriffs certificate of sale on the same date to the highest bidder which was the levying creditor. On 24 July 1986, petitioner filed before the Court of Appeals the aforementioned petition for prohibition with preliminary injunction, alleging that respondent sheriff, Ramon G. Enriquez, acted in excess of his authority or with grave abuse of discretion when he levied on execution and subsequently auctioned the abovesaid two (2) barges which were the subject of a warrant of distraint and notice of seizure by the Commissioner of Internal Revenue. Petitioner prayed that respondent be ordered to desist and refrain from further proceedings in connection with the execution and that respondent's notice of levy be declared null and void.

In its decision, dated 30 April 1987, the Court of Appeals dismissed the petition after finding that "(H)e appears to have acted in accordance with law and in keeping with his duties. There is no perceived abuse of authority or grave abuse of discretion." Hence, this appeal.

The only issue to be resolved in this appeal is the validity and effectiveness of the BIR warrant of distraint and notice of seizure of personal property as against the writ of execution issued by the Regional Trial Court and the levy on execution and auction sale of the barges in question.

It is settled that the claim of the government predicated on a tax lien is superior to the claim of a private litigant predicated on a judgment. The tax lien attaches not only from the service of the warrant of distraint of personal property but from the time the tax became due and payable. 5 Besides, the distraint on the subject properties of Maritime Company of the Philippines as well as the notice of their seizure were made by petitioner, through the Commissioner of Internal Revenue, long before the writ of execution was issued by the Regional Trial Court of Manila, Branch 31. There is no question then that at the time the writ of execution was issued, the two (2) barges, MCP-1 and MCP-4, were no longer properties of the Maritime Company of the Philippines. The power of the court in execution of judgments extends only to properties unquestionably belonging to the judgment debtor. Execution sales affect the rights of the judgment debtor only, and the purchaser in an auction sale acquires only such right

as the judgment debtor had at the time of sale. It is also well-settled that the sheriff is not authorized to attach or levy on property not belonging to the judgment debtor. 6

While it is correct for the Court of Appeals to declare that there are other remedies available to the government in connection with its tax claims, yet, the filing of a separate action, in accordance with Section 17, Rule 39, of the Rules of Court would only delay final satisfaction of the tax liabilities of the Maritime Company of the Philippines. The purpose of said rule is to afford a claimant an opportunity to vindicate his ownership over the property levied upon by the sheriff. In the case at bar, however, there is no further need for petitioner to establish its rights over the two (2) barges in question as the evidence on record clearly proves that the barges are under distraint and, in fact, seized by petitioner, through the Commissioner of Internal Revenue, in satisfaction of various final deficiency taxes of the Maritime Company of the Philippines.

The Court of Appeals gave much weight to the claim of respondent sheriff that he was unaware of any adverse claim over the subject barges. This claim is belied by receipt in the office of respondent by one "Zenriquez, 6-19-86, Staff II" of the letter dated 18 June 1986, from the Commissioner of Internal Revenue informing respondent that the two (2) barges were under distraint and no longer owned by the Maritime Company of the Philippines. It was incumbent upon respondent to have reminded members of his staff to notify him immediately of important communications or papers affecting the discharge of his official duties. Proof of due receipt by respondent's office of the petitioner's adverse claim prevails over respondent's denial thereof. It was not necessary that respondent's personal receipt of the BIR Commissioner's letter be shown on the face of the letter. It is standard operating procedure in government offices to maintain log books which record the inward and outward flow of official documents and papers. Besides, respondent never denied that Zenriquez Staff II" was a member of his office staff on 19 June 1986 when the BIR Commissioner's letter registering the petitioner's adverse claim to the subject barges, was received in respondent's office.

WHEREFORE, the instant petition is GRANTED, The appealed decision is SET ASIDE. The notice of levy upon as well as execution sale of Barges MCP-1 and MCP-4 are ANNULLED and the respondent is ENJOINED from further proceeding with their sale in Civil Case No. 85-30134 of the Regional Trial Court of Manila, Branch 31.

In the event that the execution sale, having been consummated, results innon-recovery of the aforesaid barges, respondent is ordered to remit to the Bureau of Internal Revenue the proceeds of the execution sale of said barges, to be applied in partial satisfaction of the tax liabilities of Maritime Company of the Philippines to the Philippine government.