Tax 2 cases Hizon - Reyes

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G.R. No. 130430 December 13, 1999

REPUBLIC OF THE PHILIPPINES, represented by theCommissioner 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 TrialCourt, 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 adeficiency income tax assessment of P1,113,359.68 covering the fiscalyear 1981-1982. Respondent not having contested the assessment, petitioner, on January 12, 1989, served warrants of distraint and levyto collect the tax deficiency. However, for reasons not known, it didnot proceed to dispose of the attached properties.

More than three years later, or on November 3, 1992, respondent wrotethe 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, Branch44, San Fernando, Pampanga to collect the tax deficiency. Thecomplaint was signed by Norberto Salud, Chief of the Legal Division,BIR Region 4, and verified by Amancio Saga, the Bureau's RegionalDirector in Pampanga.

Respondent moved to dismiss the case on two grounds: (1) that thecomplaint was not filed upon authority of the BIR Commissioner asrequired by §221 2 of the National Internal Revenue Code, and (2) thatthe action had already prescribed. Over petitioner's objection, the trial

court, on August 28, 1997, granted the motion and dismissed thecomplaint. Hence, this petition. Petitioner raises the following issues:

3

I. WHETHER OR NOT THE INSTITUTION OF THECIVIL CASE FOR COLLECTION OF TAXES WASWITHOUT THE APPROVAL OF THECOMMISSIONER IN VIOLATION OF SECTION 221OF THE NATIONAL INTERNAL REVENUE CODE.

II. WHETHER OR NOT THE ACTION FOR

COLLECTION OF TAXES FILED AGAINSTRESPONDENT HAD ALREADY BEEN BARREDBY THE STATUTE OF LIMITATIONS.

First . In sustaining respondent's contention that petitioner's complaintwas filed without the authority of the BIR Commissioner, the trialcourt stated:

4

There is no question that the National Internal RevenueCode 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 theabsence of the commissioner's approval. Thus, in theinstant case, the absence of the approval of thecommissioner in the institution of the action is fatal tothe cause of the plaintiff . . . .

The trial court arrived at this conclusion because the complaintfiled 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 Governmentunder the authority of this Code or other law enforced by the Bureau of Internal Revenue shall be brought inthe 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 Secretaryof 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 . (Emphasissupplied)

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 inthe Legal Branches of Revenues Regions:

xxx xxx xxx

II. Civil Cases

1. Complaints for collection on casesfalling within the jurisdiction of theRegion . . . .

In all the abovementioned cases, theRegional Director is authorized to signall pleadings filed in connectiontherewith which, otherwise, requires thesignature of the Commissioner.

xxx xxx xxx

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

However, the lower court refused to recognize RAO No. 10-95 and, byimplication, 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 theinternal functioning of the said offices. They are notlaws which courts can take judicial notice of. As such,they have no binding effect upon the courts for suchmemorand[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 issuancesrelate solely to carrying into effect the provisions of the law, they arevalid and have the force of law.

6The 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 provisionsspecifying, prescribing, or defining:

xxx xxx xxx

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

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

As amended by R.A. No. 8424, the NIRC is now even morecategorical. 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 toreverse, revoke or modify any existing ruling of theBureau;

(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 hundredthousand pesos (P500,000.00) or less, and minor criminal violations as may be determined by rules andregulations to be promulgated by the Secretary of Finance, upon the recommendation of theCommissioner, discovered by regional and districtofficials, may be compromised by a regional evaluation board which shall be composed of the RegionalDirector 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 revenueofficers to establishments where articles subject toexcise tax are produced or kept.

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

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

Any internal revenue tax which has been assessedwithin the period of limitation above-prescribed may becollected by distraint or levy or by a proceeding in courtwithin three years

7following 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 beginningdistraint or levy or a proceeding in court and for sixtydays thereafter; when the taxpayer requests for areinvestigation which is granted by the Commissioner;when the taxpayer cannot be located in the addressgiven by him in the return filed upon which the tax is

being assessed or collected; provided , that, if thetaxpayer informs the Commissioner of any change inaddress, the running of the statute of limitations will not be suspended; when the warrant of distraint or levy isduly served upon the taxpayer, his authorizedrepresentative or a member of his household withsufficient 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 deficiencyassessment on November 3, 1992 effectively suspended therunning of the period of prescription such that the governmentcould still file a case for tax collection.

9

The contention has no merit. Sec. 229 10 of the Code mandates that arequest for reconsideration must be made within 30 days from thetaxpayer's receipt of the tax deficiency assessment, otherwise theassessment 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, withoutstating when she received the notice of tax assessment. She explainedthat she was constrained to ask for a reconsideration in order to avoidthe harassment of BIR collectors.

12In all likelihood, she must have

been referring to the distraint and levy of her properties by petitioner'sagents which took place on January 12, 1989. Even assuming that shefirst learned of the deficiency assessment on this date, her request for reconsideration was nonetheless filed late since she made it more than30 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 notdetract from the fact that the assessment had long become demandable.

Nonetheless, it is contended that the running of the prescriptive periodunder §223(c) was suspended when the BIR timely served the warrantsof 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 incourt for collection of the tax deficiency, as the BIR in fact did onJanuary 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 caseand, 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 taketime to accomplish, extending even after the lapse of the statutory period for collection. In those cases, the BIR did not file any collectioncase but merely relied on the summary remedy of distraint and levy tocollect the tax deficiency. The importance of this fact was not lost onthe Court. Thus, in Advertising Associates, it was held: 16 "It should benoted that the Commissioner did not institute any judicial proceedingto collect the tax. He relied on the warrants of distraint and levy tointerrupt the running of the statute of limitations.

Moreover, if, as petitioner in effect says, the prescriptive period wassuspended twice, i.e., when the warrants of distraint and levy wereserved on respondent on January 12, 1989 and then when respondentmade her request for reinvestigation of the tax deficiency assessmenton November 3, 1992, the three-year prescriptive period must havecommenced running again sometime after the service of the warrantsof distraint and levy. Petitioner, however, does not state when or whythis took place and, indeed, there appears to be no reason for such. It isnoteworthy that petitioner raised this point before the lower courtapparently as an alternative theory, which, however, is untenable.

For the foregoing reasons, we hold that petitioner's contention that theaction 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 continuationof the summary remedy it had timely begun. Although considerabletime 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 proceedingsmay be carried out beyond the statutory period considering that suchremedy was seasonably availed of.

WHEREFORE, the petition is DENIED.

G.R. No. 139736 October 17, 2005

BANK OF THE PHILIPPINE ISLANDS, Petitioner,

vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

D E C I S I O N

CHICO-NAZARIO, J .:

This Petition for Review on Certiorari, under Rule 45 of the 1997Rules of Civil Procedure, assails the Decision of the Court of Appealsin CA-G.R. SP No. 51271, dated 11 August 1999,1 which reversed and

set aside the Decision of the Court of Tax Appeals (CTA), dated 02February 1999,

2 and which reinstated Assessment No. FAS-5-85-89-

002054 requiring petitioner Bank of the Philippine Islands (BPI) to pay the amount of P28,020.00 as deficiency documentary stamp tax(DST) for the taxable year 1985, inclusive of the compromise penalty.

There is hardly any controversy as to the factual antecedents of thisPetition.

Petitioner BPI is a commercial banking corporation organized and

existing under the laws of the Philippines. On two separate occasions, particularly on 06 June 1985 and 14 June 1985, it sold United States

http://www.lawphil.net/judjuris/juri2005/oct2005/gr_139736_2005.html#fnt1










(US) $500,000.00 to the Central Bank of the Philippines (CentralBank), for the total sales amount of US$1,000,000.00.

On 10 October 1989, the Bureau of Internal Revenue (BIR) issuedAssessment No. FAS-5-85-89-002054,3 finding petitioner BPI liablefor deficiency DST on its afore-mentioned sales of foreign bills of exchange to the Central Bank, computed as follows –

1985 Deficiency Documentary Stamp Tax

Foreign Bills of Exchange………………………….. P 18,480,000.00

Tax Due Thereon:

P18,480,000.00 x P0.30 (Sec. 182 NIRC).

P200.00

27,720.00

Add: Suggested compromise penalty………….…… 300.00

TOTAL AMOUNT DUE AND COLLECTIBLE…. P 28,020.00

Petitioner BPI received the Assessment, together with the attachedAssessment Notice,4 on 20 October 1989.

Petitioner BPI, through its counsel, protested the Assessment in a letter dated 16 November 1989, and filed with the BIR on 17 November 1989. The said protest letter is reproduced in full below –

November 16, 1989

The Commissioner of Internal Revenue

Quezon City

Attention of: Mr. Pedro C. Aguillon

Asst. Commissioner for Collection

Sir:

On behalf of our client, Bank of the Philippine Islands (BPI), we havethe honor to protest your assessment against it for deficiencydocumentary stamp tax for the year 1985 in the amount of P28,020.00,arising from its sale to the Central Bank of U.S. $500,000.00 on June6, 1985 and another U.S. $500,000.00 on June 14, 1985.

1. Under established market practice, the documentary stamp tax on

telegraphic transfers or sales of foreign exchange is paid by the buyer.Thus, when BPI sells to any party, the cost of documentary stamp taxis added to the total price or charge to the buyer and the seller affixesthe corresponding documentary stamp on the document. Similarly,when the Central Bank sells foreign exchange to BPI, it charges BPIfor the cost of the documentary stamp on the transaction.

2. In the two transactions subject of your assessment, no documentarystamps were affixed because the buyer,Central Bank of the Philippines, was exempt from such tax. And while

it is true that under P.D. 1994, a proviso was added to sec. 222 (nowsec. 186) of the Tax Code "that whenever one party to a taxabledocument enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for thetax," this proviso (and the other amendments of P.D. 1994) took effectonly on January 1, 1986, according to sec. 49 of P.D. 1994. Hence, theliability for the documentary stamp tax could not be shifted to theseller.

In view of the foregoing, we request that the assessment be revoked

and cancelled.

Very truly yours,

PADILLA LAW OFFICE

By:

(signed)

SABINO PADILLA, JR .5















Petitioner BPI did not receive any immediate reply to its protest letter.However, on 15 October 1992, the BIR issued a Warrant of Distraintand/or Levy6 against petitioner BPI for the assessed deficiency DSTfor taxable year 1985, in the amount of P27,720.00 (excluding thecompromise penalty of P300.00). It served the Warrant on petitioner BPI only on 23 October 1992.7

Then again, petitioner BPI did not hear from the BIR until 11September 1997, when its counsel received a letter, dated 13 August1997, signed by then BIR Commissioner Liwayway Vinzons-Chato,denying its "request for reconsideration," and addressing the pointsraised by petitioner BPI in its protest letter, dated 16 November 1989,thus –

In reply, please be informed that after a thorough and careful study of the facts of the case as well as the law and jurisprudence pertinentthereto, this Office finds the above argument to be legally untenable. It

is admitted that while industry practice or market convention has theforce of law between the members of a particular industry, it is not binding with the BIR since it is not a party thereto. The same should,therefore, not be allowed to prejudice the Bureau of its lawful task of collecting revenues necessary to defray the expenses of thegovernment. (Art. 11 in relation to Art. 1306 of the New Civil Code.)

Moreover, let it be stated that even before the amendment of Sec. 222(now Sec. 173) of the Tax Code, as amended, the same was alreadyinterpreted to hold that the other party who is not exempt from the

payment of documentary stamp tax liable from the tax. Thisinterpretation was further strengthened by the following BIR Rulingswhich in substance state:

1. BIR Unnumbered Ruling dated May 30, 1977 –

"x x x Documentary stamp taxes are payable by either person, signing,issuing, accepting, or transferring the instrument, document or paper.It is now settled that where one party to the instrument is exempt fromsaid taxes, the other party who is not exempt should be liable."

2. BIR Ruling No. 144-84 dated September 3, 1984 –

"x x x Thus, where one party to the contract is exempt from said tax,the other party, who is not exempt, shall be liable therefore.Accordingly, since A.J.L. Construction Corporation, the other party tothe contract and the one assuming the payment of the expensesincidental to the registration in the vendee’s name of the property sold,is not exempt from said tax, then it is the one liable therefore, pursuantto Sec. 245 (now Sec. 196), in relation to Sec. 222 (now Sec. 173),

both of the Tax Code of 1977, as amended."

Premised on all the foregoing considerations, your request for reconsideration is hereby DENIED.8

Upon receipt of the above-cited letter from the BIR, petitioner BPI proceeded to file a Petition for Review with the CTA on 10 October 1997;9 to which respondent BIR Commissioner, represented by theOffice of the Solicitor General, filed an Answer on 08 December 1997.

10

Petitioner BPI raised in its Petition for Review before the CTA, inaddition to the arguments presented in its protest letter, dated 16 November 1989, the defense of prescription of the right of respondentBIR Commissioner to enforce collection of the assessed amount. Italleged that respondent BIR Commissioner only had three years tocollect on Assessment No. FAS-5-85-89-002054, but she waited for seven years and nine months to deny the protest. In her Answer andsubsequent Memorandum, respondent BIR Commissioner merelyreiterated her position, as stated in her letter to petitioner BPI, dated 13

August 1997, which denied the latter’s protest; and remained silent asto the expiration of the prescriptive period for collection of theassessed deficiency DST.

After due trial, the CTA rendered a Decision on 02 February 1999, inwhich it identified two primary issues in the controversy between petitioner BPI and respondent BIR Commissioner: (1) whether or notthe right of respondent BIR Commissioner to collect from petitioner BPI the alleged deficiency DST for taxable year 1985 had prescribed;and (2) whether or not the sales of US$1,000,000.00 on 06 June 1985

and 14 June 1985 by petitioner BPI to the Central Bank were subjectto DST.






















The CTA answered the first issue in the negative and held that thestatute of limitations for respondent BIR Commissioner to collect onthe Assessment had not yet prescribed. In resolving the issue of prescription, the CTA reasoned that –

In the case of Commissioner of Internal Revenue vs. Wyeth Suaco

Laboratories, Inc., G.R. No. 76281, September 30, 1991, 202 SCRA

125, the Supreme Court laid to rest the first issue. It categorically ruledthat a "protest" is to be treated as request for reinvestigation or reconsideration and a mere request for reexamination or reinvestigation tolls the prescriptive period of the Commissioner tocollect on an assessment. . .

. . .

In the case at bar, there being no dispute that petitioner filed its proteston the subject assessment on November 17, 1989, there can be no

conclusion other than that said protest stopped the running of the prescriptive period of the Commissioner to collect.

Section 320 (now 223) of the Tax Code, clearly states that a requestfor reinvestigation which is granted by the Commissioner, shallsuspend the prescriptive period to collect. The underscored portionabove does not mean that the Commissioner will cancel the subjectassessment but should be construed as when the same was entertained by the Commissioner by not issuing any warrant of distraint or levy onthe properties of the taxpayer or any action prejudicial to the latter

unless and until the request for reinvestigation is finally given duecourse. Taking into consideration this provision of law and theaforementioned ruling of the Supreme Court in Wyeth Suaco whichspecifically and categorically states that a protest could be consideredas a request for reinvestigation, We rule that prescription has not set inagainst the government.11

The CTA had likewise resolved the second issue in the negative.Referring to its own decision in an earlier case, Consolidated Bank &

Trust Co. v. The Commissioner of Internal Revenue,12 the CTA

reached the conclusion that the sales of foreign currency by petitioner

BPI to the Central Bank in taxable year 1985 were not subject to DST –

From the abovementioned decision of this Court, it can be gleaned thatthe Central Bank, during the period June 11, 1984 to March 9, 1987enjoyed tax exemption privilege, including the payment of documentary stamp tax (DST) pursuant to Resolution No. 35-85 dated

May 3, 1985 of the Fiscal Incentive Review Board. As such, theCentral Bank, as buyer of the foreign currency, is exempt from payingthe documentary stamp tax for the period above-mentioned. This Courtfurther expounded that said tax exemption of the Central Bank wasmodified beginning January 1, 1986 when Presidential Decree (P.D.)1994 took effect. Under this decree, the liability for DST on sales of foreign currency to the Central Bank is shifted to the seller.

Applying the above decision to the case at bar, petitioner cannot beheld liable for DST on its 1985 sales of foreign currencies to the

Central Bank, as the latter who is the purchaser of the subjectcurrencies is the one liable thereof. However, since the Central Bank isexempt from all taxes during 1985 by virtue of Resolution No. 35-85of the Fiscal Incentive Review Board dated March 3, 1985, neither the petitioner nor the Central Bank is liable for the payment of thedocumentary stamp tax for the former’s 1985 sales of foreigncurrencies to the latter. This aforecited case of Consolidated Bank vs.Commissioner of Internal Revenue was affirmed by the Court of Appeals in its decision dated March 31, 1995, CA-GR Sp. No. 35930.Said decision was in turn affirmed by the Supreme Court in its

resolution denying the petition filed by Consolidated Bank dated November 20, 1995 with the Supreme Court under Entry of Judgmentdated March 1, 1996.13

In sum, the CTA decided that the statute of limitations for respondentBIR Commissioner to collect on Assessment No. FAS-5-85-89-002054 had not yet prescribed; nonetheless, it still ordered thecancellation of the said Assessment because the sales of foreigncurrency by petitioner BPI to the Central Bank in taxable year 1985were tax-exempt.















Herein respondent BIR Commissioner appealed the Decision of theCTA to the Court of Appeals. In its Decision dated 11 August 1999,

14

the Court of Appeals sustained the finding of the CTA on the firstissue, that the running of the prescriptive period for collection onAssessment No. FAS-5-85-89-002054 was suspended when herein petitioner BPI filed a protest on 17 November 1989 and, therefore, the prescriptive period for collection on the Assessment had not yet

lapsed. In the same Decision, however, the Court of Appeals reversedthe CTA on the second issue and basically adopted the position of therespondent BIR Commissioner that the sales of foreign currency by petitioner BPI to the Central Bank in taxable year 1985 were subject toDST. The Court of Appeals, thus, ordered the reinstatement of Assessment No. FAS-5-85-89-002054 which required petitioner BPIto pay the amount of P28,020.00 as deficiency DST for taxable year 1985, inclusive of the compromise penalty.

Comes now petitioner BPI before this Court in this Petition for Review

on Certiorari, seeking resolution of the same two legal issues raisedand discussed in the courts below, to reiterate: (1) whether or not theright of respondent BIR Commissioner to collect from petitioner BPIthe alleged deficiency DST for taxable year 1985 had prescribed; and(2) whether or not the sales of US$1,000,000.00 on 06 June 1985 and14 June 1985 by petitioner BPI to the Central Bank were subject toDST.

I

The efforts of respondent Commissioner to collect on Assessment No. FAS-5-85-89-002054 were already barred by prescription.

Anent the question of prescription, this Court disagrees in theDecisions of the CTA and the Court of Appeals, and herein determinesthe statute of limitations on collection of the deficiency DST inAssessment No. FAS-5-85-89-002054 had already prescribed.

The period for the BIR to assess and collect an internal revenue tax islimited to three years by Section 203 of the Tax Code of 1977, as

amended,15

which provides that –

SEC. 203. Period of limitation upon assessment and collection. – Except as provided in the succeeding section, internal revenue taxesshall be assessed within three years after the last day prescribed by lawfor the filing of the return, and no proceeding in court withoutassessment for the collection of such taxes shall be begun after theexpiration of such period: Provided, That in a case where a return isfiled beyond the period prescribed by law, the three-year period shall

be counted from the day the return was filed. For the purposes of thissection, a return filed before the last day prescribed by law for thefiling thereof shall be considered as filed on such last day.16

The three-year period of limitations on the assessment and collectionof national internal revenue taxes set by Section 203 of the Tax Codeof 1977, as amended, can be affected, adjusted, or suspended, inaccordance with the following provisions of the same Code –

SEC. 223. – Exceptions as to period of limitation of assessment and

collection of taxes. – (a) In the case of a false or fraudulent return withintent to evade tax or of failure to file a return, the tax may beassessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after thediscovery of the falsity, fraud, or omission: Provided, That in a fraudassessment which has become final and executory, the fact of fraudshall be judicially taken cognizance of in the civil or criminal actionfor the collection thereof.

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

section for the assessment of the tax, both the Commissioner and thetaxpayer have agreed in writing to its assessment after such time thetax may be assessed within the period agreed upon. The period soagreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon.

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















(d) Any internal revenue tax which has been assessed within the periodagreed upon as provided in paragraph (b) hereinabove may becollected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the three-year period. The period so agreed upon may be extended by subsequentwritten agreements made before the expiration of the period previouslyagreed upon.

(e) Provided, however, That nothing in the immediately precedingsection and paragraph (a) hereof shall be construed to authorize theexamination and investigation or inquiry into any tax returns filed inaccordance with the provisions of any tax amnesty law or decree.17

SEC. 224. Suspension of running of statute. – The running of thestatute of limitation provided in Section[s] 203 and 223 on the makingof assessment and the beginning of distraint or levy or a proceeding incourt for collection, in respect of any deficiency, shall be suspended

for the period during which the Commissioner is prohibited frommaking the assessment or beginning distraint or levy or a proceedingin court and for sixty days thereafter; when the taxpayer requests for areinvestigation which is granted by the Commissioner; when thetaxpayer cannot be located in the address given by him in the returnfiled upon which a 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; whenthe warrant of distraint and levy is duly served upon the taxpayer, hisauthorized representative, or a member of his household with

sufficient discretion, and no property could be located; and when thetaxpayer is out of the Philippines.

18

As enunciated in these statutory provisions, the BIR has three years,counted from the date of actual filing of the return or from the last date prescribed by law for the filing of such return, whichever comes later,to assess a national internal revenue tax or to begin a court proceedingfor the collection thereof without an assessment. In case of a false or fraudulent return with intent to evade tax or the failure to file anyreturn at all, the prescriptive period for assessment of the tax due shall

be 10 years from discovery by the BIR of the falsity, fraud, or omission. When the BIR validly issues an assessment, within either the

three-year or ten-year period, whichever is appropriate, then the BIR has another three years

19 after the assessment within which to collect

the national internal revenue tax due thereon by distraint, levy, and/or court proceeding. The assessment of the tax is deemed made and thethree-year period for collection of the assessed tax begins to run on thedate the assessment notice had been released, mailed or sent by theBIR to the taxpayer .

20

In the present Petition, there is no controversy on the timeliness of theissuance of the Assessment, only on the prescription of the period tocollect the deficiency DST following its Assessment. WhileAssessment No. FAS-5-85-89-002054 and its correspondingAssessment Notice were both dated 10 October 1989 and werereceived by petitioner BPI on 20 October 1989, there was no showingas to when the said Assessment and Assessment Notice were released,mailed or sent by the BIR. Still, it can be granted that the latest datethe BIR could have released, mailed or sent the Assessment and

Assessment Notice to petitioner BPI was on the same date they werereceived by the latter, on 20 October 1989. Counting the three-year prescriptive period, for a total of 1,095 days,21 from 20 October 1989,then the BIR only had until 19 October 1992 within which to collectthe assessed deficiency DST.

The earliest attempt of the BIR to collect on Assessment No. FAS-5-85-89-002054 was its issuance and service of a Warrant of Distraintand/or Levy on petitioner BPI. Although the Warrant was issued on 15October 1992, previous to the expiration of the period for collection on

19 October 1992, the same was served on petitioner BPI only on 23October 1992.

Under Section 223(c) of the Tax Code of 1977, as amended, it is notessential that the Warrant of Distraint and/or Levy be fully executed sothat it can suspend the running of the statute of limitations on thecollection of the tax. It is enough that the proceedings have validly began or commenced and that their execution has not been suspended by reason of the voluntary desistance of the respondent BIR Commissioner. Existing jurisprudence establishes that distraint and

levy proceedings are validly begun or commenced by the issuance of the Warrant and service thereof on the taxpayer .22 It is only logical to


























require that the Warrant of Distraint and/or Levy be, at the very least,served upon the taxpayer in order to suspend the running of the prescriptive period for collection of an assessed tax, because it mayonly be upon the service of the Warrant that the taxpayer is informedof the denial by the BIR of any pending protest of the said taxpayer,and the resolute intention of the BIR to collect the tax assessed.

If the service of the Warrant of Distraint and/or Levy on petitioner BPIon 23 October 1992 was already beyond the prescriptive period for collection of the deficiency DST, which had expired on 19 October 1992, then what more the letter of respondent BIR Commissioner,dated 13 August 1997 and received by the counsel of the petitioner BPI only on 11 September 1997, denying the protest of petitioner BPIand requesting payment of the deficiency DST? Even later and moreunequivocally barred by prescription on collection was the demandmade by respondent BIR Commissioner for payment of the deficiencyDST in her Answer to the Petition for Review of petitioner BPI before

the CTA, filed on 08 December 1997.23

II

There is no valid ground for the suspension of the running of the prescriptive period for collection of the assessed DST under the Tax

Code of 1977, as amended.

In their Decisions, both the CTA and the Court of Appeals found thatthe filing by petitioner BPI of a protest letter suspended the running of

the prescriptive period for collecting the assessed DST. This Court,however, takes the opposing view, and, based on the succeedingdiscussion, concludes that there is no valid ground for suspending therunning of the prescriptive period for collection of the deficiency DSTassessed against petitioner BPI.

A. The statute of limitations on assessment and collection of taxes is for the protection of the taxpayer and, thus, shall be construed

liberally in his favor.

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 saidtaxpayer of the assurance that he will no longer be subjected to further investigation for taxes after the expiration of a reasonable period of time.24 As aptly explained in Republic of the Philippines v. Ablaza

25 –

The law prescribing a limitation of actions for the collection of theincome tax is beneficial both to the Government and to its citizens; tothe Government because tax officers would be obliged to act promptlyin the making of assessment, and to citizens because after the lapse of the period of prescription citizens would have a feeling of securityagainst unscrupulous tax agents who will always find an excuse toinspect the books of taxpayers, not to determine the latter’s realliability, but to take advantage of every opportunity to molest peaceful,law-abiding citizens. Without such a legal defense taxpayers wouldfurthermore be under obligation to always keep their books and keep

them open for inspection subject to harassment by unscrupulous taxagents. The law on prescription being a remedial measure should beinterpreted in a way conducive to bringing about the beneficent purpose of affording protection to the taxpayer within thecontemplation of the Commission which recommend the approval of the law.

In order to provide even better protection to the taxpayer againstunreasonable investigation, the Tax Code of 1977, as amended,identifies specifically in Sections 223 and 224

26 thereof the

circumstances when the prescriptive periods for assessing andcollecting taxes could be suspended or interrupted.

To give effect to the legislative intent, these provisions on the statuteof limitations on assessment and collection of taxes shall be construedand applied liberally in favor of the taxpayer and strictly against theGovernment.

B. The statute of limitations on assessment and collection of national internal revenue taxes may be waived, subject to certain conditions,

under paragraphs (b) and (d) of Section 223 of the Tax Code of 1977,

















as amended, respectively. Petitioner BPI, however, did not execute any such waiver in the case at bar.

According to paragraphs (b) and (d) of Section 223 of the Tax Code of 1977, as amended, the prescriptive periods for assessment andcollection of national internal revenue taxes, respectively, could bewaived by agreement, to wit –

SEC. 223. – Exceptions as to period of limitation of assessment and

collection of taxes. –

. . .

(b) If before the expiration of the time prescribed in the precedingsection for the assessment of the tax, both the Commissioner and thetaxpayer have agreed in writing to its assessment after such time thetax 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.

. . .

(d) Any internal revenue tax which has been assessed within the periodagreed upon as provided in paragraph (b) hereinabove may becollected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the three-year period. The period so agreed upon may be extended by subsequent

written agreements made before the expiration of the period previouslyagreed upon.

27

The agreements so described in the afore-quoted provisions are oftenreferred to as waivers of the statute of limitations. The waiver of thestatute of limitations, whether on assessment or collection, should not be construed as a waiver of the right to invoke the defense of prescription but, rather, an agreement between the taxpayer and theBIR to extend the period to a date certain, within which the latter couldstill assess or collect taxes due. The waiver does not mean that the

taxpayer relinquishes the right to invoke prescription unequivocally.28

A valid waiver of the statute of limitations under paragraphs (b) and(d) of Section 223 of the Tax Code of 1977, as amended, must be: (1)in writing; (2) agreed to by both the Commissioner and the taxpayer;(3) before the expiration of the ordinary prescriptive periods for assessment and collection; and (4) for a definite period beyond theordinary prescriptive periods for assessment and collection. The periodagreed upon can still be extended by subsequent written agreement,

provided that it is executed prior to the expiration of the first periodagreed upon. The BIR had issued Revenue Memorandum Order (RMO) No. 20-90 on 04 April 1990 to lay down an even more detailed procedure for the proper execution of such a waiver. RMO No. 20-90mandates that the procedure for execution of the waiver shall bestrictly followed, and any revenue official who fails to complytherewith resulting in the prescription of the right to assess and collectshall be administratively dealt with.

This Court had consistently ruled in a number of cases that a request

for reconsideration or reinvestigation by the taxpayer, without a validwaiver of the prescriptive periods for the assessment and collection of tax, as required by the Tax Code and implementing rules, will notsuspend the running thereof .

29

In the Petition at bar, petitioner BPI executed no such waiver of thestatute of limitations on the collection of the deficiency DST per Assessment No. FAS-5-85-89-002054. In fact, an internalmemorandum of the Chief of the Legislative, Ruling & ResearchDivision of the BIR to her counterpart in the Collection Enforcement

Division, dated 15 October 1992, expressly noted that, "The taxpayer fails to execute a Waiver of the Statute of Limitations extending the period of collection of the said tax up to December 31, 1993 pendingreconsideration of its protest. . ."30 Without a valid waiver, the statuteof limitations on collection by the BIR of the deficiency DST couldnot have been suspended under paragraph (d) of Section 223 of theTax Code of 1977, as amended.

C. The protest filed by petitioner BPI did not constitute a request for

reinvestigation, granted by the respondent BIR Commissioner, which

could have suspended the running of the statute of limitations on



















collection of the assessed deficiency DST under Section 224 of the TaxCode of 1977, as amended.

The Tax Code of 1977, as amended, also recognizes instances whenthe running of the statute of limitations on the assessment andcollection of national internal revenue taxes could be suspended, evenin the absence of a waiver, under Section 224 thereof, which reads –

SEC. 224. Suspension of running of statute. – The running of thestatute of limitation provided in Section[s] 203 and 223 on the makingof assessment and the beginning of distraint or levy or a proceeding incourt for collection, in respect of any deficiency, shall be suspendedfor the period during which the Commissioner is prohibited frommaking the assessment or beginning distraint or levy or a proceedingin court and for sixty days thereafter; when the taxpayer requests for areinvestigation which is granted by the Commissioner; when thetaxpayer cannot be located in the address given by him in the return

filed upon which a tax is being assessed or collected: Provided, That,if the taxpayer informs the Commissioner of any change in address,the running of the statute of limitations will not be suspended; whenthe warrant of distraint and levy is duly served upon the taxpayer, hisauthorized representative, or a member of his household withsufficient discretion, and no property could be located; and when thetaxpayer is out of the Philippines.31

Of particular importance to the present case is one of thecircumstances enumerated in Section 224 of the Tax Code of 1977, as

amended, wherein the running of the statute of limitations onassessment and collection of taxes is considered suspended "when thetaxpayer requests for a reinvestigation which is granted by theCommissioner."

This Court gives credence to the argument of petitioner BPI that thereis a distinction between a request for reconsideration and a request for reinvestigation. Revenue Regulations (RR) No. 12-85, issued on 27 November 1985 by the Secretary of Finance, upon therecommendation of the BIR Commissioner, governs the procedure for

protesting an assessment and distinguishes between the two types of protest, as follows –

PROTEST TO ASSESSMENT

SEC. 6. Protest. The taxpayer may protest administratively anassessment by filing a written request for reconsideration or reinvestigation. . .

. . .

For the purpose of the 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 or additional

evidence that a taxpayer intends to present in the reinvestigation. Itmay also involve a question of fact or law or both.

With the issuance of RR No. 12-85 on 27 November 1985 providingthe above-quoted distinctions between a request for reconsiderationand a request for reinvestigation, the two types of protest can no longer be used interchangeably and their differences so lightly brushed aside.It bears to emphasize that under Section 224 of the Tax Code of 1977,as amended, the running of the prescriptive period for collection of taxes can only be suspended by a request for reinvestigati on , not a

request for reconsideration. Undoubtedly, a reinvestigation, whichentails the reception and evaluation of additional evidence, will takemore time than a reconsideration of a tax assessment, which will belimited 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 can not.

The protest letter of petitioner BPI, dated 16 November 1989 and filedwith the BIR the next day, on 17 November 1989, did not specificallyrequest for either a reconsideration or reinvestigation. A close review

of the contents thereof would reveal, however, that it protestedAssessment No. FAS-5-85-89-002054 based on a question of law, in







particular, whether or not petitioner BPI was liable for DST on itssales of foreign currency to the Central Bank in taxable year 1985. Thesame protest letter did not raise any question of fact; neither did itoffer to present any new evidence. In its own letter to petitioner BPI,dated 10 September 1992, the BIR itself referred to the protest of petitioner BPI as a request for reconsideration.32 These considerationswould lead this Court to deduce that the protest letter of petitioner BPI

was in the nature of a request for reconsideration, rather than a requestfor reinvestigation and, consequently, Section 224 of the Tax Code of 1977, as amended, on the suspension of the running of the statute of limitations should not apply.

Even if, for the sake of argument, this Court glosses over thedistinction between a request for reconsideration and a request for reinvestigation, and considers the protest of petitioner BPI as a requestfor reinvestigation, the filing thereof could not have suspended at oncethe running of the statute of limitations. Article 224 of the Tax Code of

1977, as amended, very plainly requires that the request for reinvestigation had been granted by the BIR Commissioner tosuspend the running of the prescriptive periods for assessment andcollection.

That the BIR Commissioner must first grant the request for reinvestigation as a requirement for suspension of the statute of limitations is even supported by existing jurisprudence.

In the case of Republic of the Philippines v. Gancayco,33 taxpayer

Gancayco requested for a thorough reinvestigation of the assessmentagainst him and placed at the disposal of the Collector of InternalRevenue all the evidences he had for such purpose; yet, the Collector ignored the request, and the records and documents were not at allexamined. Considering the given facts, this Court pronounced that –

. . .The act of r equesting a reinvestigation alone does not suspend the

peri od. The request should f ir st be granted, in order to eff ect

suspension. (Collector vs. Suyoc Consolidated, supra; also Republicvs. Ablaza, supra). Moreover, the Collector gave appellee until April

1, 1949, within which to submit his evidence, which the latter did one

day before. There were no impediments on the part of the Collector tofile the collection case from April 1, 1949. . . .

34

In Republic of the Philippines v. Acebedo,35 this Court similarly foundthat –

. . . [T]he defendant, after receiving the assessment notice of

September 24, 1949, asked for a reinvestigation thereof on October 11,1949 (Exh. A). There is no evidence that thi s request was considered or acted upon. In fact, on October 23, 1950 the then Collector of Internal Revenue issued a warrant of distraint and levy for the fullamount of the assessment (Exh. D), but there was no follow-up of thiswarrant. Consequently, the request for reinvestigation did not

suspend the runn ing of the peri od for fi li ng an action for coll ection.

The burden of proof that the taxpayer’s request for reinvestiga tion had been actually granted shall be on respondent BIR Commissioner. The

grant may be expressed in communications with the taxpayer or implied from the actions of the respondent BIR Commissioner or hisauthorized BIR representatives in response to the request for reinvestigation.

In Querol v. Collector of Internal Revenue ,36 the BIR, after receiving

the protest letters of taxpayer Querol, sent a tax examiner to SanFernando, Pampanga, to conduct the reinvestigation; as a result of which, the original assessment against taxpayer Querol was revised by permitting him to deduct reasonable depreciation. In another case,

Republic of the Philippines v. Lopez ,37

taxpayer Lopez filed a total of four petitions for reconsideration and reinvestigation. The first petitionwas denied by the BIR. The second and third petitions were granted bythe BIR and after each reinvestigation, the assessed amount wasreduced. The fourth petition was again denied and, thereafter, the BIR filed a collection suit against taxpayer Lopez. When the taxpayersspouses Sison, in Commissioner of Internal Revenue v. Sison,38 contested the assessment against them and asked for a reinvestigation,the BIR ordered the reinvestigation resulting in the issuance of anamended assessment. Lastly, in Republic of the Philippines v.

Oquias ,

39

the BIR granted taxpayer Oquias’s request for reinvestigation and duly notified him of the date when such



































reinvestigation would be held; only, neither taxpayer Oquias nor hiscounsel appeared on the given date.

In all these cases, the request for reinvestigation of the assessmentfiled by the taxpayer was evidently granted and actual reinvestigationwas conducted by the BIR, which eventually resulted in the issuanceof an amended assessment. On the basis of these facts, this Court ruled

in the same cases that the period between the request for reinvestigation and the revised assessment should be subtracted fromthe total prescriptive period for the assessment of the tax; and, once theassessment had been reconsidered at the taxpayer’s instance, the period for collection should begin to run from the date of thereconsidered or modified assessment.

40

The rulings of the foregoing cases do not apply to the present Petition because: (1) the protest filed by petitioner BPI was a request for reconsideration, not a reinvestigation, of the assessment against it; and

(2) even granting that the protest of petitioner BPI was a request for reinvestigation, there was no showing that it was granted byrespondent BIR Commissioner and that actual reinvestigation had beenconducted.

Going back to the administrative records of the present case, it wouldseem that the BIR, after receiving a copy of the protest letter of petitioner BPI on 17 November 1989, did not attempt to communicateat all with the latter until 10 September 1992, less than a month beforethe prescriptive period for collection on Assessment No. FAS-5-85-89-

002054 was due to expire. There were internal communications,mostly indorsements of the docket of the case from one BIR divisionto another; but these hardly fall within the same sort of acts in the previously discussed cases that satisfactorily demonstrated the grant of

the taxpayer’s request for reinvestigation. Petitioner BPI, in themeantime, was left in the dark as to the status of its protest in theabsence of any word from the BIR. Besides, in its letter to petitioner BPI, dated 10 September 1992, the BIR unwittingly admitted that ithad not yet acted on the protest of the former –

This refers to your protest against and/or request for reconsideration of the assessment/s of this Office against you involving the amount of

P28,020.00 under FAS-5-85-89-002054 dated October 23, 1989 asdeficiency documentary stamp tax inclusive of compromise penalty for the year 1985.

In this connection, it is requested that the enclosed waiver of thestatute of limitations extending the period of collection of the saidtax/es to December 31, 1993 be executed by you as a conditi on

precedent of our giving due course to your protest…41

When the BIR stated in its letter, dated 10 September 1992, that thewaiver of the statute of limitations on collection was a condition precedent to its giving due course to the request for reconsideration of petitioner BPI, then it was understood that the grant of such request for reconsideration was being held off until compliance with the givencondition. When petitioner BPI failed to comply with the condition precedent, which was the execution of the waiver, the logical inferencewould be that the request was not granted and was not given due

course at all.

III

The suspension of the statute of limitations on collection of theassessed deficiency DST from petitioner BPI does not find support in jurisprudence.

It is the position of respondent BIR Commissioner, affirmed by theCTA and the Court of Appeals, that the three-year prescriptive period

for collecting on Assessment No. FAS-5-85-89-002054 had not yet prescribed, because the said prescriptive period was suspended,invoking the case of Commissioner of Internal Revenue v. Wyeth

Suaco Laboratories, Inc.42 It was in this case in which this Court ruled

that the prescriptive period provided by law to make a collection isinterrupted once a taxpayer requests for reinvestigation or reconsideration of the assessment.

Petitioner BPI, on the other hand, is requesting this Court to revisit theWyeth Suaco case contending that it had unjustifiably expanded the

grounds for suspending the prescriptive period for collection of national internal revenue taxes.














This Court finds that although there is no compelling reason toabandon its decision in the Wyeth Suaco case, the said case cannot beapplied to the particular facts of the Petition at bar.

A. The only exception to the statute of limitations on collection of

taxes, other than those already provided in the Tax Code, was

recognized in the Suyoc case.

As had been previously discussed herein, the statute of limitations onassessment and collection of national internal revenue taxes may besuspended if the taxpayer executes a valid waiver thereof, as providedin paragraphs (b) and (d) of Section 223 of the Tax Code of 1977, asamended; and in specific instances enumerated in Section 224 of thesame Code, which include a request for reinvestigation granted by theBIR Commissioner. Outside of these statutory provisions, however,this Court also recognized one other exception to the statute of limitations on collection of taxes in the case of Collector of Internal

Revenue v. Suyoc Consolidated Mining Co.43

In the said case, the Collector of Internal Revenue issued anassessment against taxpayer Suyoc Consolidated Mining Co. on 11February 1947 for deficiency income tax for the taxable year 1941.Taxpayer Suyoc requested for at least a year within which to pay theamount assessed, but at the same time, reserving its right to questionthe correctness of the assessment before actual payment. The Collector granted taxpayer Suyoc an extension of only three months to pay theassessed tax. When taxpayer Suyoc failed to pay the assessed tax

within the extended period, the Collector sent it a demand letter, dated28 November 1950. Upon receipt of the demand letter, taxpayer Suyocasked for a reinvestigation and reconsideration of the assessment, butthe Collector denied the request. Taxpayer Suyoc reiterated its requestfor reconsideration on 25 April 1952, which was denied again by theCollector on 06 May 1953. Taxpayer Suyoc then appealed the denialto the Conference Staff. The Conference Staff heard the appeal from02 September 1952 to 16 July 1955, and the negotiations resulted inthe reduction of the assessment on 26 July 1955. It was the collectionof the reduced assessment that was questioned before this Court for

being enforced beyond the prescriptive period.

44

In resolving the issue on prescription, this Court ratiocinated thus –

It is obvious from the foregoing that petitioner refrained fromcollecting the tax by distraint or levy or by proceeding in court withinthe 5-year period from the filing of the second amended final returndue to the several requests of respondent for extension to which petitioner yielded to give it every opportunity to prove its claim

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

While we may agree with the Court of Tax Appeals that a mere

request for reexamination or reinvestigation may not have the effect of suspending the running of the period of limitation for in such casethere is need of a written agreement to extend the period between theCollector and the taxpayer, there are cases however where 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 hi s repeated

requests or positi ve acts the Government has been, f or good reasons,

persuaded to postpone collection to make him feel that the demand

was not unr easonable or that no harassment or i nj ustice is meant by

the Government. And when such situation comes to pass there are

authorities that hold, based on weighty reasons, that such an attitude or behavior should not be countenanced if only to protect the interest of the Government.45

By the principle of estoppel, taxpayer Suyoc was not allowed to raisethe defense of prescription against the efforts of the Government tocollect the tax assessed against it. This Court adopted the following principle from American jurisprudence: "He who prevents a thingfrom being done may not avail himself of the nonperformance whichhe has himself occasioned, for the law says to him in effect ‘this is

your own act, and therefore you are not damnified.’"

46



















In the Suyoc case, this Court expressly conceded that a mere requestfor reconsideration or reinvestigation of an assessment may notsuspend the running of the statute of limitations. It affirmed the needfor a waiver of the prescriptive period in order to effect suspensionthereof. However, even without such waiver, the taxpayer may beestopped from raising the defense of prescription because by hisrepeated requests or positive acts, he had induced Government

authorities to delay collection of the assessed tax.

Based on the foregoing, petitioner BPI contends that the declarationmade in the later case of Wyeth Suaco, that the statute of limitations oncollection is suspended once the taxpayer files a request for reconsideration or reinvestigation, runs counter to the ruling made bythis Court in the Suyoc case.

B. Although this Court is not compelled to abandon its decision in theWyeth Suaco case, it finds that Wyeth Suaco is not applicable to the

Petition at bar because of the distinct facts involved herein.

In the case of Wyeth Suaco, taxpayer Wyeth Suaco was assessed for failing to remit withholding taxes on royalties and dividenddeclarations, as well as, for deficiency sales tax. The BIR issued twoassessments, dated 16 December 1974 and 17 December 1974, bothreceived by taxpayer Wyeth Suaco on 19 December 1974. Taxpayer Wyeth Suaco, through its tax consultant, SGV & Co., sent to the BIR two letters, dated 17 January 1975 and 08 February 1975, protestingthe assessments and requesting their cancellation or withdrawal on the

ground that said assessments lacked factual or legal basis. On 12September 1975, the BIR Commissioner advised taxpayer WyethSuaco to avail itself of the compromise settlement being offered under Letter of Instruction No. 308. Taxpayer Wyeth Suaco manifested itsconformity to paying a compromise amount, but subject to certainconditions; though, apparently, the said compromise amount was never paid. On 10 December 1979, the BIR Commissioner rendered adecision reducing the assessment for deficiency withholding taxagainst taxpayer Wyeth Suaco, but maintaining the assessment for deficiency sales tax. It was at this point when taxpayer Wyeth Suaco

brought its case before the CTA to enjoin the BIR from enforcing theassessments by reason of prescription. Although the CTA decided in

favor of taxpayer Wyeth Suaco, it was reversed by this Court when thecase was brought before it on appeal. According to the decision of thisCourt –

Settled is the rule that the prescriptive period provided by law to makea collection by distraint or levy or by a proceeding in court isinterrupted once a taxpayer requests for reinvestigation or

reconsideration of the assessment. . .

. . .

Although the protest letters prepared by SGV & Co. in behalf of private respondent did not categorically state or use the words"reinvestigation" and "reconsideration," the same are to be treated asletters of reinvestigation and reconsideration…

These letters of Wyeth Suaco interrupted the running of the five-year

prescriptive period to collect the deficiency taxes. The Bur eau of I nternal Revenue, after having r eviewed the records of Wyeth Suaco,

in accordance with its request for reinvestigation, rendered a fi nal

asse ssment… It was only upon receipt by Wyeth Suaco of this finalassessment that the five-year prescriptive period started to run again.47

The foremost criticism of petitioner BPI of the Wyeth Suaco decisionis directed at the statement made therein that, "settled is the rule thatthe prescriptive period provided by law to make a collection bydistraint or levy or by a proceeding in court is interrupted once a

taxpayer requests for reinvestigation or reconsideration of theassessment."48 It would seem that both petitioner BPI and respondentBIR Commissioner, as well as, the CTA and Court of Appeals, takethe statement to mean that the filing alone of the request for reconsideration or reinvestigation can already interrupt or suspend therunning of the prescriptive period on collection. This Court thereforetakes this opportunity to clarify and qualify this statement made in theWyeth Suaco case. While it is true that, by itself, such statement wouldappear to be a generalization of the exceptions to the statute of limitations on collection, it is best interpreted in consideration of the

particular facts of the Wyeth Suaco case and previous jurisprudence.











The Wyeth Suaco case cannot be in conflict with the Suyoc case because there are substantial differences in the factual backgrounds of the two cases. The Suyoc case refers to a situation where there wererepeated requests or positive acts performed by the taxpayer thatconvinced the BIR to delay collection of the assessed tax. This Court pronounced therein that the repeated requests or positive acts of thetaxpayer prevented or estopped it from setting up the defense of

prescription against the Government when the latter attempted tocollect the assessed tax. In the Wyeth Suaco case, taxpayer WyethSuaco filed a request for reinvestigation, which was apparently granted by the BIR and, consequently, the prescriptive period was indeedsuspended as provided under Section 224 of the Tax Code of 1977, asamended.49

To reiterate, Section 224 of the Tax Code of 1977, as amended,identifies specific circumstances when the statute of limitations onassessment and collection may be interrupted or suspended, among

which is a request for reinvestigation that is granted by the BIR Commissioner. The act of filing a request for reinvestigation alonedoes not suspend the period; such request must be granted.50 The grantneed not be express, but may be implied from the acts of the BIR Commissioner or authorized BIR officials in response to the requestfor reinvestigation.51

This Court found in the Wyeth Suaco case that the BIR actuallyconducted a reinvestigation, in accordance with the request of thetaxpayer Wyeth Suaco, which resulted in the reduction of the

assessment originally issued against it. Taxpayer Wyeth Suaco wasalso aware that its request for reinvestigation was granted, as written by its Finance Manager in a letter dated 01 July 1975, addressed to theChief of the Tax Accounts Division, wherein he admitted that, "[a]swe understand, the matter is now undergoing review and consideration by your Manufacturing Audit Division…" The statute of limitations oncollection, then, started to run only upon the issuance and release of the reduced assessment.

The Wyeth Suaco case, therefore, is correct in declaring that the

prescriptive period for collection is interrupted or suspended when thetaxpayer files a request for reinvestigation, provided that, as clarified

and qualified herein, such request is granted by the BIR Commissioner.

Thus, this Court finds no compelling reason to abandon its decision inthe Wyeth Suaco case. It also now rules that the said case is notapplicable to the Petition at bar because of the distinct facts involvedherein. As already heretofore determined by this Court, the protest

filed by petitioner BPI was a request for reconsideration, which merelyrequired a review of existing evidence and the legal basis for theassessment. Respondent BIR Commissioner did not require, neither did petitioner BPI offer, additional evidence on the matter. After petitioner BPI filed its request for reconsideration, there was no other communication between it and respondent BIR Commissioner or anyof the authorized representatives of the latter. There was no showingthat petitioner BPI was informed or aware that its request for reconsideration was granted or acted upon by the BIR.

IV

Conclusion

To summarize all the foregoing discussion, this Court lays down thefollowing rules on the exceptions to the statute of limitations oncollection.

The statute of limitations on collection may only be interrupted or suspended by a valid waiver executed in accordance with paragraph

(d) of Section 223 of the Tax Code of 1977, as amended, and theexistence of the circumstances enumerated in Section 224 of the sameCode, which include a request for reinvestigation granted by the BIR Commissioner.

Even when the request for reconsideration or reinvestigation is notaccompanied by a valid waiver or there is no request for reinvestigation that had been granted by the BIR Commissioner, thetaxpayer may still be held in estoppel and be prevented from setting upthe defense of prescription of the statute of limitations on collection

when, by his own repeated requests or positive acts, the Governmenthad been, for good reasons, persuaded to postpone collection to make















the taxpayer feel that the demand is not unreasonable or that noharassment or injustice is meant by the Government, as laid down bythis Court in the Suyoc case.

Applying the given rules to the present Petition, this Court finds that –

(a) The statute of limitations for collection of the deficiency DST in

Assessment No. FAS-5-85-89-002054, issued against petitioner BPI,had already expired; and

(b) None of the conditions and requirements for exception from thestatute of limitations on collection exists herein: Petitioner BPI did notexecute any waiver of the prescriptive period on collection asmandated by paragraph (d) of Section 223 of the Tax Code of 1977, asamended; the protest filed by petitioner BPI was a request for reconsideration, not a request for reinvestigation that was granted byrespondent BIR Commissioner which could have suspended the

prescriptive period for collection under Section 224 of the Tax Code of 1977, as amended; and, petitioner BPI, other than filing a request for reconsideration of Assessment No. FAS-5-85-89-002054, did notmake repeated requests or performed positive acts that could have persuaded the respondent BIR Commissioner to delay collection, andthat would have prevented or estopped petitioner BPI from setting upthe defense of prescription against collection of the tax assessed, asrequired in the Suyoc case.

This is a simple case wherein respondent BIR Commissioner and other

BIR officials failed to act promptly in resolving and denying therequest for reconsideration filed by petitioner BPI and in enforcingcollection on the assessment. They presented no reason or explanationas to why it took them almost eight years to address the protest of petitioner BPI. The statute on limitations imposed by the Tax Code precisely intends to protect the taxpayer from such prolonged andunreasonable assessment and investigation by the BIR.

Considering that the right of the respondent BIR Commissioner tocollect from petitioner BPI the deficiency DST in Assessment No.

FAS-5-85-89-002054 had already prescribed, then, there is no moreneed for this Court to make a determination on the validity and

correctness of the said Assessment for the latter would only beunenforceable.

Wherefore, based on the foregoing, the instant Petition is GRANTED.The Decision of the Court of Appeals in CA-G.R. SP No. 51271, dated11 August 1999, which reinstated Assessment No. FAS-5-85-89-002054 requiring petitioner BPI to pay the amount of P28,020.00 as

deficiency documentary stamp tax for the taxable year 1985, inclusiveof the compromise penalty, is REVERSED and SET ASIDE.Assessment No. FAS-5-85-89-002054 is hereby ordered CANCELED.

G.R. No. 174942 March 7, 2008

BANK OF THE PHILIPPINE ISLANDS (Formerly: Far East

Bank and Trust Company), petitioner,vs.

COMMISSIONER OF INTERNAL REVENUE, respondent.

D E C I S I O N

TINGA, J.:

The Bank of the Philippine Islands (BPI) seeks a review of theDecision

1dated 15 August 2006 and the Resolution

2dated 5 October

2006, both of the Court of Tax Appeals (CTA or tax court), whichruled that BPI is liable for the deficiency documentary stamp tax(DST) on its cabled instructions to its foreign correspondent bank and

that prescription had not yet set in against the government.

The following undisputed facts are culled from the CTA decision:

Petitioner, the surviving bank after its merger with Far EastBank and Trust Company, is a corporation duly created andexisting under the laws of the Republic of the Philippines with principal office at Ayala Avenue corner Paseo de Roxas Ave.,Makati City.

http://www.lawphil.net/judjuris/juri2008/mar2008/gr_174942_2008.html#fnt1






Respondent thru then Revenue Service Chief Cesar M. Valdez,issued to the petitioner a pre-assessment notice (PAN) dated November 26, 1986.

Petitioner, in a letter dated November 29, 1986, requested for the details of the amounts alleged as 1982-1986 deficiencytaxes mentioned in the November 26, 1986 PAN.

On April 7, 1989, respondent issued to the petitioner,assessment/demand notices FAS-1-82 to 86/89-000 and FAS 5-82 to 86/89-000 for deficiency withholding tax at source (SwapTransactions) and DST involving the amounts of P190,752,860.82 and P24,587,174.63, respectively, for theyears 1982 to 1986.

On April 20, 1989, petitioner filed a protest on thedemand/assessment notices. On May 8, 1989, petitioner filed a

supplemental protest.

On March 12, 1993, petitioner requested for an opportunity to present or submit additional documentation on the SwapTransactions with the then Central Bank (page 240, BIR Records). Attached to the letter dated June 17, 1994, inconnection with the reinvestigation of the abovementionedassessment, petitioner submitted to the BIR, Swap Contractswith the Central Bank.

Petitioner executed several Waivers of the Statutes of Limitations, the last of which was effective until December 31,1994.

On August 9, 2002, respondent issued a final decision on

petitioner’s protest ordering the withdrawal and cancellation of the deficiency withholding tax assessment in the amount of P190,752,860.82 and considered the same as closed andterminated. On the other hand, the deficiency DST assessmentin the amount of P24,587,174.63 was reiterated and the

petitioner was ordered to pay the said amount within thirty (30)days from receipt of such order. Petitioner received a copy of

the said decision on January 15, 2003. Thereafter, on January24, 2003, petitioner filed a Petition for Review before theCourt.

On August 31, 2004, the Court rendered a Decision denyingthe petitioner’s Petition for Review, the dispositive portion of which is quoted hereunder:

IN VIEW OF ALL THE FOREGOING, the petitionis hereby DENIED for lack of merit. Accordingly, petitioner is ORDERED to PAY the respondent theamount of P24,587,174.63 representing deficiencydocumentary stamp tax for the period 1982-1986, plus20% interest starting February 14, 2003 until theamount is fully paid pursuant to Section 249 of the TaxCode.

SO ORDERED.

On September 21, 2004, petitioner filed a Motion for Reconsideration of the abovementioned Decision which wasdenied for lack of merit in a Resolution dated February 14,2005.

On March 9, 2005, petitioner filed with the Court En Banc aMotion for Extension of Time to File Petition for Review praying for an extension of fifteen (15) days from March 10,

2005 or until March 25, 2005. Petitioner’s motion was grantedin a Resolution dated March 16, 2005.

On March 28, 2005, (March 25 was Good Friday), petitioner filed the instant Petition for Review, advancing the followingassignment of errors.

I. THIS HONORABLE COURT OVERLOOKED THESIGNIFICANCE OF THE WAIVER DULY ANDVALIDLY AGREED UPON BY THE PARTIES AND

EFFECTIVE UNTIL DECEMBER 31, 1994;



II. THIS TAX COURT ERRED IN HOLDING THATTHE COLLECTION OF ALLEGED DEFICIENCYTAX HAS NOT PRESCRIBED.

III. THIS HONORABLE COURT ERRED INHOLDING THAT RESPONDENT DID NOTVIOLATE PROCEDURAL DUE PROCESS IN THE

ISSUANCE OF ASSESSMENT NOTICE RELATIVETO DOCUMENTARY STAMP DEFICIENCY.

IV. THIS HONORABLE COURT ERRED INHOLDING THAT THE 4 MARCH 1987MEMORANDUM OF THE LEGAL SERVICE CHIEFDULY APPROVED BY THE BIR COMMISISONER VESTS NO RIGHTS TO PETITIONER.

V. THIS HONORABLE COURT ERRED IN

HOLDING THAT PETITIONER IS LIABLE FOR DOCUMENTARY STAMP TAX ON SWAP LOANSTRANSACTIONS FROM 1982 TO 1986.

3

The CTA synthesized the foregoing issues into whether the collectionof the deficiency DST is barred by prescription and whether BPI isliable for DST on its SWAP loan transactions.

On the first issue, the tax court, applying the case of Commissioner of

Internal Revenue v. Wyeth Suaco Laboratories, Inc. ,4(Wyeth Suaco

case), ruled that BPI’s protest and supplemental protest should beconsidered requests for reinvestigation which tolled the prescriptive period provided by law to collect a tax deficiency by distraint, levy, or court proceeding. It further held, as regards the second issue, that

BPI’s cabled instructions to its foreign correspondent bank to remit aspecific sum in dollars to the Federal Reserve Bank, the same to becredited to the account of the Central Bank, are in the nature of atelegraphic transfer subject to DST under Section 195 of the Tax Code.

In its Petition for Review5 dated 24 November 2006, BPI argues that

the government’s right to collect the DST had already prescribed because the Commissioner of Internal Revenue (CIR) failed to issue

any reply granting BPI’s request for reinvestigation manifested in the protest letters dated 20 April and 8 May 1989. It was only through the9 August 2002 Decision ordering BPI to pay deficiency DST, or after the lapse of more than thirteen (13) years, that the CIR acted on therequest for reinvestigation, warranting the conclusion that prescriptionhad already set in. It further claims that the CIR was not precludedfrom collecting the deficiency within three (3) years from the time the

notice of assessment was issued on 7 April 1989, or even until theexpiration on 31 December 1994 of the last waiver of the statute of limitations signed by BPI.

Moreover, BPI avers that the cabled instructions to its correspondent bank are not subject to DST because the National Internal RevenueCode of 1977 (Tax Code of 1977) does not contain a specific provisionthat cabled instructions on SWAP transactions are subject to DST.

The Office of the Solicitor General (OSG) filed a Comment6 dated 1

June 2007, on behalf of the CIR, asserting that the prescriptive periodwas tolled by the protest letters filed by BPI which were granted andacted upon by the CIR. Such action was allegedly communicated toBPI as, in fact, the latter submitted additional documents pertaining toits SWAP transactions in support of its request for reinvestigation.Thus, it was only upon BPI’s receipt on 13 January 2003 of the 9August 2002 Decision that the period to collect commenced to runagain.

The OSG cites the case of Collector of Internal Revenue v. Suyoc

Consolidated Mining Company, et al .

7

(Suyoc case) in support of itsargument that BPI is already estopped from raising the defense of prescription in view of its repeated requests for reinvestigation whichallegedly induced the CIR to delay the collection of the assessed tax.

In its Reply8dated 30 August 2007, BPI argues against the applicationof the Suyoc case on two points: first, it never induced the CIR to postpone tax collection; second, its request for reinvestigation was notcategorically acted upon by the CIR within the three-year collection period after assessment. BPI maintains that it did not receive any

communication from the CIR in reply to its protest letters.


























We grant the petition.

Section 3189 of the Tax Code of 1977 provides:

Sec. 318. Period of limitation upon assessment and

collection. — Except as provided in the succeeding section,internal revenue taxes shall be assessed within five years after

the return was filed, and no proceeding in court withoutassessment for the collection of such taxes shall be begun after the expiration of such period. For the purposes of this section, areturn filed before the last day prescribed by law for the filingthereof shall be considered as filed on such last day: Provided,That this limitation shall not apply to cases already investigated prior to the approval of this Code.

The statute of limitations on assessment and collection of nationalinternal revenue taxes was shortened from five (5) years to three (3)

years by Batas Pambansa Blg. 700.10

Thus, the CIR has three (3) yearsfrom the date of actual filing of the tax return to assess a nationalinternal revenue tax or to commence court proceedings for thecollection thereof without an assessment.

When it validly issues an assessment within the three (3)-year period,it has another three (3) years within which to collect the tax due bydistraint, levy, or court proceeding. The assessment of the tax isdeemed made and the three (3)-year period for collection of theassessed tax begins to run on the date the assessment notice had been

released, mailed or sent to the taxpayer .

11

As applied to the present case, the CIR had three (3) years from thetime he issued assessment notices to BPI on 7 April 1989 or until 6April 1992 within which to collect the deficiency DST. However, itwas only on 9 August 2002 that the CIR ordered BPI to pay thedeficiency.

In order to determine whether the prescriptive period for collecting thetax deficiency was effectively tolled by BPI’s filing of the protest

letters dated 20 April and 8 May 1989 as claimed by the CIR, we needto examine Section 32012 of the Tax Code of 1977, which states:

Sec. 320. Suspension of running of statute. — The running of thestatute of limitations provided in Sections 318 or 319 on themaking of assessment and the beginning of distraint or levy or a proceeding in court for collection, in respect of anydeficiency, shall be suspended for the period during which theCommissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for

sixty days thereafter; when the taxpayer requests for a re-investigation which is granted by the Commissioner; whenthe taxpayer cannot be located in the address given by him inthe return filed upon which a tax is being assessed or collected: Provided, That if the taxpayer informs the Commissioner of any change in address, the running of the statute of limitationswill not be suspended; when the warrant of distraint and levy isduly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and no property could be located; and when the taxpayer is out of the

Philippines. (Emphasis supplied)

The above section is plainly worded. In order to suspend the runningof the prescriptive periods for assessment and collection, the requestfor reinvestigation must be granted by the CIR.

In BPI v. Commissioner of Internal Revenue ,13the Court emphasizedthe rule that the CIR must first grant the request for reinvestigation asa requirement for the suspension of the statute of limitations. TheCourt said:

In the case of Republic of the Philippines v. Gancayco,taxpayer Gancayco requested for a thorough reinvestigation of the assessment against him and placed at the disposal of theCollector of Internal Revenue all the evidences he had for such purpose; yet, the Collector ignored the request, and the recordsand documents were not at all examined. Considering the givenfacts, this Court pronounced that —

x x x The act of requesting a reinvestigation alone does not

suspend the peri od. The request should fi rst be granted, in order to effect suspension. (Collector v. Suyoc Consolidated,





















supra; also Republic v. Ablaza, supra). Moreover, the Collector gave appellee until April 1, 1949, within which to submit hisevidence, which the latter did one day before. There were noimpediments on the part of the Collector to file the collectioncase from April 1, 1949…

In Republic of the Philippines v. Acebedo, this Court similarly found

that —

x x x T]he defendant, after receiving the assessment notice of September 24, 1949, asked for a reinvestigation thereof onOctober 11, 1949 (Exh. "A"). There is no evidence that thi s request was considered or acted upon . In fact, on October 23,1950 the then Collector of Internal Revenue issued a warrant of distraint and levy for the full amount of the assessment (Exh."D"), but there was follow-up of this warrant. Consequently,

the request for reinvestigati on did not suspend the running of

the peri od for fi li ng an action f or collection. [Emphasis in theoriginal]14

The Court went on to declare that the burden of proof that the requestfor reinvestigation had been actually granted shall be on the CIR. Suchgrant may be expressed in its communications with the taxpayer or implied from the action of the CIR or his authorized representative inresponse to the request for reinvestigation.

There is nothing in the records of this case which indicates, expressly

or impliedly, that the CIR had granted the request for reinvestigationfiled by BPI. What is reflected in the records is the piercing silenceand inaction of the CIR on the request for reinvestigation, as he

considered BPI’s letters of protest to be.

In fact, it was only in his comment to the present petition that the CIR,through the OSG, argued for the first time that he had granted therequest for reinvestigation. His consistent stance invoking the Wyeth

Suaco case, as reflected in the records, is that the prescriptive period

was tolled by BPI’s request for reinvestigation, without any assertion

that the same had been granted or at least acted upon.

15

In the Wyeth Suaco case, private respondent Wyeth SuacoLaboratories, Inc. sent letters seeking the reinvestigation or reconsideration of the deficiency tax assessments issued by the BIR.The records of the case showed that as a result of these protest letters,the BIR Manufacturing Audit Division conducted a review andreinvestigation of the assessments. The records further showed that thecompany, thru its finance manager, communicated its inability to settle

the tax deficiency assessment and admitted that it knew of the ongoingreview and consideration of its protest.

As differentiated from the Wyeth Suaco case, however, there is noevidence in this case that the CIR actually conducted a reinvestigationupon the request of BPI or that the latter was made aware of the actiontaken on its request. Hence, there is no basis for the tax court’s rulingthat the filing of the request for reinvestigation tolled the running of the prescriptive period for collecting the tax deficiency.

Neither did the waiver of the statute of limitations signed by BPIsupposedly effective until 31 December 1994 suspend the prescriptive period. The CIR himself contends that the waiver is void as it showsno date of acceptance in violation of RMO No. 20-90.16 At any rate,the records of this case do not disclose any effort on the part of theBureau of Internal Revenue to collect the deficiency tax after theexpiration of the waiver until eight (8) years thereafter when it finallyissued a decision on the protest.

We also find the Suyoc case inapplicable. In that case, several requests

for reinvestigation and reconsideration were filed by SuyocConsolidated Mining Company purporting to question the correctnessof tax assessments against it. As a result, the Collector of InternalRevenue refrained from collecting the tax by distraint, levy or court proceeding in order to give the company every opportunity to prove itsclaim. The Collector also conducted several reinvestigations whicheventually led to a reduced assessment. The company, however, filed a petition with the CTA claiming that the right of the government tocollect the tax had already prescribed.

When the case reached this Court, we ruled that Suyoc could not set upthe defense of prescription since, by its own action, the government















was induced to delay the collection of taxes to make the company feelthat the demand was not unreasonable or that no harassment or injustice was meant by the government.

In this case, BPI’s letters of protest and submission of additionaldocuments pertaining to its SWAP transactions, which were never even acted upon, much less granted, cannot be said to have persuaded

the CIR to postpone the collection of the deficiency DST.

The inordinate delay of the CIR in acting upon and resolving therequest for reinvestigation filed by BPI and in collecting the DSTallegedly due from the latter had resulted in the prescription of thegovernment’s right to collect the deficiency. As this Court declared in Republic of the Philippines v. Ablaza:17

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 beobliged to act promptly in the making of assessment, and tocitizens because after the lapse of the period of prescriptioncitizens would have a feeling of security against unscrupuloustax agents who will always find an excuse to inspect the booksof taxpayers, not to determine the latter’s real liability, but totake advantage of every opportunity to molest peaceful, law-abiding citizens. Without such a legal defense taxpayers wouldfurthermore be under obligation to always keep their books andkeep them open for inspection subject to harassment by

unscrupulous tax agents. The law on prescription being aremedial measure should be interpreted in a way conducive to bringing about the beneficent purpose of affording protectionto the taxpayer within the contemplation of the Commissionwhich recommend the approval of the law.18

Given the prescription of the government’s claim, we no longer deemit necessary to pass upon the validity of the assessment.

WHEREFORE, the petition is GRANTED. The Decisionof the Court

of Tax Appeals dated 15 August 2006 and its Resolution dated 5

October 2006, are hereby REVERSED and SET ASIDE. No pronouncement as to costs.

G.R. No. 155541 January 27, 2004

ESTATE OF THE LATE JULIANA DIEZ VDA. DE GABRIEL, petitioner,

vs.COMMISSIONER OF INTERNAL REVENUE, respondent.

D E C I S I O N

YNARES-SANTIAGO, J.:

This petition for review on certiorari assails the decision of the Courtof Appeals in CA-G.R. CV No. 09107, dated September 30, 2002,1 which reversed the November 19, 1995 Order of Regional Trial Court

of Manila, Branch XXXVIII, in Sp. Proc. No. R-82-6994, entitled"Testate Estate of Juliana Diez Vda. De Gabriel". The petition wasfiled by the Estate of the Late Juliana Diez Vda. De Gabriel,represented by Prudential Bank as its duly appointed and qualifiedAdministrator.

As correctly summarized by the Court of Appeals, the relevant factsare as follows:

During the lifetime of the decedent, Juliana Vda. De Gabriel,

her business affairs were managed by the Philippine TrustCompany (Philtrust). The decedent died on April 3, 1979. Twodays after her death, Philtrust, through its Trust Officer, Atty.Antonio M. Nuyles, filed her Income Tax Return for 1978. Thereturn did not indicate that the decedent had died.

On May 22, 1979, Philtrust also filed a verified petition for appointment as Special Administrator with the Regional Trial Court of Manila, Branch XXXVIII, docketed as Sp. Proc. No. R-82-6994. Thecourt a quo appointed one of the heirs as Special Administrator.

Philtrust’s motion for reconsideration was denied by the probate court.











On January 26, 1981, the court a quo issued an Order relieving Mr.Diez of his appointment, and appointed Antonio Lantin to take over asSpecial Administrator. Subsequently, on July 30, 1981, Mr. Lantin wasalso relieved of his appointment, and Atty. Vicente Onosa wasappointed in his stead.

In the meantime, the Bureau of Internal Revenue conducted an

administrative investigation on the decedent’s tax liability and found adeficiency income tax for the year 1977 in the amount of P318,233.93.Thus, on November 18, 1982, the BIR sent by registered mail ademand letter and Assessment Notice No. NARD-78-82-00501addressed to the decedent "c/o Philippine Trust Company, Sta. Cruz,Manila" which was the address stated in her 1978 Income Tax Return. No response was made by Philtrust. The BIR was not informed thatthe decedent had actually passed away.

In an Order dated September 5, 1983, the court a quo appointed

Antonio Ambrosio as the Commissioner and Auditor Tax Consultantof the Estate of the decedent.

On June 18, 1984, respondent Commissioner of Internal Revenueissued warrants of distraint and levy to enforce collection of thedecedent’s deficiency income tax liability, which were served upon her heir, Francisco Gabriel. On November 22, 1984, respondent filed a"Motion for Allowance of Claim and for an Order of Payment of Taxes" with the court a quo. On January 7, 1985, Mr. Ambrosio filed aletter of protest with the Litigation Division of the BIR, which was not

acted upon because the assessment notice had allegedly become final,executory and incontestable.

On May 16, 1985, petitioner, the Estate of the decedent, through Mr.Ambrosio, filed a formal opposition to the BIR’s Mo tion for Allowance of Claim based on the ground that there was no proper service of the assessment and that the filing of the aforesaid claim hadalready prescribed. The BIR filed its Reply, contending that service toPhilippine Trust Company was sufficient service, and that the filing of the claim against the Estate on November 22, 1984 was within the

five-year prescriptive period for assessment and collection of taxes

under Section 318 of the 1977 National Internal Revenue Code(NIRC).

On November 19, 1985, the court a quo issued an Order denyingrespondent’s claim against the Estate,2 after finding that there was nonotice of its tax assessment on the proper party.3

On July 2, 1986, respondent filed an appeal with the Court of Appeals,docketed as CA-G.R. CV No. 09107,4 assailing the Order of the probate court dated November 19, 1985. It was claimed that Philtrust,

in filing the decedent’s 1978 income tax return on April 5, 1979, twodays after the taxpayer’s death, had "constituted itself as theadministrator of the estate of the deceased at least insofar as said returnis concerned."5 Citing Basilan Estate Inc. v. Commissioner of InternalRevenue,6 respondent argued that the legal requirement of notice withrespect to tax assessments7 requires merely that the Commissioner of Internal Revenue release, mail and send the notice of the assessment to

the taxpayer at the address stated in the return filed, but not that thetaxpayer actually receive said assessment within the five-year prescriptive period.8 Claiming that Philtrust had been remiss in not

notifying respondent of the decedent’s death, respondent thereforeargued that the deficiency tax assessment had already become final,executory and incontestable, and that petitioner Estate was liabletherefor.

On September 30, 2002, the Court of Appeals rendered a decision infavor of the respondent. Although acknowledging that the bond of

agency between Philtrust and the decedent was severed upon thelatter’s death, it was ruled that the administrator of the Estate hadfailed in its legal duty to inform respondent of the decedent’s death, pursuant to Section 104 of the National Internal Revenue Code of

1977. Consequently, the BIR’s service to Philtrust of the demand letter and Notice of Assessment was binding upon the Estate, and, upon thelapse of the statutory thirty-day period to question this claim, theassessment became final, executory and incontestable. The dispositive portion of said decision reads:

WHEREFORE, finding merit in the appeal, the appealeddecision is REVERSED AND SET ASIDE. Another one is



entered ordering the Administrator of the Estate to pay theCommissioner of Internal Revenue the following:

a. The amount of P318,223.93, representing thedeficiency income tax liability for the year 1978, plus20% interest per annum from November 2, 1982 up to November 2, 1985 and in addition thereto 10%

surcharge on the basic tax of P169,155.34 pursuant toSection 51(e)(2) and (3) of the Tax Code as amended by PD 69 and 1705; and

b. The costs of the suit.

SO ORDERED.9

Hence, the instant petition, raising the following issues:

1. Whether or not the Court of Appeals erred in holding thatthe service of deficiency tax assessment against Juliana DiezVda. de Gabriel through the Philippine Trust Company was avalid service in order to bind the Estate;

2. Whether or not the Court of Appeals erred in holding thatthe deficiency tax assessment and final demand was alreadyfinal, executory and incontestable.

Petitioner Estate denies that Philtrust had any legal personality to

represent the decedent after her death. As such, petitioner argues thatthere was no proper notice of the assessment which, therefore, never became final, executory and incontestable.10 Petitioner further contends that respondent’s failure to file its claim against the Estatewithin the proper period prescribed by the Rules of Court is a fatalerror, which forever bars its claim against the Estate.

11

Respondent, on the other hand, claims that because Philtrust filed thedecedent’s income tax return su bsequent to her death, Philtrust was thede facto administrator of her Estate.12 Consequently, when the

Assessment Notice and demand letter dated November 18, 1982 weresent to Philtrust, there was proper service on the Estate.13

Respondent

further asserts that Philtrust had the legal obligation to inform petitioner of the decedent’s death, which requirement is found inSection 104 of the NIRC of 1977.14 Since Philtrust did not, respondentcontends that petitioner Estate should not be allowed to profit fromthis omission.15 Respondent further argues that Philtrust’s failure to protest the aforementioned assessment within the 30-day period provided in Section 319-A of the NIRC of 1977 meant that the

assessment had already become final, executory and incontestable.16

The resolution of this case hinges on the legal relationship betweenPhiltrust and the decedent, and, by extension, between Philtrust and petitioner Estate. Subsumed under this primary issue is the sub-issueof whether or not service on Philtrust of the demand letter andAssessment Notice No. NARD-78-82-00501 was valid service on petitioner, and the issue of whether Philtrust’s inaction thereon could bind petitioner. If both sub-issues are answered in the affirmative,

respondent’s contention as to the finality of Assessment Notice No.

NARD-78-82-00501 must be answered in the affirmative. This is because Section 319-A of the NIRC of 1977 provides a clear 30-day period within which to protest an assessment. Failure to file such a protest within said period means that the assessment ipso jure becomesfinal and unappealable, as a consequence of which legal proceedingsmay then be initiated for collection thereof.

We find in favor of the petitioner.

The first point to be considered is that the relationship between the

decedent and Philtrust was one of agency, which is a personalrelationship between agent and principal. Under Article 1919 (3) of theCivil Code, death of the agent or principal automatically terminates theagency. In this instance, the death of the decedent on April 3, 1979automatically severed the legal relationship between her and Philtrust,and such could not be revived by the mere fact that Philtrust continuedto act as her agent when, on April 5, 1979, it filed her Income TaxReturn for the year 1978.

Since the relationship between Philtrust and the decedent was

automatically severed at the moment of the Taxpayer’s death, none of Philtrust’s acts or omissions could bind the estate of the Taxpayer.



Service on Philtrust of the demand letter and Assessment Notice No. NARD-78-82-00501 was improperly done.

It must be noted that Philtrust was never appointed as the administrator of the Estate of the decedent, and, indeed, that the court a quo twicerejected Philtrust’s motion to be thus appointed. As of November 18,1982, the date of the demand letter and Assessment Notice, the legal

relationship between the decedent and Philtrust had already been non-existent for three years.

Respondent claims that Section 104 of the National Internal RevenueCode of 1977 imposed the legal obligation on Philtrust to informrespondent of the decedent’s death. The said Section reads:

SEC. 104. Notice of death to be filed . – In all cases of transferssubject to tax or where, though exempt from tax, the grossvalue of the estate exceeds three thousand pesos, the executor,

administrator, or any of the legal heirs, as the case may be,within two months after the decedent’s death, or within a like period after qualifying as such executor or administrator, shallgive written notice thereof to the Commissioner of InternalRevenue.

The foregoing provision falls in Title III, Chapter I of the National Internal Revenue Code of 1977, or the chapter onEstate Tax, and pertains to "all cases of transfers subject to tax"or where the "gross value of the estate exceeds three thousand

pesos". It has absolutely no applicability to a case for deficiency income tax, such as the case at bar. It further lacksapplicability since Philtrust was never the executor,

administrator of the decedent’s estate, and, as such, never hadthe legal obligation, based on the above provision, to informrespondent of her death.

Although the administrator of the estate may have been remissin his legal obligation to inform respondent of the decedent’sdeath, the consequences thereof, as provided in Section 119 of

the National Internal Revenue Code of 1977, merely refer tothe imposition of certain penal sanctions on the administrator.

These do not include the indefinite tolling of the prescriptive period for making deficiency tax assessments, or the waiver of the notice requirement for such assessments.

Thus, as of November 18, 1982, the date of the demand letter and Assessment Notice No. NARD-78-82-00501, there wasabsolutely no legal obligation on the part of Philtrust to either

(1) respond to the demand letter and assessment notice, (2)inform respondent of the decedent’s death, or (3) inform petitioner that it had received said demand letter andassessment notice. This lack of legal obligation was implicitlyrecognized by the Court of Appeals, which, in fact, rendered itsassailed decision on grounds of "equity".

17

Since there was never any valid notice of this assessment, it could nothave become final, executory and incontestable, and, for failure tomake the assessment within the five-year period provided in Section

318 of the National Internal Revenue Code of 1977, respondent’sclaim against the petitioner Estate is barred. Said Section 18 reads:

SEC. 318. Period of limitation upon assessment and collection.

– Except as provided in the succeeding section, internalrevenue taxes shall be assessed within five years after thereturn was filed, and no proceeding in court without assessmentfor the collection of such taxes shall be begun after theexpiration of such period. For the purpose of this section, areturn filed before the last day prescribed by law for the filing

thereof shall be considered as filed on such last day: Provided,That this limitation shall not apply to cases already investigated prior to the approval of this Code.

Respondent argues that an assessment is deemed made for the purposeof giving effect to such assessment when the notice is released, mailedor sent to the taxpayer to effectuate the assessment, and there is nolegal requirement that the taxpayer actually receive said notice withinthe five-year period.18 It must be noted, however, that the foregoingrule requires that the notice be sent to the taxpayer, and not merely to a

disinterested party. Although there is no specific requirement that thetaxpayer should receive the notice within the said period, due process



requires at the very least that such notice actually be received. InCommissioner of Internal Revenue v. Pascor Realty and DevelopmentCorporation,19 we had occasion to say:

An assessment contains not only a computation of taxliabilities, but also a demand for payment within a prescribed period. It also signals the time when penalties and interests

begin to accrue against the taxpayer. To enable the taxpayer todetermine his remedies thereon, due process requires that itmust be served on and received by the taxpayer.

In Republic v. De le Rama,20

we clarified that, when an estate is under administration, notice must be sent to the administrator of the estate,since it is the said administrator, as representative of the estate, whohas the legal obligation to pay and discharge all debts of the estate andto perform all orders of the court. In that case, legal notice of theassessment was sent to two heirs, neither one of whom had any

authority to represent the estate. We said:

The notice was not sent to the taxpayer for the purpose of giving effect to the assessment, and said notice could not produce any effect. In the case of Bautista and Corrales Tan v.Collector of Internal Revenue … this Court had occasion tostate that "the assessment is deemed made when the notice tothis effect is released, mailed or sent to the taxpayer for the purpose of giving effect to said assessment." It appearing thatthe person liable for the payment of the tax did not receive the

assessment, the assessment could not become final andexecutory. (Citations omitted, emphasis supplied.)

In this case, the assessment was served not even on an heir of theEstate, but on a completely disinterested third party. This improper service was clearly not binding on the petitioner.

By arguing that (1) the demand letter and assessment notice wereserved on Philtrust, (2) Philtrust was remiss in its obligation to respondto the demand letter and assessment notice, (3) Philtrust was remiss in

its obligation to inform respondent of the decedent’s death, and (4) theassessment notice is therefore binding on the Estate, respondent is

arguing in circles. The most crucial point to be remembered is thatPhiltrust had absolutely no legal relationship to the deceased, or to her Estate. There was therefore no assessment served on the Estate as tothe alleged underpayment of tax. Absent this assessment, no proceedings could be initiated in court for the collection of said tax,21

and respondent’s claim for collection, filed with the probate court onlyon November 22, 1984, was barred for having been made beyond the

five-year prescriptive period set by law.

WHEREFORE, the petition is GRANTED. The Decision of theCourt of Appeals in CA-G.R. CV No. 09107, dated September 30,2002, is REVERSED and SET ASIDE. The Order of the RegionalTrial Court of Manila, Branch XXXVIII, in Sp. Proc. No. R-82-6994,dated November 19, 1985, which denied the claim of the Bureau of Internal Revenue against the Estate of Juliana Diez Vda. De Gabrielfor the deficiency income tax of the decedent for the year 1977 in theamount of P318,223.93, is AFFIRMED.

No pronouncement as to costs.

COMMISSIONER OF INTERNAL G.R. No. 167560

REVENUE,

Petitioner, Present:

YNARES-SANTIAG

Chairperson,

- versus - AUSTRIA-MARTIN

CHICO-NAZARIO,

NACHURA, and

REYES, JJ.

DOMINADOR MENGUITO, Promulgated:

Respondent. September 17, 2008

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - x



D E C I S I O N

AUSTRIA-MARTINEZ, J.:

Before the Court is a Petition for Review on Certiorari under Rule 45of the Rules of Court, assailing the March 31, 2005 Decision1 of theCourt of Appeals (CA) which reversed and set aside the Court of Tax

Appeals (CTA) April 2, 2002 Decision2

and October 10, 2002Resolution3 ordering Dominador Menguito (respondent) to pay theCommissioner of Internal Revenue (petitioner) deficiency income and percentage taxes and delinquency interest.

Based on the Joint Stipulation of Facts and Admissions4 of the parties,

the CTA summarized the factual and procedural antecedents of thecase, the relevant portions of which read:

Petitioner Dominador Menguito [herein respondent] is a Filipino

citizen, of legal age, married to Jeanne Menguito and is engaged in therestaurant and/or cafeteria business. For the years 1991, 1992 and1993, its principal place of business was at Gloriamaris, CCPComplex, Pasay City and later transferred to Kalayaan Bar (Copper Kettle Cafeteria Specialist or CKCS), Departure Area, Ninoy AquinoInternational Airport, Pasay City. During the same years, he alsooperated a branch at Club John Hay, Baguio City carrying the businessname of Copper Kettle Cafeteria Specialist (Joint Stipulation of Factsand Admissions, p. 133, CTA records).

x x x x

Subsequently, BIR Baguio received information that Petitioner [hereinrespondent] has undeclared income from Texas Instruments and ClubJohn Hay, prompting the BIR to conduct another investigation.Through a letter dated July 28, 1997, Spouses Dominador Menguitoand Jeanne Menguito (Spouses Menguito) were informed by theAssessment Division of the said office that they have underdeclaredsales totaling P48,721,555.96 (Exhibit 11, p. 83, BIR records). Thiswas followed by a Preliminary Ten (10) Day Letter dated August 11,

1997, informing Petitioner [herein respondent] that in the investigationof his 1991, 1992 and 1993 income, business and withholding tax case,

it was found out that there is still due from him the total sum of P34,193,041.55 as deficiency income and percentage tax.

On September 2, 1997, the assessment notices subject of the instant petition were issued. These were protested by Ms. Jeanne Menguito,through a letter dated September 28, 1997 (Exhibit 14, p. 112, BIR Records), on the ground that the 40% deduction allowed on their

computed gross revenue, is unrealistic. Ms. Jeanne Menguitorequested for a period of thirty (30) days within which to coordinatewith the BIR regarding the contested assessment.

On October 10, 1997, BIR Baguio replied, informing the SpousesMenguito that the source of assessment was not through thedisallowance of claimed expenses but on data received from Club JohnHay and Texas Instruments Phils., Inc. Said letter gave the spouses ten(10) days to present evidence (Exhibit 15, p. 110, BIR Records).

I n an eff ort to clear an al leged confusion regarding Copper Kettle Cafeteria Speciali st (CKCS) being a sole propri etorship owned by the

Spouses, and Copper Kettl e Cateri ng Services, I nc. (CKCS, Inc.)

being a corporati on with whom Texas I nstruments and Club John

Hay entered into a contract, Petit ioner [respondent] submitted to

BI R Baguio a photocopy of the SEC Registration of Copper Kettle

Catering Servi ces, I nc. on March 23, 1999 (pp. 134-141, BI R

Records).

On April 12, 1999, BIR Baguio wrote a letter to Spouses Menguito,

informing the latter that a reinvestigation or reconsideration cannot begiven due course by the mere submission of an uncertified photocopyof the Certificate of Incorporation. Thus, it avers that the amendmentissued is still valid and enforceable.

On May 26, 1999, Petitioner [respondent] filed the present case, praying for the cancellation and withdrawal of the deficiency incometax and percentage tax assessments on account of prescription,whimsical factual findings, violation of procedural due process on theissuance of assessment notices, erroneous address of notices and

multiple credit/ investigation by the Respondent [petitioner] of

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Petitioner's [respondent’s] books of accounts and other related recordsfor the same tax year.

Instead of filing an Answer, Respondent [herein petitioner] moved todismiss the instant petition on July 1, 1999, on the ground of lack of jurisdiction. According to Respondent [petitioner], the assessment hadlong become final and executory when Petitioner [respondent] failed

to comply with the letter dated October 10, 1997.

Petitioner opposed said motion on July 21, 1999, claiming that thefinal decision on Petitioner's [respondent’s] protest is the April 12,1999 letter of the Baguio Regional Office; therefore, the filing of theaction within thirty (30) days from receipt of the said letter wasseasonably filed. Moreover, Petitioner [respondent] asserted thatgranting that the April 12, 1999 letter in question could not beconstrued to mean as a denial or final decision of the protest, stillPetitioner's [respondent’s] appeal was timely filed since Respondent

[petitioner] issued a Warrant of Distraint and/or Levy against thePetitioner [respondent] on May 3, 1999, which warrant constituted afinal decision of the Respondent [petitioner] on the protest of thetaxpayer.

On September 3, 1999, this Court denied Respondent's [petitioner’s]'Motion to Dismiss' for lack of merit.

Respondent [petitioner] filed his Answer on September 24, 1999,raising the following Special and Affirmative Defenses:

x x x x

5. Investigation disclosed that for taxable years 1991, 1992 and 1993, petitioner [respondent] filed false or fraudulent income and percentagetax returns with intent to evade tax by under declaring his sales.

6. The alleged duplication of investigation of petitioner [respondent] by the BIR Regional Office in Baguio City and by the RevenueDistrict Office in Pasay City is justified by the finding of fraud on the

part of the petitioner [respondent], which is an exception to the provision in the Tax Code that the examination and inspection of

books and records shall be made only once in a taxable year (Section235, Tax Code). At any rate, petitioner [respondent], in a letter datedJuly 18, 1994, waived his right to the consolidation of saidinvestigation.

7. The aforementioned fal sity or fr aud was discovered on August 5,

1997. The assessments were issued on September 2, 1997, or withi n

ten (10) years from the discovery of such falsity or fr aud (Section 223, Tax Code). Hence, the assessments have not prescri bed.

8. Petitioner's [respondent’s] allegation that the assessments were

not properly addressed is rendered moot and academic by h is

acknowledgment in his protest l etter dated September 28, 1997 that

he received the assessments.

9. Respondent [petiti oner] compl ied with the provisions of Revenue

Regulations No. 12-85 by informing petiti oner [r espondent] of the

fi ndings of the investigati on in letters dated Jul y 28, 1997 and August 11, 1997 pri or to the issuance of the assessments.

10. Petiti oner [r espondent] did not allege in his administrative

protest that there was a dupli cation of i nvestigati on, that the

assessments have prescri bed, that they were not properly addressed,

or th at the provisions of Revenue Regulations No. 12-85 were not

observed. Not having raised them in the admini strative level,

petitioner [r espondent] cannot rai se the same for the fi rst time on

appeal (Aguinal do I ndustries Corp. vs. Commissioner of I nternal

Revenue, 112 SCRA 136) .

11. The assessments were issued in accordance with law andregulations.

12. All presumptions are in favor of the correctness of tax assessments(CIR vs. Construction Resources of Asia, Inc., 145 SCRA 67), and the burden to prove otherwise is upon petitioner [respondent].5 (Emphasissupplied)

On April 2, 2002, the CTA rendered a Decision, the dispositive portionof which reads:







Accordingly, Petitioner [herein respondent] is ORDERED to PAY theRespondent [herein petitioner] the amount of P11,333,233.94 andP2,573,655.82 as deficiency income and percentage tax liabilities,respectively for taxable years 1991, 1992 and 1993 plus 20%delinquency interest from October 2, 1997 until full payment thereof.

SO ORDERED.6

Respondent filed a motion for reconsideration but the CTA denied thesame in its Resolution of October 10, 2002.7

Through a Petition for Review8 filed with the CA, respondentquestioned the CTA Decision and Resolution mainly on the groundthat Copper Kettle Catering Services, Inc. (CKCS, Inc.) was a separateand distinct entity from Copper Kettle Cafeteria Specialist (CKCS);the sales and revenues of CKCS, Inc. could not be ascribed to CKCS;neither may the taxes due from one, charged to the other; nor the

notices to be served on the former, coursed through the latter .

9

Respondent cited the Joint Stipulation in which petitioner acknowledged that its (respondent’s) business was called Copper Kettle Cafeteria Specialist, not Copper Kettle Catering Services, Inc.10

Based on the unrefuted11 CTA summary, the CA rendered theDecision assailed herein, the dispositive portion of which reads:

WHEREFORE, the instant petition is GRANTED. Reversing theassailed Decision dated April 2, 2002 and Resolution dated October

10, 2002, the deficiency income tax and percentage income taxassessments against petitioner in the amounts of P11,333,233.94 andP2,573,655.82 for taxable years 1991, 1992 and 1993 plus the 20%delinquency interest thereon are annulled.

SO ORDERED.12

Petitioner filed a motion for reconsideration but the CA denied thesame in its October 10, 2002 Resolution.13

Hence, herein recourse to the Court for the reversal of the CA decisionand resolution on the following grounds:

I

The Court of Appeals erred in reversing the decision of the Court of Tax Appeals and in holding that Copper Kettle Cafeteria Specialistowned by respondent and Copper Kettle Catering Services, Inc. ownedand managed by respondent's wife are not one and the same.

II

The Court of Appeals erred in holding that respondent was denied due process for failure of petitioner to validly serve respondent with the post-reporting and pre-assessment notices as required by law.

On the first issue, the CTA has ruled that CKCS, Inc. and CKCS areone and the same corporation because "[t]he contract between TexasInstruments and Copper Kettle was signed by petitioner’s

[respondent’s] wife, Jeanne Menguito as proprietress."14

However, the CA reversed the CTA on these grounds:

Respondent’s [herein petitioner’s] allegation that Copper KettleCatering Services, Inc. and Copper Kettle Cafeteria Specialists are notdistinct entities and that the under-declared sales/revenues of Copper Kettle Catering Services, Inc. pertain to Copper Kettle CafeteriaSpecialist are belied by the evidence on record. In the Joint Stipulationof Facts submitted before the tax court, respondent [petitioner]admitted "that petitioner’s [herein respondent’s] business name is

Copper Kettle Cafeteria Specialist."

Also, the Certification of Club John Hay and Letter dated July 9, 1997of Texas Instruments both addressed to respondent indicate that thesecompanies transacted with Copper Kettle Catering Services, Inc.,owned and managed by JEANNE G. MENGUITO, NOT petitioner Dominador Menguito. The alleged under-declared sales incomesubject of the present assessments were shown to have been earned byCopper Kettle Catering Services, Inc. in its commercial transactionwith Texas Instruments and Camp John Hay; NOT by petitioner’s

dealing with these companies. In fact, there is nothing on record whichshows that Texas Instruments and Camp John Hay conducted business




































relations with Copper Kettle Cafeteria Specialist, owned by herein petitioner Dominador Menguito. In the absence, therefore, of clear andconvincing evidence showing that Copper Kettle Cafeteria Specialistand Copper Kettle Catering Services, Inc. are one and the same,respondent can NOT validly impute alleged underdeclared salesincome earned by Copper Kettle Catering Services, Inc. as salesincome of Copper Kettle Cafeteria Specialist.

15 (Emphasis supplied)

Respondent is adamant that the CA is correct. Many times in the past,the BIR had treated CKCS separately from CKCS, Inc.: from May1994 to June 1995, the BIR sent audit teams to examine the books of account and other accounting records of CKCS, and based on saidaudits, respondent was held liable for deficiency taxes, all of which hehad paid.16 Moreover, the certifications17 issued by Club John Hay andTexas Instruments identify the concessionaire operating therein asCKCS, Inc., owned and managed by his spouse Jeanne Menguito, andnot

CKCS.18

Petitioner impugns the findings of the CA, claiming that these arecontradicted by evidence on record consisting of a reply to theSeptember 2, 1997 assessment notice of BIR Baguio which JeanneMenguito wrote on September 28, 1997, to wit:

We are in receipt of the assessment notice you have sent us, datedSeptember 2, 1997. Having taken hold of the same only now following

our travel overseas, we were not able to respond immediately andmanifest our protest. Also, with the impending termination of our businesses at 19th Tee, Club John Hay and at Texas Instruments,Loakan, Baguio City, we have already started the transfer of our records and books in Baguio City to Manila that we will need moretime to review and sort the records that may have to be presentedrelative to the assessment x x x.19 (Emphasis supplied)

Petitioner insists that said reply confirms that the assessment notice isdirected against the businesses which she and her husband, respondentherein, own and operate at Club John Hay and Texas Instruments, and

establishes that she is protesting said notice not just for herself but alsofor respondent.

20

Moreover, petitioner argues that if it were true that CKCS, Inc. andCKCS are separate and distinct entities, respondent could have easily produced the articles of incorporation of CKCS, Inc.; instead, whatrespondent presented was merely a photocopy of the incorporation

articles.

21

Worse, petitioner adds, said document was not offered inevidence before the CTA, but was presented only before the CA.22

Petitioner further insists that CKCS, Inc. and CKCS are merelyemploying the fiction of their separate corporate existence to evade payment of proper taxes; that the CTA saw through their ploy andrightly disregarded their corporate individuality, treating them insteadas one taxable entity with the same tax base and liability;23 and that theCA should have sustained the CTA.24

In effect, petitioner would have the Court resolve a purely factualissue25 of whether or not there is substantial evidence that CKCS, Inc.and CKCS are one and the same taxable entity.

As a general rule, the Court does not venture into a trial of facts in proceedings under Rule 45 of the Rules of Courts, for its only functionis to review errors of law.26 The Court declines to inquire into errors inthe factual assessment of the CA, for the latter’s findings areconclusive, especially when these are synonymous to those of theCTA.

27 But when the CA contradicts the factual findings of the CTA,

the Court deems it necessary to determine whether the CA was justified in doing so, for one basic rule in taxation is that the factualfindings of the CTA, when supported by substantial evidence, will not be disturbed on appeal unless it is shown that the CTA committedgross error in its appreciation of facts.

28

The Court finds that the CA gravely erred when it ignored the

substantial evidence on record and reversed the CTA.

In a number of cases, the Court has shredded the veil of corporate

identity and ruled that where a corporation is merely an adjunct,business conduit or alter ego of another corporation or when they



























































practice fraud on our internal revenue laws,[29]

the fiction of their

separate and distinct corporate identities shall be disregarded, and

both entities treated as one taxable person, subject to assessment

for the same taxable transaction.

The Court considers the presence of the following circumstances,

to wit: when the owner of one directs and controls the operations

of the other, and the payments effected or received by one are forthe accounts due from or payable to the other;30 or when the

properties or products of one are all sold to the other, which in

turn immediately sells them to the public,[31]

as substantial

evidence in support of the finding that the two are actually one

juridical taxable personality.

In the present case, overwhelming evidence supports the CTA indisregarding the separate identity of CKCS, Inc. from CKCS and intreating them as one taxable entity.

First, in respondent’s Petition for Review before the CTA, heexpressly admitted that he "is engaged in restaurant and/or cafeteria business" and that "[i] n 1991, 1992 and 1993, he also operated a branc h at Club John Hay, Baguio City with a business name of Copper Kettle Cafeteria Specialist."

32 Respondent repeated such

admission in the Joint Stipulation.33 And then in Exhibit "1"34 for petitioner, a July 18, 1994 letter sent by Jeanne Menguito to BIR,Baguio City, she stated thus:

"in connection with the investigation of Copper Kettle Cafeteri a Specialist which is located at 19th Tee Club John Hay, Baguio Cityunder letter of authority nos. 0392897, 0392898, and 0392690 datedMay 16, 1994, investigating my income, business, and withholdingtaxes for the years 1991, 1992, and 1993."

35 (Emphasis supplied)

Jeanne Menguito signed the letter as proprietor of Copper KettleCafeteria Specialist.36

Related to Exhibit "1" is petitioner's Exhibit "14," which is another letter dated September 28, 1997, in which Jeanne Menguito protestedthe September 2, 1997 assessment notices directed at Copper Kettle

Cafeteria Specialist and referred to the latter as "our business at 19thTee Club John Hay and at Texas Instruments."

37 Taken along with the

Joint Stipulation, Exhibits "A" through "C" and the August 3, 1993Certification of Camp John Hay, Exhibits "1" and "14," confirm thatrespondent, together with his spouse Jeanne Menguito, own, operateand manage a branch of Copper Kettle Cafeteria Specialist, also calledCopper Kettle Catering Services at Camp John Hay.

Moreover, in Exhibits "A" to "A-1,"38 Exhibits "B" to "B-1"39 andExhibits "C" to "C-1"

40 which are lists of concessionaires that operated

in Club John Hay in 1992, 1993 and 1991, respectively,41 it appearsthat there is no outlet with the name "Copper Kettle CafeteriaSpecialist" as claimed by respondent. The name that appears in thelists is "19th TEE CAFETERIA (Copper Kettle, Inc.)." However, inthe light of the express admission of respondent that in 1991, 1992 and1993, he operated a branch called Copper Kettle Cafeteria Specialist inClub John Hay, the entries in Exhibits "A" through "C" could only

mean that said branch refers to "19th Tee Cafeteria (Copper Kettle,Inc.)." There is no evidence presented by respondent that contradictsthis conclusion.

In addition, the August 9, 1993 Certification issued by Club John Haythat "COPPER KETTLE CATERING SERVICES owned andmanaged by MS. JEANNE G. MENGUITO is a concessionaire inJohn Hay since July 1991 up to the present and is operating the outlet19TH TEE CAFETERIA AND THE TEE BAR "42 convincinglyestablishes that respondent's branch which he refers to as Copper Kettle Cafeteria Specialist at Club John Hay also appears in the latter'srecords as "Copper Kettle Catering Services" with an outlet called"19th Tee Cafeteria and The Tee Bar."

Second, in Exhibit "8"43 and Exhibit "E,"44 Texas Instrumentsidentified the concessionaire operating its canteen as "Copper KettleCatering Services, Inc."45 and/or "COPPER KETTLE CAFETERIASPECIALIST SVCS."46 It being settled that respondent's "Copper Kettle Cafeteria Specialist" is also known as "Copper Kettle CateringServices," and that respondent and Jeanne Menguito both own,manage and act as proprietors of the business, Exhibit "8" and Exhibit

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"E" further establish that, through said business, respondent also hadtaxable transactions with Texas Instruments.

In view of the foregoing facts and circumstances, the Articles of Incorporation of CKCS, Inc. -- a certified true copy of whichrespondent attached only to his Reply filed with the CA47 -- cannotinsulate it from scrutiny of its real identity in relation to CKCS. It is

noted that said Articles of Incorporation of CKCS, Inc. was issued in1989, but documentary evidence indicate that after said date, CKCS,Inc. has also assumed the name CKCS, and vice-versa. The mostconcrete indication of this practice is the 1991 Quarterly PercentageTax Returns covering the business name/trade "19th Tee Camp JohnHay." In said returns, the taxpayer is identified as "Copper KettleCafeteria Specialist"48 or CKCS, not CKCS, Inc. Yet, in severaldocuments already cited, the purported owner of 19th Tee Bar at ClubJohn Hay is CKCS, Inc.

All these pieces of evidence buttress the finding of the CTA that in1991, 1992 and 1993, respondent, together with his spouse JeanneMenguito, owned and operated outlets in Club John Hay and TexasInstruments under the names Copper Kettle Cafeteria Specialist or CKCS and Copper Kettle Catering Services or Copper Kettle CateringServices, Inc..

Turning now to the second issue.

In respondent's Petition for Review with the CTA, he questioned the

validity of the Assessment Notices,

49

all dated September 2, 1997,issued by BIR, Baguio City against him on the following grounds:

1. The assessment notices, based on income and percentage tax returnsfiled for 1991, 1992 and 1993, were issued beyond the three-year prescriptive period under Section 203 of the Tax Code;

50

2. The assessment notices were addressed to Copper Kettle Specialist,Club John Hay, Baguio City, despite notice to petitioner thatrespondent's principal place of business was at the CCP Complex,Pasay City.51

3. The assessment notices were issued in violation of the requirementof Revenue Regulations No. 12-85, dated November 27, 1985, that thetaxpayer be issued a post-reporting notice and pre-assessment notice before the preliminary findings of deficiency may ripen into a formalassessment;52 and

4. The assessment notices did not give respondent a 15-day period to

reply to the findings of deficiency.

53

The Court notes that nowhere in his Petition for Review didrespondent deny that he received the September 2, 1997 assessmentnotices. Instead, during the trial, respondent's witness, Ma. Theresa Nalda (Nalda), testified that she informed the BIR, Baguio City "thatthere was no Notice or letter, that we did not receive,

perhaps, because they were not addressed to Mr. Menguito's headoffice."54

The CTA correctly upheld the validity of the assessment notices.Citing Section 223 of the Tax Code which provides that the prescriptive period for the issuance of assessment notices based onfraud is 10 years, the CTA ruled that the assessment notices issuedagainst respondent on September 2, 1997 were timely because petitioner discovered the falsity in respondent's tax returns for 1991,1992 and 1993 only on February 19, 1997.55 Moreover, in accordancewith Section 2 of Revenue Regulation No. 12-85, which requires thatassessment notices be sent to the address indicated in the taxpayer's

return, unless the latter gives a notice of change of address, theassessment notices in the present case were sent by petitioner to CampJohn Hay, for this was the address respondent indicated in his taxreturns.56 As to whether said assessment notices were actuallyreceived, the CTA correctly held that since respondent did not testifythat he did not receive said notices, it can be presumed that the samewere actually sent to and received by the latter. The Court agrees withthe CTA in considering as hearsay the testimony of Nalda thatrespondent did not receive the notices, because Nalda was notcompetent to testify on the matter, as she was employed by respondentonly in June 1998, whereas the assessment notices were sent onSeptember 2, 1997.57














































Anent compliance with the requirements of Revenue Regulation No.12-85, the CTA held:

BIR records show that on July 28, 1997, a letter was issued by BIR Baguio to Spouses Menguito, informing the latter of their supposedunderdeclaration of sales totaling P48,721,555.96 and giving them 5days to communicate any objection to the results of the investigation

(Exhibit 11, p. 83, BIR Records). Records likewise reveal the issuanceof a Preliminary Ten (10) Day Letter on August 11, 1997, informingPetitioner [respondent herein] that the sum of P34,193,041.55 is duefrom him as deficiency income and percentage tax (Exhibit 13, p. 173,BIR Records). Said letter gave the Petitioner [respondent herein] a period of ten (10) days to submit his objection to the proposedassessment, either personally or in writing, together with any evidencehe may want to present.

x x x x

As to Petitioner's allegation that he was given only ten (10) days toreply to the findings of deficiency instead of fifteen (15) days grantedto a taxpayer under Revenue Regulations No. 12-85, this Court believes that when Respondent [petitioner herein] gave the Petitioner [respondent herein] on October 10, 1997 an additional period of ten(10) days to present documentary evidence or a total of twenty (20)days, there was compliance with Revenue Regulations No. 12-85 andthe latter was amply given opportunity to present his side x x x.58

The CTA further held that respondent was estopped from raising procedural issues against the assessment notices, because these werenot cited in the September 28, 1997 letter-protest which his spouseJeanne Menguito filed with petitioner .59

On appeal by respondent,60

the CA resolved the issue, thus:

Moreover, i f the taxpayer deni es ever having received an assessment

fr om the BIR, it is incumbent upon the latter to prove by competent

evidence that such notice was indeed received by the addressee. Here,respondent [petitioner herein] merely alleged that it "forwarded" theassessment notices to petitioner [respondent herein]. The respondent

did not show any proof of mailing, registry receipt or acknowledgmentreceipt signed by the petitioner [respondent herein]. Since respondent

[petiti oner herein] has not adduced suf fi cient evidence that petitioner

[r espondent herein ] had in f act received the pre-assessment notice

and post-reporting notice requi red by law, it cannot be assumed that

petitioner [ respondent herein] had been served said notices .61

No other ground was cited by the CA for the reversal of the finding of the CTA on the issue.

The CA is gravely mistaken.

In their Petition for Review with the CTA, respondent expressly statedthat "[s]ometime in September 1997, petitioner [respondent herein]received various assessment notices, all dated 02 September 1997,issued by BIR-Baguio for alleged deficiency income and percentagetaxes for taxable years ending 31 December 1991, 1992 and 1993 x x

x."

62

In their September 28, 1997 protest to the September 2, 1997assessment notices, respondent, through his spouses Jeanne Menguito,acknowledged that "[they] are in receipt of the assessment notice youhave sent us, dated September 2, 1997 x x x."63

Respondent is therefore estopped from denying actual receipt of theSeptember 2, 1997 assessment notices, notwithstanding the denial of his witness Nalda.

As to the address indicated on the assessment notices, respondent

cannot question the same for it is the said address which appears in its percentage tax returns.64 While respondent claims that he had earlier notified petitioner of a change in his business address, no evidence of such written notice was presented. Under Section 11 of RevenueRegulation No. 12-85, respondent's failure to give written notice of change of address bound him to whatever communications were sentto the address appearing in the tax returns for the period involved inthe investigation.65

Thus, what remain in question now are: whether petitioner issued andmailed a post-reporting notice and a pre-assessment notice; andwhether respondent actually received them.





































Superama, Inc. (Metro Star) of deficiency value-added tax andwithholding tax for the taxable year 1999.

Based on a Joint Stipulation of Facts and Issues3 of the parties, theCTA Second Division summarized the factual and proceduralantecedents of the case, the pertinent portions of which read:

Petitioner is a domestic corporation duly organized and existing byvirtue of the laws of the Republic of the Philippines, x x x.

On January 26, 2001, the Regional Director of Revenue Region No.10, Legazpi City, issued Letter of Authority No. 00006561 for Revenue Officer Daisy G. Justiniana to examine petitioner’s books of accounts and other accounting records for income tax and other internal revenue taxes for the taxable year 1999. Said Letter of Authority was revalidated on August 10, 2001 by Regional Director Leonardo Sacamos.

For petitioner’s failure to comply with several requests for the presentation of records and Subpoena Duces Tecum, [the] OIC of BIR Legal Division issued an Indorsement dated September 26, 2001informing Revenue District Officer of Revenue Region No. 67,Legazpi City to proceed with the investigation based on the bestevidence obtainable preparatory to the issuance of assessment notice.

On November 8, 2001, Revenue District Officer Socorro O. Ramos-Lafuente issued a Preliminary 15-day Letter, which petitioner receivedon November 9, 2001. The said letter stated that a post audit reviewwas held and it was ascertained that there was deficiency value-addedand withholding taxes due from petitioner in the amount of P292,874.16.

On April 11, 2002, petitioner received a Formal Letter of Demanddated April 3, 2002 from Revenue District No. 67, Legazpi City,assessing petitioner the amount of Two Hundred Ninety TwoThousand Eight Hundred Seventy Four Pesos and Sixteen Centavos(P292,874.16.) for deficiency value-added and withholding taxes for the taxable year 1999, computed as follows:

ASSESSMENT NOTICE NO. 067-99-003-579-072

VALUE ADDED TAX

Gross Sales P1,697,718.90

Output Tax P 154,338.08

Less: Input Tax _____________

VAT Payable P 154,338.08

Add: 25% SurchargeP38,584.54

20% Interest 79,746.49

Compromise Penalty

Late Payment P16,000.00

Failure to FileVAT returns

2,400.00 18,400.00 136,731.01

TOTAL P 291,069.09

WITHHOLDING TAX

Compensation 2,772.91

Expanded 110,103.92

Total Tax Due P 112,876.83

Less: Tax Withheld 111,848.27

Deficiency Withholding Tax P 1,028.56

Add: 20% Interest p.a. 576.51

Compromise Penalty 200.00

TOTAL P 1,805.07

*Expanded P1,949,334.25 x 5% 97,466.71

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WithholdingTax

Film Rental 10,000.25 x 10% 1,000.00

Audit Fee 193,261.20 x 5% 9,663.00

Rental Expense 41,272.73 x 1% 412.73

Security Service 156,142.01 x 1% 1,561.42

Service Contractor P 110,103.92

Total

SUMMARIES OF DEFICIENCIES

VALUE ADDED TAX P 291,069.09

WITHHOLDING TAX 1,805.07

TOTAL P 292,874.16

Subsequently, Revenue District Office No. 67 sent a copy of the Final Notice of Seizure dated May 12, 2003, which petitioner received onMay 15, 2003, giving the latter last opportunity to settle its deficiencytax liabilities within ten (10) [days] from receipt thereof, otherwiserespondent BIR shall be constrained to serve and execute the Warrantsof Distraint and/or Levy and Garnishment to enforce collection.

On February 6, 2004, petitioner received from Revenue District Office No. 67 a Warrant of Distraint and/or Levy No. 67-0029-23 dated May12, 2003 demanding payment of deficiency value-added tax andwithholding tax payment in the amount of P292,874.16.

On July 30, 2004, petitioner filed with the Office of respondentCommissioner a Motion for Reconsideration pursuant to Section 3.1.5of Revenue Regulations No. 12-99.

On February 8, 2005, respondent Commissioner, through its

authorized representative, Revenue Regional Director of Revenue

Region 10, Legaspi City, issued a Decision denying petitioner’sMotion for Reconsideration. Petitioner, through counsel received saidDecision on February 18, 2005.

x x x.

Denying that it received a Preliminary Assessment Notice (PAN) and

claiming that it was not accorded due process, Metro Star filed a petition for review4 with the CTA. The parties then stipulated on thefollowing issues to be decided by the tax court:

1. Whether the respondent complied with the due processrequirement as provided under the National Internal RevenueCode and Revenue Regulations No. 12-99 with regard to theissuance of a deficiency tax assessment;

1.1 Whether petitioner is liable for the respective

amounts of P291,069.09 and P1,805.07 as deficiencyVAT and withholding tax for the year 1999;

1.2. Whether the assessment has become final andexecutory and demandable for failure of petitioner to protest the same within 30 days from its receipt thereof on April 11, 2002, pursuant to Section 228 of the National Internal Revenue Code;

2. Whether the deficiency assessments issued by therespondent are void for failure to state the law and/or factsupon which they are based.

2.2 Whether petitioner was informed of the law andfacts on which the assessment is made in compliancewith Section 228 of the National Internal RevenueCode;

3. Whether or not petitioner, as owner/operator of amovie/cinema house, is subject to VAT on sales of servicesunder Section 108(A) of the National Internal Revenue Code;






4. Whether or not the assessment is based on the best evidenceobtainable pursuant to Section 6(b) of the National InternalRevenue Code.

The CTA-Second Division found merit in the petition of Metro Star and, on March 21, 2007, rendered a decision, the decretal portion of which reads:

WHEREFORE, premises considered, the Petition for Review is herebyGRANTED. Accordingly, the assailed Decision dated February 8,2005 is hereby REVERSED and SET ASIDE and respondent isORDERED TO DESIST from collecting the subject taxes against petitioner.

The CTA-Second Division opined that "[w]hile there [is] a disputable presumption that a mailed letter [is] deemed received by the addresseein the ordinary course of mail, a direct denial of the receipt of mail

shifts the burden upon the party favored by the presumption to provethat the mailed letter was indeed received by the addressee."5 It alsofound that there was no clear showing that Metro Star actuallyreceived the alleged PAN, dated January 16, 2002. It, accordingly,ruled that the Formal Letter of Demand dated April 3, 2002, as well asthe Warrant of Distraint and/or Levy dated May 12, 2003 were void, asMetro Star was denied due process.6

The CIR sought reconsideration7 of the decision of the CTA-SecondDivision, but the motion was denied in the latter’s July 24, 2007Resolution.8

Aggrieved, the CIR filed a petition for review9 with the CTA-En Banc,

but the petition was dismissed after a determination that no newmatters were raised. The CTA-En Banc disposed:

WHEREFORE, the instant Petition for Review is hereby DENIEDDUE COURSE and DISMISSED for lack of merit. Accordingly, theMarch 21, 2007 Decision and July 27, 2007 Resolution of the CTASecond Division in CTA Case No. 7169 entitled, "Metro Star Superama, Inc., petitioner vs. Commissioner of Internal Revenue,respondent" are hereby AFFIRMED in toto.

SO ORDERED.

The motion for reconsideration10

filed by the CIR was likewise denied by the CTA-En Banc in its November 18, 2008 Resolution.11

The CIR, insisting that Metro Star received the PAN, dated January16, 2002, and that due process was served nonetheless because the

latter received the Final Assessment Notice (FAN), comes now beforethis Court with the sole issue of whether or not Metro Star was denieddue process.

The general rule is that the Court will not lightly set aside theconclusions reached by the CTA which, by the very nature of itsfunctions, has accordingly developed an exclusive expertise on theresolution unless there has been an abuse or improvident exercise of authority.12 In Barcelon, Roxas Securities, Inc. (now known as UBPSecurities, Inc.) v. Commissioner of Internal Revenue,13 the Court

wrote:

Jurisprudence has consistently shown that this Court accords thefindings of fact by the CTA with the highest respect. In Sea-Land

Service Inc. v. Court of Appeals [G.R. No. 122605, 30 April 2001, 357SCRA 441, 445-446], this Court recognizes that the Court of TaxAppeals, which by the very nature of its function is dedicatedexclusively to the consideration of tax problems, has necessarilydeveloped an expertise on the subject, and its conclusions will not beoverturned unless there has been an abuse or improvident exercise of authority. Such findings can only be disturbed on appeal if they are notsupported by substantial evidence or there is a showing of gross error or abuse on the part of the Tax Court. In the absence of any clear andconvincing proof to the contrary, this Court must presume that theCTA rendered a decision which is valid in every respect.

On the matter of service of a tax assessment, a further perusal of our ruling in Barcelon is instructive, viz:

Jurisprudence is replete with cases holding that if the taxpayer deniesever having received an assessment from the BIR, it is incumbent uponthe latter to prove by competent evidence that such notice was indeed



































received by the addressee. The onus probandi was shifted torespondent to prove by contrary evidence that the Petitioner receivedthe assessment in the due course of mail. The Supreme Court hasconsistently held that while a mailed letter is deemed received by theaddressee in the course of mail, this is merely a disputable presumption subject to controversion and a direct denial thereof shiftsthe burden to the party favored by the presumption to prove that the

mailed letter was indeed received by the addressee (Republic vs. Courtof Appeals, 149 SCRA 351). Thus as held by the Supreme Court inGonzalo P. Nava vs. Commissioner of Internal Revenue , 13 SCRA104, January 30, 1965:

"The facts to be proved to raise this presumption are (a) that the letter was properly addressed with postage prepaid, and (b) that it wasmailed. Once these facts are proved, the presumption is that the letter was received by the addressee as soon as it could have beentransmitted to him in the ordinary course of the mail. But if one of thesaid facts fails to appear, the presumption does not lie. (VI, Moran,Comments on the Rules of Court, 1963 ed, 56-57 citing Enriquez vs.Sunlife Assurance of Canada, 41 Phil 269)."

x x x. What is essential to prove the fact of mailing is the registryreceipt issued by the Bureau of Posts or the Registry return card whichwould have been signed by the Petitioner or its authorizedrepresentative. And if said documents cannot be located, Respondentat the very least, should have submitted to the Court a certificationissued by the Bureau of Posts and any other pertinent document whichis executed with the intervention of the Bureau of Posts. This Courtdoes not put much credence to the self serving documentations made by the BIR personnel especially if they are unsupported by substantialevidence establishing the fact of mailing. Thus:

"While we have held that an assessment is made when sent within the prescribed period, even if received by the taxpayer after its expiration(Coll. of Int. Rev. vs. Bautista, L-12250 and L-12259, May 27, 1959),this ruling makes it the more imperative that the release, mailing or sending of the notice be clearly and satisfactorily proved. Merenotations made without the taxpayer’s intervention, notice or control,without adequate supporting evidence cannot suffice; otherwise, the

taxpayer would be at the mercy of the revenue offices, withoutadequate protection or defense." (Nava vs. CIR, 13 SCRA 104,January 30, 1965).

x x x.

The failure of the respondent to prove receipt of the assessment by the

Petitioner leads to the conclusion that no assessment was issued.Consequently, the government’s right to issue an assessment for thesaid period has already prescribed. (Industrial Textile ManufacturingCo. of the Phils., Inc. vs. CIR CTA Case 4885, August 22, 1996).(Emphases supplied.)

The Court agrees with the CTA that the CIR failed to discharge itsduty and present any evidence to show that Metro Star indeed receivedthe PAN dated January 16, 2002. It could have simply presented theregistry receipt or the certification from the postmaster that it mailed

the PAN, but failed. Neither did it offer any explanation on why itfailed to comply with the requirement of service of the PAN. It merelyaccepted the letter of Metro Star’s chairman dated April 29, 2002, thatstated that he had received the FAN dated April 3, 2002, but not thePAN; that he was willing to pay the tax as computed by the CIR; andthat he just wanted to clarify some matters with the hope of lesseningits tax liability.

This now leads to the question: Is the failure to strictly comply withnotice requirements prescribed under Section 228 of the NationalInternal Revenue Code of 1997 and Revenue Regulations (R.R.) No.12-99 tantamount to a denial of due process? Specifically, are therequirements of due process satisfied if only the FAN stating thecomputation of tax liabilities and a demand to pay within the prescribed period was sent to the taxpayer?

The answer to these questions require an examination of Section 228of the Tax Code which reads:

SEC. 228. Protesting of Assessment. - When the Commissioner or hisduly authorized representative finds that proper taxes should beassessed, he shall first notify the taxpayer of his findings: provided,



however, that a preassessment notice shall not be required in thefollowing cases:

(a) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearingon the face of the return; or

(b) When a discrepancy has been determined between the taxwithheld and the amount actually remitted by the withholdingagent; or

(c) When a taxpayer who opted to claim a refund or tax creditof excess creditable withholding tax for a taxable period wasdetermined to have carried over and automatically applied thesame amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year;or

(d) When the excise tax due on exciseable articles has not been paid; or

(e) When the article locally purchased or imported by anexempt person, such as, but not limited to, vehicles, capitalequipment, machineries and spare parts, has been sold, tradedor transferred to non-exempt persons.

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

Within a period to be prescribed by implementing rules andregulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorizedrepresentative shall issue an assessment based on his findings.

Such assessment may be protested administratively by filing a requestfor reconsideration or reinvestigation within thirty (30) days fromreceipt 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 shallhave been submitted; otherwise, the assessment shall become final.

If the protest is denied in whole or in part, or is not acted upon withinone hundred eighty (180) days from submission of documents, thetaxpayer adversely affected by the decision or inaction may appeal tothe Court of Tax Appeals within thirty (30) days from receipt of the

said decision, or from the lapse of one hundred eighty (180)-day period; otherwise, the decision shall become final, executory anddemandable. (Emphasis supplied).

Indeed, Section 228 of the Tax Code clearly requires that the taxpayer must first be informed that he is liable for deficiency taxes through thesending of a PAN. He must be informed of the facts and the law uponwhich the assessment is made. The law imposes a substantive, notmerely a formal, requirement. To proceed heedlessly with taxcollection without first establishing a valid assessment is evidentlyviolative of the cardinal principle in administrative investigations - thattaxpayers should be able to present their case and adduce supportingevidence.14

This is confirmed under the provisions R.R. No. 12-99 of the BIR which pertinently provide:

SECTION 3. Due Process Requirement in the Issuance of a DeficiencyTax Assessment. —

3.1 Mode of procedures in the issuance of a deficiency taxassessment:

3.1.1 Notice for informal conference. — The Revenue Officer who audited the taxpayer's records shall, among others, state inhis report whether or not the taxpayer agrees with his findingsthat the taxpayer is liable for deficiency tax or taxes. If thetaxpayer is not amenable, based on the said Officer's submittedreport of investigation, the taxpayer shall be informed, inwriting, by the Revenue District Office or by the SpecialInvestigation Division, as the case may be (in the case RevenueRegional Offices) or by the Chief of Division concerned (in the







case of the BIR National Office) of the discrepancy or discrepancies in the taxpayer's payment of his internal revenuetaxes, for the purpose of "Informal Conference," in order toafford the taxpayer with an opportunity to present his side of the case. If the taxpayer fails to respond within fifteen (15)days from date of receipt of the notice for informal conference,he shall be considered in default, in which case, the Revenue

District Officer or the Chief of the Special InvestigationDivision of the Revenue Regional Office, or the Chief of Division in the National Office, as the case may be, shallendorse the case with the least possible delay to theAssessment Division of the Revenue Regional Office or to theCommissioner or his duly authorized representative, as the casemay be, for appropriate review and issuance of a deficiency taxassessment, if warranted.

3.1.2 Preliminary Assessment Notice (PAN). — If after reviewand evaluation by the Assessment Division or by theCommissioner or his duly authorized representative, as the casemay be, it is determined that there exists sufficient basis toassess the taxpayer for any deficiency tax or taxes, the saidOffice shall issue to the taxpayer, at least by registered mail, aPreliminary Assessment Notice (PAN) for the proposedassessment, showing in detail, the facts and the law, rules andregulations, or jurisprudence on which the proposed assessmentis based (see illustration in ANNEX A hereof). If the taxpayer fails to respond within fifteen (15) days from date of receipt of the PAN, he shall be considered in default, in which case, aformal letter of demand and assessment notice shall be causedto be issued by the said Office, calling for payment of thetaxpayer's deficiency tax liability, inclusive of the applicable penalties.

3.1.3 Exceptions to Prior Notice of the Assessment. — Thenotice for informal conference and the preliminary assessmentnotice shall not be required in any of the following cases, inwhich case, issuance of the formal assessment notice for the payment of the taxpayer's deficiency tax liability shall besufficient:

(i) When the finding for any deficiency tax is the resultof mathematical error in the computation of the taxappearing on the face of the tax return filed by thetaxpayer; or

(ii) When a discrepancy has been determined betweenthe tax withheld and the amount actually remitted by

the withholding agent; or

(iii) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for ataxable period was determined to have carried over andautomatically applied the same amount claimed againstthe estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or

(iv) When the excise tax due on excisable articles hasnot been paid; or

(v) When an article locally purchased or imported by anexempt person, such as, but not limited to, vehicles,capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons.

3.1.4 Formal Letter of Demand and Assessment Notice. — Theformal letter of demand and assessment notice shall be issued by the Commissioner or his duly authorized representative. Theletter of demand calling for payment of the taxpayer'sdeficiency tax or taxes shall state the facts, the law, rules andregulations, or jurisprudence on which the assessment is based,otherwise, the formal letter of demand and assessment noticeshall be void (see illustration in ANNEX B hereof).

The same shall be sent to the taxpayer only by registered mail or by personal delivery.

If sent by personal delivery, the taxpayer or his duly authorizedrepresentative shall acknowledge receipt thereof in the duplicate copyof the letter of demand, showing the following: (a) His name; (b)



signature; (c) designation and authority to act for and in behalf of thetaxpayer, if acknowledged received by a person other than thetaxpayer himself; and (d) date of receipt thereof.

x x x.

From the provision quoted above, it is clear that the sending of a PAN

to taxpayer to inform him of the assessment made is but part of the"due process requirement in the issuance of a deficiency taxassessment," the absence of which renders nugatory any assessmentmade by the tax authorities. The use of the word "shall" in subsection3.1.2 describes the mandatory nature of the service of a PAN. The persuasiveness of the right to due process reaches both substantial and procedural rights and the failure of the CIR to strictly comply with therequirements laid down by law and its own rules is a denial of Metro

Star’s right to due process.15 Thus, for its failure to send the PAN

stating the facts and the law on which the assessment was made asrequired by Section 228 of R.A. No. 8424, the assessment made by theCIR is void.

The case of CIR v. Menguito16 cited by the CIR in support of itsargument that only the non-service of the FAN is fatal to the validityof an assessment, cannot apply to this case because the issue thereinwas the non-compliance with the provisions of R. R. No. 12-85 whichsought to interpret Section 229 of the old tax law. RA No. 8424 hasalready amended the provision of Section 229 on protesting anassessment. The old requirement of merely notifying the taxpayer of the CIR’s findings was changed in 1998 to informing the taxpayer of not only the law, but also of the facts on which an assessment would be made. Otherwise, the assessment itself would be invalid.

17 The

regulation then, on the other hand, simply provided that a notice besent to the respondent in the form prescribed, and that no consequencewould ensue for failure to comply with that form.1avvphi1

The Court need not belabor to discuss the matter of Metro Star’sfailure to file its protest, for it is well-settled that a void assessment bears no fruit.

18

It is an elementary rule enshrined in the 1987 Constitution that no person shall be deprived of property without due process of law.

19 In

balancing the scales between the power of the State to tax and itsinherent right to prosecute perceived transgressors of the law on oneside, and the constitutional rights of a citizen to due process of law andthe equal protection of the laws on the other, the scales must tilt infavor of the individual, for a citizen’s right is amply protected by theBill of Rights under the Constitution. Thus, while "taxes are thelifeblood of the government," the power to tax has its limits, in spite of all its plenitude. Hence in Commissioner of Internal Revenue v. Algue,Inc.,20 it was said –

Taxes are the lifeblood of the government and so should be collectedwithout unnecessary hindrance. On the other hand, such collectionshould be made in accordance with law as any arbitrariness will negatethe very reason for government itself. It is therefore necessary toreconcile the apparently conflicting interests of the authorities and thetaxpayers so that the real purpose of taxation, which is the promotionof the common good, may be achieved.

x x x x x x x x x

It is said that taxes are what we pay for civilized society. Withouttaxes, the government would be paralyzed for the lack of the motive power to activate and operate it. Hence, despite the natural reluctanceto surrender part of one’s hard-earned income to taxing authorities,every person who is able to must contribute his share in the running of the government. The government for its part is expected to respond inthe form of tangible and intangible benefits intended to improve thelives of the people and enhance their moral and material values. Thissymbiotic relationship is the rationale of taxation and should dispel theerroneous notion that it is an arbitrary method of exaction by those inthe seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it beexercised reasonably and in accordance with the prescribed procedure.If it is not, then the taxpayer has a right to complain and the courts willthen come to his succor. For all the awesome power of the tax


























collector, he may still be stopped in his tracks if the taxpayer candemonstrate x x x that the law has not been observed.

21 (Emphasis

supplied).

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 andrestraining order to annul and set aside the informations filed inCriminal Case Nos. 1960, 1961, 1962, 1963, 1964, and 1965 of theCourt of First Instance of Davao, all entitled: "People of the

Philippines, plaintiff, versus Quirico Ungab, accused;" and to restrainthe respondent Judge from further proceeding with the hearing andtrial of the said cases.

It is not disputed that sometime in July, 1974, BIR Examiner BenGarcia examined the income tax returns filed by the herein petitioner,Quirico P. Ungab, for the calendar year ending December 31, 1973. Inthe course of his examination, he discovered that the petitioner failedto 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, businesstax and forest charges for the year 1973 and inviting petitioner to aninformal 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 DistrictRevenue Officer protesting the assessment, claiming that he was onlya dealer or agent on commission basis in the banana sapling businessand that his income, as reported in his income tax returns for the saidyear, was accurately stated. BIR Examiner Ben Garcia, however, wasfully convinced that the petitioner had filed a fraudulent income taxreturn so that he submitted a "Fraud Referral Report," to the Tax FraudUnit of the Bureau of Internal Revenue. After examining the records of the case, the Special Investigation Division of the Bureau of InternalRevenue 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 taxreturn for 1973 with intent to evade his just taxes duethe government under Section 45 in relation to Section72 of the National Internal Revenue Code;

(2) For failure to pay a fixed annual tax of P50.00 ayear in 1973 and 1974, or a total of unpaid fixed taxesof 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 salesof P129,580.35 to the Davao Fruit Corporation,depriving thereby the government of its due revenue inthe 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 Revenueapproved the prosecution of the petitioner. 3

Thereafter, State Prosecutor Jesus Acebes who had been designated toassist all Provincial and City Fiscals throughout the Philippines in theinvestigation and prosecution, if the evidence warrants, of allviolations of the National Internal Revenue Code, as amended, andother related laws, in Administrative Order No. 116 dated December 5,







1974, and to whom the case was assigned, conducted a preliminaryinvestigation 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, inrelation to Sec. 72 of the National Internal-RevenueCode, for filing a fraudulent income tax return for thecalendar 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 toDecember, 1973, without first paying the annual fixedor privilege tax thereof; 5

(3) Criminal Case No. 1962 — Violation of Sec. 183(a), in relation to Secs. 186 and 209 of the NationalInternal Revenue Code, for failure to render a true andcomplete return on the gross quarterly sales, receiptsand earnings in his business as producer of bananasaplings 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 NationalInternal Revenue Code, for failure to render a true andcomplete return on the gross quarterly sales receipts andearnings 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 NationalInternal Revenue Code, for failure to render a true andcomplete return on the gross quarterly sales, receiptsand 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 NationalInternal Revenue Code, for failure to render a true andcomplete return on the gross quarterly sales, receiptsand earnings as producer of banana saplings, for thequarter 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 theinformations upon the grounds that: (1) the informations are null andvoid for want of authority on the part of the State Prosecutor to initiateand prosecute the said cases; and (2) the trial court has no jurisdictionto take cognizance of the above-entitled cases in view of his pending protest against the assessment made by the BIR Examiner.

10However,

the trial court denied the motion on October 22, 1975. 11 Whereupon,the petitioner filed the instant recourse. As prayed for, a temporaryrestraining order was issued by the Court, ordering the respondentJudge from further proceeding with the trial and hearing of CriminalCase 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 againsthim on the ground that the respondent State Prosecutor is allegedlywithout authority to do so. The petitioner argues that while therespondent 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 caseof Estrella vs. Orendain,

12 should be observed before such authoritymay be exercised; otherwise, the provisions of the Charter of DavaoCity on the functions and powers of the City Fiscal will bemeaningless 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 interventionof 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 theruling of this Court that under Sections 1679 and 1686of the Revised Administrative Code, in any instancewhere a provincial or city fiscal fails, refuses or isunable, for any reason, to investigate or prosecute acase and, in the opinion of the Secretary of Justice it isadvisable in the public interest to take a different courseof action, the Secretary of Justice may either appoint asacting provincial or city fiscal to handle theinvestigation or prosecution exclusively and only of such case, any practicing attorney or some competentofficer of the Department of Justice or office of any cityor provincial fiscal, with complete authority to acttherein in all respects as if he were the provincial or cityfiscal himself, or appoint any lawyer in the governmentservice, temporarily to assist such city of provincialfiscal in the discharge of his duties, with the samecomplete authority to act independently of and for suchcity or provincial fiscal provided that no suchappointment may be made without first hearing thefiscal concerned and never after the correspondinginformation has already been filed with the court by thecorresponding city or provincial fiscal without theconformity of the latter, except when it can be patentlyshown to the court having cognizance of the case thatsaid 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 byRepublic Act 5184. The observation in Salcedo vs.

Liwag, supra, regarding the nature of the power of theSecretary of Justice over fiscals as being purely over administrative matters only was not really necessary, asindicated in the above relation of the facts anddiscussion 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 sameis hereby modified.

The contention is without merit. Contrary to the petitioner's claim, therule therein established had not been violated. The respondent StateProsecutor, although believing that he can proceed independently of the City Fiscal in the investigation and prosecution of these cases, firstsought permission from the City Fiscal of Davao City before he startedthe 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 Cityfiscals throughout the Philippines in the investigation and prosecutionof all violations of the National Internal Revenue Code, as amended,and other related laws, graciously allowed the respondent StateProsecutor to conduct the investigation of said cases, and in fact, saidinvestigation 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 Revenuehas not yet resolved his protests against the assessment of the RevenueDistrict Officer; and that he was denied recourse to the Court of TaxAppeals.

The contention is without merit. What is involved here is not thecollection of taxes where the assessment of the Commissioner of Internal Revenue may be reviewed by the Court of Tax Appeals, but acriminal prosecution for violations of the National Internal RevenueCode which is within the cognizance of courts of first instance. Whilethere can be no civil action to enforce collection before the assessment procedures provided in the Code have been followed, there is norequirement 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 anassessment of the deficiency tax due is necessary beforethe taxpayer can be prosecuted criminally for thecharges 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 acriminal prosecution for willful attempt to defeat andevade the income tax. A crime is complete when theviolator has knowingly and willfuly filed a fraudulentreturn with intent to evade and defeat the tax. The perpetration of the crime is grounded upon knowledgeon the part of the taxpayer that he has made aninaccurate return, and the government's failure todiscover the error and promptly to assess has noconnections with the commission of the crime.

15

Besides, it has been ruled that a petition for reconsideration of anassessment may affect the suspension of the prescriptive period for thecollection of taxes, but not the prescriptive period of a criminal actionfor violation of law. 16 Obviously, the protest of the petitioner againstthe 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 indenying the motion to quash filed by the petitioner.

WHEREFORE, the petition should be, as it is hereby dismissed. Thetemporary restraining order heretofore issued is hereby set aside. Withcosts against the petitioner.

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 DAVIDR. CORTES, respondents-intervenors.

KAPUNAN, J.: p

The pivotal issue in this petition for review is whether or notrespondent 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 graveabuse of discretion amounting to lack of jurisdiction in issuing four (4)orders directing the issuance of writs of preliminary injunctionrestraining petitioner prosecutors from continuing with the preliminaryinjunction of I.S. Nos. 93-508 and 93-584 in the Department of Justiceand I.S. No. 93-17942 in the Office of the City Prosecutors of QuezonCity 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. Bygrave abuse of discretion is meant such capricious and whimsicalexercise of judgment as is equivalent to lack of jurisdiction. The abuseof 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 inan 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 taxevasion scheme, such as selling products through dummy marketingcorporations to avoid payment of correct internal revenue tax, tocollect from them any tax liabilities discovered from suchinvestigation, and to file the necessary criminal actions against thosewho may have violated the tax code. The task force was composed of the Commissioner of Internal Revenue as Chairman, a representativeof the Department of Justice and a representative of the ExecutiveSecretary.

On July 1, 1993, the Commissioner of Internal Revenue issued aRevenue Memorandum Circular No. 37-93 reclassifying best sellingcigarettes bearing the brands "Hope," "More," and "Champion" ascigarettes 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 brandsof 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 theCommissioner "is of doubtful legality" and enjoined its enforcement.

In a letter of August 13, 1993 which was received by Fortune onAugust 24, 1993, the Commissioner assessed against Fortune the totalamount of P7,685,942,221.66 representing deficiency income, advalorem and value-added tax for the year 1992 with the request thatthe said amount be paid within thirty (30) days upon receipt thereof.

4

Fortune on September 17, 1993 moved for reconsideration of theassessments.

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

In the said income tax return, the taxpayer declared anet taxable income of P183,613,408.00 and an incometax due of P64,264,693.00. Based mainly ondocumentary evidence submitted by the taxpayer itself,these declarations are false and fraudulent because thecorrect taxable income of the corporation for the saidyear is P1,282,959,399.25.

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

xxx xxx xxx

Fortune Tobacco Corporation, through its Vice-President for Finance, Roxas Chua, likewise filedvalue-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 taxablesales, 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 thesaid value- added tax returns, and based ondocumentary evidence obtained from the taxpayer, thetotal 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 inthe said VAT returns.

These fraudulent underdeclarations which resulted inthe evasion of value-added taxes in the aggregateamount of P1,169,688,645.63 for the entire year 1992are violations of Section 110 in relation to Section 100of 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 theamount of P11,736,658,580. This declaration islikewise false and fraudulent because, based on thedaily manufacturer's sworn statements submitted to theBIR by the taxpayer, its total taxable sales during theyear 1992 is P16,686,372,295.00. As a result thereof,the corporation was able to evade the payment of advalorem 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 relationto Section 252, all of the Tax Code. Sections 127 and142, as amended by R.A. 6956, are quoted as follows: .. .

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

The fraudulent scheme allegedly adopted by private respondentsconsisted of making fictitious and simulated sales of Fortune'scigarette products to non-existing individuals and to entitiesincorporated and existing only for the purpose of such fictitious sales by declaring registered wholesale prices with the BIR lower thanFortune's actual wholesale prices which are required for determinationof Fortune's correct income, ad valorem, and value-added taxliabilities. 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 andmanufacturer's sworn statements filed by Fortune would then declarethe fictitious sales it made to the conduit corporators and non-existingindividual buyers as its gross sales.

5

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

Instead of filing their counter-affidavits, the private respondents onOctober 15, 1993 filed a Verified Motion to Dismiss; AlternativelyMotion 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 TaxAppeals have still to determine Fortune's tax liabilityfor 1992 in question; without any tax liability, there can be no tax evasion.

3. Exclusive jurisdiction to determine tax liability isvested in the Court of Tax Appeals; therefore, the DOJis without jurisdiction to conduct preliminaryinvestigation.

4. The complaint of petitioner Commissioner is notsupported by any evidence to serve as adequate basisfor the issuance of subpoena to private respondents andto 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 itof 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 areply in writing to private respondents' Verified Motion to Dismiss.Thereupon, the panel of prosecutors declared a recess. Uponreconvening, the panel of prosecutors denied the motion to dismiss andtreated 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 bythe Bureau of Internal Revenue of certain documents in further supportof their Verified Motion to Dismiss. Among the documents sought to be produced are the "Daily Manufacturer's Sworn Statements" whichaccording to petitioner Commissioner in her complaint were submitted by Fortune to the BIR and which were the basis of her conclusion thatFortune's tax declarations were false and fraudulent. Fortune claimedthat without the "Daily Manufacturer's Sworn Statements," there is no

evidence to support the complaint, hence, warranting its outrightdismissal.

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 certaincigarette companies similarly situated as Fortune but were not proceeded against, thus, private respondents charged that Fortune andits officers were being singled out for criminal prosecution which isdiscriminatory and in violation of the equal protection clause of theConstitution.

On December 20, 1993, the panel of prosecutors issued an OmnibusOrder 11 denying private respondents' motion for reconsideration,motion for suspension of investigation, motion to inhibit the StateProsecutors, and motion to require submission by the BIR of certaindocuments 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 theRegional Trial Court, Branch 88, Quezon City, docketed as Q-94-18790, praying that the complaint of the Commissioner of InternalRevenue and the orders of the prosecutors in I.S. No. 93-508 bedismissed or set aside, alternatively, the proceedings on the preliminary investigation be suspended pending final determination bythe 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 toenjoin a criminal prosecution under preliminary investigation; (b) acriminal 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) privaterespondents' 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 respondentsoffered in evidence their verified petition for certiorari and prohibitionand its annexes. Petitioners responded by praying that their motion todismiss the petition for certiorari and prohibition be considered astheir 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.

14The trial court

rationalized its order in this wise:

a) It is private respondents' claim that the ad valoremtax 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 thatFortune's declaration was false and fraudulent because, based on its daily manufacturer's sworn statementssubmitted to the BIR, its taxable sales in 1992 wereP16,686,372,295.00, as a result of which, Fortune wasable to evade the payment of ad valorem tax in theaggregate 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 werenot produced as part of the evidence for petitioners. Infact, private respondents had filed a motion to require petitioner Commissioner to submit the aforesaid dailymanufacturer's sworn statements before the DOJ panelof prosecutors to show that Fortune's actual taxable

sales totaled P16,686,373,295.00, but the motion wasdenied.

d) There is nothing on record in the preliminaryinvestigation before the panel of investigators whichsupports the allegation that Fortune made a fraudulentdeclaration of its 1992 taxable sales.

e) Since, as alleged by private respondents, the advalorem tax for the year 1992 should be based on the"manufacturer's registered wholesale price" while, asclaimed 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 bya BIR lawyer during the hearing for preliminaryinjunction, the correct interpretation of the lawinvolved, which is Section 142(c) of the Tax Code,constitutes a prejudicial question which must first beresolved before criminal proceedings for tax evasionmay be pursued. In other words, the BIR must firstmake 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 thevery day following the filing of the complaint with the

DOJ consisting of about 600 pages, and the precipitatedenial by the panel of prosecutors, after a recess of about twenty (20) minutes, of private respondents'motion to dismiss, consisting of one hundred and thirtyfive (135) pages.

g) Private respondents had been especially targeted bythe 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 ahigher rate of tax that would price them out of themarket.

h) While in petitioner Commissioner's letter of August13, 1993, she gave Fortune a period of thirty (30) daysfrom receipt thereof within which to pay the alleged taxdeficiency assessments, she filed the criminal complaintfor tax evasion before the period lapsed.

i) Based on the foregoing, the criminal complaintagainst private respondents was filed prematurely andin violation of their constitutional right to equal protection of the laws.

On January 26, 1994, private respondents filed with the trial court aMotion to Admit Supplemental Petition and sought the issuance of awrit of preliminary injunction to enjoin the State Prosecutors fromcontinuing 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. Privaterespondents 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' constitutionalright 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 Revenueand considering that taxes paid have not been challenged, no taxliability exists; and that since Assistant City Prosecutor Baraquia was aformer classmate of Presidential Legal Counsel Antonio T. Carpio, theformer cannot conduct the preliminary investigation in an impartialmanner.

On January 28, 1994, private respondents filed with the trial court asecond supplemental petition,

15also 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 taxevasion 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 anUrgent Motion for Immediate Resolution of petitioners' motion todismiss.

On February 7, 1994, the trial court issued an order denying petitioners' motion to dismiss private respondents' petition seeking tostay 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 Bureauof Internal Revenue, or whether it is Section 142(c) of the same Codethat applies, as argued by herein private respondents, should first besettled before any complaint for fraudulent tax evasion can beinitiated. 1

7

On February 14, 1994, the trial court issued an order granting privaterespondents' 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 DOJfor fraudulent tax evasion, I.S. 93-17942 and I.S. 93-584, for allegedtax evasion for the taxable years 1990 and 1991 respectively.

18In

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 Appealsruled 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 andconclusions given by the trial court in its orders for the issuance of thequestioned writs, the Court of Appeals said in part:

In making such conclusion the respondent Court musthave understood from herein petitioner Commissioner'sletter-complaint of 14 pages (pp. 477-490, rollo of thiscase) and the joint affidavit of eight revenue officers of 17 pages attached thereto (pp. 491-507, supra) and itsannexes (pp. 508-1077, supra), that the charge againstherein 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, notnecessarily "fraudulent tax evasion." Hence, the needfor previous assessment of the correct amount by herein petitioner Commissioner before herein respondents may be charged criminally. Certiorari will not be issued tocure errors in proceedings or correct erroneousconclusions of law or fact. As long as a Court actswithin its jurisdictions, any alleged error committed inthe exercise of its jurisdiction, will amount to nothingmore than errors of judgment which are reviewable bytimely appeal and not by a special civil action of certiorari (Santos, Jr. vs. Court of Appeals, 152 SCRA378; 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, reviewthereof by this Court is inappropriate until final judgment is rendered, absent a showing of grave abuseof discretion on the part of the issuing court (See VanDorn 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 issuesinvolved in the main case still before the respondentCourt 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 withRule 11 of the Revised Rules of Court, interposing asdefense or defenses the objection or objections raised intheir motion to dismiss, then proceed to trial in order that thereafter the case may be decided on the merits bythe respondent Court. In case of an adverse decision,they may appeal therefrom by which the entire recordof the case would be elevated for review (See Mendozavs. Court of Appeals, supra). Therefore, certiorari and prohibition resorted to by herein petitioners will not liein view of the remedy open to them. Thus, the resultingdelay in the final disposition of the case before therespondent Court would not have been incurred.

Grave abuse of discretion as a ground for issuance of writs of certiorari and prohibition implies capriciousand whimsical exercise of judgment as is equivalent tolack of jurisdiction, or where the power is exercised inan arbitrary or despotic manner by reason of passion, prejudice, or personal hostility, amounting to anevasion of positive duty or to a virtual refusal to perform the duty enjoined, or to act at all incontemplation of law (Confederation of Citizens Labor Union vs. NLRC, 60 SCRA 84; Bustamante vs.Commission on Audit, 216 SCRA 134). For such writsto lie, there must be capricious, arbitrary and whimsicalexercise of power, the very antithesis of the judicial prerogative in accordance with centuries of both civil

law and common law traditions (Young vs. Sulit, 162SCRA 659, 664; FCC vs. IAC, 166 SCRA 155;Purefoods Corp. vs. NLRC, 171 SCRA 45). Certiorariand prohibition are remedies narrow in scope andinflexible in character. They are not general utility toolsin the legal workshop (Vda. de Guia vs. Veloso, 158SCRA 340, 344). Their function is but limited tocorrection of defects of jurisdiction solely, not to beused for any other purpose (Garcia vs. Ranada, 166SCRA 9), such as to cure errors in. proceedings or to

correct erroneous conclusions of law or fact (Gold City

d S i AC 1 1 SC A 9) S A C A A /O GA



Integrated Ports Services vs. IAC, 171 SCRA 579). Dueregard for the foregoing teachings enunciated in thedecisions cited can not bring about a decision other thanwhat has been reached herein.

Needless to say, the case before the respondent courtinvolving those against herein respondents for allegednon-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 notended by this decision. The respondent Court is still totry the case and decide it on the merits. All that isdecided here is but the validity of the orders of therespondent Court granting herein respondents'application for preliminary injunction and denyingherein petitioners' motion to dismiss. If upon the factsestablished after trial and the applicable law, dissolutionof the writ of preliminary injunction allowed to beissued by the respondent Court is called for and a judgment favorable to herein petitioners is demanded,the respondent Court is duty bound to render judgmentaccordingly.

WHEREFORE, the instant petition for certiorari and prohibition with application for issuance of restrainingorder and writ of preliminary injunction isDISMISSED. Costs de oficio.

19

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

THE RESPONDENT COURTS COMMITTEDGRAVE ABUSE OF DISCRETION AMOUNTINGTO LACK OR EXCESS OF JURISDICTION INHOLDING THAT:

I. THERE IS A PREJUDICIAL AND/OR LEGALQUESTION TO JUSTIFY THE SUSPENSION OFTHE PRELIMINARY INVESTIGATION.

II. PRIVATE RESPONDENTS' RIGHTS TO DUEPROCESS, EQUAL PROTECTION ANDPRESUMPTION OF INNOCENCE WEREVIOLATED; ON THE CONTRARY, THE STATEITSELF WAS DEPRIVED OF DUE PROCESS.

III. THE ADMISSION OF PRIVATERESPONDENTS' SUPPLEMENTAL PETITIONSWERE PROPER.

IV. THERE WAS SELECTIVE PROSECUTION.

V. THE FACTUAL ALLEGATIONS IN THEPETITION ARE HYPOTHETICALLY ADMITTEDIN A MOTION TO DISMISS BASED ONJURISDICTIONAL GROUNDS.

VI. THE ISSUANCE OF THE WRITS OFINJUNCTION IS NOT A DECISION ON THEMERITS 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 93-17942charged private respondents with fraudulent tax evasion or wilfullyattempting to evade or defeat payment of income tax, ad valorem taxand 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) and142(c) of the National Internal Revenue Code which state:

Sec. 127. . . .

(b) D i i f lli i f d P i i h S i 127(b) l d h l h i



(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 thegoods are sold at wholesale in the place of productionor through their sales agents to the public shallconstitute 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, thewholesale price in such establishment shall constitutethe gross selling price. Should such price be less thanthe costs of manufacture plus expenses incurred untilthe goods are finally sold, then a proportionate marginof profit, not less than 10% of such manufacturing costsand expenses, shall be added to constitute the grossselling price.

Sec. 142. . . .

(c) Cigarettes packed in twenties. -- There shall belevied, assessed and collected on cigarettes packed intwenties 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, correcttaxable sales for 1992 was in the amount of P11,736,658,580.00 which

was the "manufacturer's registered wholesale price" in accordance withSection 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 thecomplaint in I.S. No. 93-508, that "based on the daily manufacturer'ssworn statements submitted to the BIR by the Taxpayer (Fortune's)total taxable sales during the year 1992 is P16,686,372,295.00," asresult of which Fortune "was able to evade the payment of ad valoremtaxes in the aggregate amount of P5,792,479,816.24 . . ."

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

There can be no question that under Section 127(b), the ad valorem taxshould be based on the correct price excluding the value-added tax, atwhich goods are sold at wholesale in the place of production. It issignificant to note that among the goods subject to ad valorem tax, thelaw -- specifically Section 142(c) -- requires that the corresponding taxon cigarettes shall be levied, assessed and collected at the rates based

on the "manufacturer's registered wholesale price." Why does thewholesale price need to be registered and what is the purpose of theregistration? The reason is self-evident, which is to ensure the paymentof the correct taxes by the manufacturers of cigarettes through closesupervision, monitoring and checking of the business operations of thecigarette companies. As pointed out by private respondents, noindustry is as intensely supervised by the BIR and also by the NationalTobacco Administration (NTA). Thus, the purchase and use of rawmaterials 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, RevenueEnforcement Officers are detailed on a 24-hour basis in the premisesof 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 RevenueEnforcement Officers detailed thereat. Every transfer of any rawmaterial is not allowed unless, in addition to the required permits,

accompanied by Revenue Enforcement Officer. For the purpose of

d t i i th "M f t ' R i t d Wh l l P i " " dit t d li i d ith i t t ith b d ti



determining the "Manufacturer's Registered Wholesale Price" acigarette 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 theWholesale Price by Case. The data submitted therewith is verified bythe Revenue Officers and approved by the Commission of InternalRevenue. Any change in the manufacturer's registered wholesale priceof any brand cannot be effected without submitting the correspondingSworn Manufacturer's Declaration and verified by the Revenue Officer and approved by the Commissioner on Internal Revenue. 22 Theamount of ad valorem tax payments together with the Payment Order and Confirmation Receipt Nos. must be indicated in the sales anddelivery invoices and together with the Manufacturer's SwornDeclarations on (a) the quantity of raw materials used during the day'soperations; (b) the total quantity produced according to brand; and (c)the corresponding quantity removed during the day, the correspondingwholesale price thereof, and the VAT paid thereon must be presentedto the corresponding BIR representative for authentication before

removal.

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

Now, if every step in the production of cigarettes was closelymonitored and supervised by the BIR personnel specifically assignedto 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 themanufacturer's wholesale price was duly approved by the BIR, then itis presumed that such registered wholesale price is the same as, or approximates "the price, excluding the value-added tax, at which thegoods are sold at wholesale in the place production," otherwise, theBIR would not have approved the registered wholesale price of thegoods 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 motiveor purpose, or with indifference to the natural consequence . . ."

24

"Fraud" in its general sense, "is deemed to comprise anythingcalculated to deceive, including all acts, omissions, and concealmentinvolving a breach of legal or equitable duty, trust or confidence justlyreposed, resulting in the damage to another, or by which an undue andunconscionable advantage taken of another.

25

Fraud cannot be presumed. If there was fraud or wilful attempt toevade payment of ad valorem taxes by private respondents through themanipulation of the registered wholesale price of the cigarettes, it musthave been with the connivance or cooperation of certain BIR officialsand employees who supervised and monitored Fortune's productionactivities to see to it that the correct taxes were paid. But there is noallegation, much less evidence, of BIR personnel's malfeasance. In thevery least, there is the presumption that the BIR personnel performedtheir 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 TaxCode, the fact that the deficiency income, ad valorem and value-addedtaxes were due from Fortune for the year 1992 should first beestablished. Fortune received form the Commissioner of InternalRevenue the deficiency assessment notices in the total amount of P7,685,942,221.06 on August 24, 1993. However, under Section 229of the Tax Code, the taxpayer has the right to move for reconsideration

of the assessment issued by the Commissioner of Internal Revenuewithin thirty (30) days from receipt of the assessment; and if themotion for reconsideration is denied, it may appeal to the Court of Appeals within thirty (30) days from receipt of the Commissioner'sdecision. Here, Fortune received the Commissioner's assessmentnotice dated August 13, 1993 on August 24, 1993 asking for the payment of the deficiency taxes. Within thirty (30) days from receiptthereof, Fortune moved for reconsideration. The Commissioner has notresolved the request for reconsideration up to the present.

W h ith th i f b th th t i l t d t f A l Thi b i t th di i iti th t i t d t '



We share with the view of both the trial court and court of Appealsthat before the tax liabilities of Fortune are first finally determined, itcannot be correctly asserted that private respondents have wilfullyattempted to evade or defeat the taxes sought to be collected fromFortune. In plain words, before one is prosecuted for wilful attempt toevade 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 isnot liable for any deficiency assessment, then, the criminal complaintsfiled 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 tocriminal prosecution, and that while a precise computation andassessment is required for a civil action to collect tax deficiencies, the

Tax Code does not require such computation and assessment prior tocriminal prosecution.

Reading Ungad carefully, the pronouncement therein that deficiencyassessment is not necessary prior to prosecution is pointedly anddeliberately qualified by the Court with following statement quotedfrom Guzik v. U .S .:

28"The crime is complete when the violator has

knowingly and wilfully filed a fraudulent return with intent to evadeand 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 attemptto evade tax in Ungad because of the taxpayer's failure to declare inhis income tax return "his income derived from banana sapplings." Inthe mind of the trial court and the Court of Appeals, Fortune's situationis quite apart factually since the registered wholesale price of thegoods, approved by the BIR, is presumed to be the actual wholesale price, therefore, not fraudulent and unless and until the BIR has madea final determination of what is supposed to be the correct taxes, thetaxpayer 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 thestate prosecutors (preliminary injunction) were far from terminated -- private respondents were merely subpoenaed and asked to submitcounter affidavits, matters that they should have appealed to theSecretary of Justice; b) it is only after the submission of privaterespondents' counter affidavits that the prosecutors will determinewhether or not there is enough evidence to file in court criminalcharges for fraudulent tax evasion against private respondents; and c)the proper procedure is to allow the prosecutors to conduct and finishthe preliminary investigation and to render a resolution, after whichthe 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 constitutionalrights 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 excessof authority (Planas vs. Gil, 67 Phil 62);

e Where the prosecution is under an invalid law preliminary investigation In the case at bar private respondents filed a



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 (Sangalangvs. 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, 18SCRA 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 theaccused and a motion to quash on that ground has beendenied (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 trialcourt 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 beenjoined 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 amotion to dismiss the complaint against them before the prosecutionand alternatively, to suspend the preliminary investigation on thegrounds cited hereinbefore, one of which is that the complaint of theCommissioner 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 theinnocent against hasty, malicious and oppressive prosecution and to protect him from an open and public accusation of crime, from thetrouble, expense and anxiety of a public trial and also to protect thestate 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 Section7 hereof, no complaint or information for an offensecognizable by the Regional Trial Court shall be filed

without a preliminary investigation having been firstconducted in the following manner:

(a) The complaint shall state the known address of therespondent and be accompanied by affidavits of thecomplainant and his witnesses as well as other supporting documents, in such number of copies asthere are respondents, plus two (2) copies for theofficial file. The said affidavits shall be sworn to beforeany 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 satisfiedthat they voluntarily executed and understood their affidavits.

(b) Within ten (10) days after the filing of thecomplaint, the investigating officer shall either dismissthe same if he finds no ground to continue with theinquiry, or issue a subpoena to the respondent, attaching

thereto a copy of the complaint, affidavits and other

supporting documents Within ten (10) days from documents appended to the complaint for them to determine if



supporting documents. Within ten (10) days fromreceipt thereof, the respondent shall submit counter-affidavits and other supporting documents. He shallhave the right to examine all other evidence submitted by the complainant.

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

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

(e) If the investigating officer believes that there arematters 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 anopportunity to be present but without the right toexamine or cross-examine. If the parties so desire, theymay submit questions to the investigating officer whichthe latter may propound to the parties or witnessesconcerned.

(f) Thereafter, the investigation shall be deemedconcluded, and the investigating officer shall resolvethe case within ten (10) days therefrom. Upon theevidence thus adduced, the investigating officer shalldetermine whether or not there is sufficient ground tohold the respondent for trial.

As found by the Court of Appeals, there was obvious haste by whichthe subpoena was issued to private respondents, just the day after thecomplaint 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 Appealsfurther added that the precipitate haste in the issuance of the subpoena justified private respondents' misgivings regarding the objectivity andneutrality of the prosecutors in the conduct of the preliminaryinvestigation 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 tolack of jurisdiction.

The complaint filed by the Commissioner on Internal Revenue statesitself that the primary evidence establishing the falsity of the declaredtaxable 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 theamount 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 respondentsto move for their production in order to verify the basis of petitioners'computation. Still, the Commissioner failed to produce thedeclarations. In Borja v. Moreno, 33 it was held that the act of theinvestigator in proceeding with the hearing without first acting onrespondents' motion to dismiss is a manifest disregard of therequirement of due process. Implicit in the opinion of the trial courtand the Court of Appeals is that, if upon the examination of thecomplaint, it was clear that there was no ground to continue, with theinquiry, 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 allegationthat private respondents wilfully attempted to evade payment of thecorrect taxes. The prosecutors should also have produced the "DailyManufacturer's Sworn Statements" by other cigarette companies, assought by private respondents, to show that these companies whichhad paid the ad valorem taxes on the same basis and in the samemanner 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



indicating that only Fortune was singled out for prosecution. The trialcourt and the Court of Appeals maintained that at that stage of the preliminary investigation, where the complaint and the accompanyingaffidavits and supporting documents did not show any violation of theTax Code providing penal sanctions, the prosecutors should havedismissed 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, whichare interlocutory in nature, committed no grave abuse of discretionamounting 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 awhimsical 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 actswithin its jurisdiction, any alleged errors committed in the exercise of

its jurisdiction will amount to nothing more than errors of judgmentwhich are reviewable by timely appeal and not by a special civil actionof certiorari.

34 Consequently, the Regional Trial Court acted correctly

and judiciously, and as demanded by the facts and the law, in issuingthe 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 tothe petition filed in the trial court, proceed to the hearing and appealthe decision of the court if adverse to them.

WHEREFORE, the instant petition is hereby DISMISSED.

SO ORDERED.

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Tax 2 cases Hizon - Reyes