G.R. No. 134062 April 17, 2007COMMISSIONER OF INTERNAL REVENUE,Petitioner,vs.BANK OF THE PHILIPPINE ISLANDS,Respondent.

D E C I S I O N

CORONA, J.:This is a petition for review on certiorari1of a decision2of the Court of Appeals (CA) dated May 29, 1998 in CA-G.R. SP No. 41025 which reversed and set aside the decision3and resolution4of the Court of Tax Appeals (CTA) dated November 16, 1995 and May 27, 1996, respectively, in CTA Case No. 4715.

In two notices dated October 28, 1988, petitioner Commissioner of Internal Revenue (CIR) assessed respondent Bank of the Philippine Islands (BPIs) deficiency percentage and documentary stamp taxes for the year 1986 in the total amount ofP129,488,656.63:

1986 Deficiency Percentage Tax

Deficiency percentage taxP7, 270,892.88

Add: 25% surcharge1,817,723.22

20% interest from 1-21-87 to 10-28-88 3,215,825.03

Compromise penalty15,000.00

TOTAL AMOUNT DUE AND COLLECTIBLEP12,319,441.13

1986 Deficiency Documentary Stamp Tax

Deficiency percentage taxP93,723,372.40

Add: 25% surcharge23,430,843.10

Compromise penalty15,000.00

TOTAL AMOUNT DUE AND COLLECTIBLEP117,169,215.50.5

Both notices of assessment contained the following note:

Please be informed that your [percentage and documentary stamp taxes have] been assessed as shown above. Said assessment has been based on return (filed by you) (as verified) (made by this Office) (pending investigation) (after investigation). You are requested to pay the above amount to this Office or to our Collection Agent in the Office of the City or Deputy Provincial Treasurer of xxx6In a letter dated December 10, 1988, BPI, through counsel, replied as follows:

1. Your "deficiency assessments" are no assessments at all. The taxpayer is not informed, even in the vaguest terms, why it is being assessed a deficiency. The very purpose of a deficiency assessment is to inform taxpayer why he has incurred a deficiency so that he can make an intelligent decision on whether to pay or to protest the assessment. This is all the more so when the assessment involves astronomical amounts, as in this case.

We therefore request that the examiner concerned be required to state, even in the briefest form, why he believes the taxpayer has a deficiency documentary and percentage taxes, and as to the percentage tax, it is important that the taxpayer be informed also as to what particular percentage tax the assessment refers to.

2. As to the alleged deficiency documentary stamp tax, you are aware of the compromise forged between your office and the Bankers Association of the Philippines [BAP] on this issue and of BPIs submission of its computations under this compromise. There is therefore no basis whatsoever for this assessment, assuming it is on the subject of the BAP compromise. On the other hand, if it relates to documentary stamp tax on some other issue, we should like to be informed about what those issues are.

3. As to the alleged deficiency percentage tax, we are completely at a loss on how such assessment may be protested since your letter does not even tell the taxpayer what particular percentage tax is involved and how your examiner arrived at the deficiency. As soon as this is explained and clarified in a proper letter of assessment, we shall inform you of the taxpayers decision on whether to pay or protest the assessment.7On June 27, 1991, BPI received a letter from CIR dated May 8, 1991 stating that:

although in all respects, your letter failed to qualify as a protest under Revenue Regulations No. 12-85 and therefore not deserving of any rejoinder by this office as no valid issue was raised against the validity of our assessment still we obliged to explain the basis of the assessments.

xxx xxx xxx

this constitutes the final decision of this office on the matter.8On July 6, 1991, BPI requested a reconsideration of the assessments stated in the CIRs May 8, 1991 letter.9This was denied in a letter dated December 12, 1991, received by BPI on January 21, 1992.10On February 18, 1992, BPI filed a petition for review in the CTA.11In a decision dated November 16, 1995, the CTA dismissed the case for lack of jurisdiction since the subject assessments had become final and unappealable. The CTA ruled that BPI failed to protest on time under Section 270 of the National Internal Revenue Code (NIRC) of 1986 and Section 7 in relation to Section 11 of RA 1125.12It denied reconsideration in a resolution dated May 27, 1996.13On appeal, the CA reversed the tax courts decision and resolution and remanded the case to the CTA14for a decision on the merits.15It ruled that the October 28, 1988 notices were not valid assessments because they did not inform the taxpayer of the legal and factual bases therefor. It declared that the proper assessments were those contained in the May 8, 1991 letter which provided the reasons for the claimed deficiencies.16Thus, it held that BPI filed the petition for review in the CTA on time.17The CIR elevated the case to this Court.

This petition raises the following issues:

1) whether or not the assessments issued to BPI for deficiency percentage and documentary stamp taxes for 1986 had already become final and unappealable and

2) whether or not BPI was liable for the said taxes.

The former Section 27018(now renumbered as Section 228) of the NIRC stated:

Sec. 270. Protesting of assessment. When the [CIR] or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings.Within a period to be prescribed by implementing regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the [CIR]shall issue an assessment based on his findings.xxx xxx xxx (emphasis supplied)

Were the October 28, 1988 Notices Valid Assessments?The first issue for our resolution is whether or not the October 28, 1988 notices19were valid assessments. If they were not, as held by the CA, then the correct assessments were in the May 8, 1991 letter, received by BPI on June 27, 1991. BPI, in its July 6, 1991 letter, seasonably asked for a reconsideration of the findings which the CIR denied in his December 12, 1991 letter, received by BPI on January 21, 1992. Consequently, the petition for review filed by BPI in the CTA on February 18, 1992 would be well within the 30-day period provided by law.20The CIR argues that the CA erred in holding that the October 28, 1988 notices were invalid assessments. He asserts that he used BIR Form No. 17.08 (as revised in November 1964) which was designed for the precise purpose of notifying taxpayers of the assessed amounts due and demanding payment thereof.21He contends that there was no law or jurisprudence then that required notices to state the reasons for assessing deficiency tax liabilities.22BPI counters that due process demanded that the facts, data and law upon which the assessments were based be provided to the taxpayer. It insists that the NIRC, as worded now (referring to Section 228), specifically provides that:

"[t]he taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void."

According to BPI, this is declaratory of what sound tax procedure is and a confirmation of what due process requires even under the former Section 270.

BPIs contention has no merit. The present Section 228 of the NIRC provides:

Sec. 228. Protesting of Assessment. When the [CIR] or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings:Provided, however, That a preassessment notice shall not be required in the following cases:

xxx xxx xxx

The taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void.xxx xxx xxx (emphasis supplied)

Admittedly, the CIR did not inform BPI in writing of the law and facts on which the assessments of the deficiency taxes were made. He merely notified BPI of his findings, consisting only of the computation of the tax liabilities and a demand for payment thereof within 30 days after receipt.

In merely notifying BPI of his findings, the CIR relied on the provisions of the former Section 270 prior to its amendment by RA 8424 (also known as the Tax Reform Act of 1997).23InCIR v. Reyes,24we held that:

In the present case, Reyes was not informed in writing of the law and the facts on which the assessment of estate taxes had been made. She was merely notified of the findings by the CIR, who had simply relied upon the provisions of former Section 229 prior to its amendment by [RA] 8424, otherwise known as the Tax Reform Act of 1997.

First, RA 8424 has already amended the provision of Section 229 on protesting an assessment.The old requirement ofmerelynotifying the taxpayer of the CIR's findings was changed in 1998toinformingthe 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.

It was on February 12, 1998, that a preliminary assessment notice was issued against the estate. On April 22, 1998, the final estate tax assessment notice, as well as demand letter, was also issued. During those dates, RA 8424 was already in effect.The notice required under the old law was no longer sufficient under the new law.25(emphasis supplied; italics in the original)

Accordingly, when the assessments were made pursuant to the former Section 270, the only requirement was for the CIR to "notify" or inform the taxpayer of his "findings." Nothing in the old law required a written statement to the taxpayer of the law and facts on which the assessments were based. The Court cannot read into the law what obviously was not intended by Congress. That would be judicial legislation, nothing less.

Jurisprudence, on the other hand, simply required that the assessments contain a computation of tax liabilities, the amount the taxpayer was to pay and a demand for payment within a prescribed period.26Everything considered, there was no doubt the October 28, 1988 notices sufficiently met the requirements of a valid assessment under the old law and jurisprudence.

The sentence

[t]he taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void

was not in the old Section 270 but was only later on inserted in the renumbered Section 228 in 1997. Evidently, the legislature saw the need to modify the former Section 270 by inserting the aforequoted sentence.27The fact that the amendment was necessary showed that, prior to the introduction of the amendment, the statute had an entirely different meaning.28Contrary to the submission of BPI, the inserted sentence in the renumbered Section 228 was not an affirmation of what the law required under the former Section 270. The amendment introduced by RA 8424 was an innovation and could not be reasonably inferred from the old law.29Clearly, the legislature intended to insert a new provision regarding the form and substance of assessments issued by the CIR.30In ruling that the October 28, 1988 notices were not valid assessments, the CA explained:

xxx. Elementary concerns of due process of law should have prompted the [CIR] to inform [BPI] of the legal and factual basis of the formers decision to charge the latter for deficiency documentary stamp and gross receipts taxes.31In other words, the CAs theory was that BPI was deprived of due process when the CIR failed to inform it in writing of the factual and legal bases of the assessments even if these were not called for under the old law.

We disagree.

Indeed, the underlying reason for the law was the basic constitutional requirement that "no person shall be deprived of his property without due process of law."32We note, however, what the CTA had to say:

xxx xxx xxx

From the foregoing testimony, it can be safely adduced that not only was [BPI] given the opportunity to discuss with the [CIR] when the latter issued the former a Pre-Assessment Notice (which [BPI] ignored) but that the examiners themselves went to [BPI] and "we talk to them and we try to [thresh] out the issues, present evidences as to what they need." Now, how can [BPI] and/or its counsel honestly tell this Court that they did not know anything about the assessments?

Not only that. To further buttress the fact that [BPI] indeed knew beforehand the assessments[,] contrary to the allegations of its counsel[,] was the testimony of Mr. Jerry Lazaro, Assistant Manager of the Accounting Department of [BPI]. He testified to the fact that he prepared worksheets which contain his analysis regarding the findings of the [CIRs] examiner, Mr. San Pedro and that the same worksheets were presented to Mr. Carlos Tan, Comptroller of [BPI].

xxx xxx xxx

From all the foregoing discussions, We can now conclude that [BPI] was indeed aware of the nature and basis of the assessments, and was given all the opportunity to contest the same but ignored it despite the notice conspicuously written on the assessments which states that "this ASSESSMENT becomes final and unappealable if not protested within 30 days after receipt." Counsel resorted to dilatory tactics and dangerously played with time. Unfortunately, such strategy proved fatal to the cause of his client.33The CA never disputed these findings of fact by the CTA:

[T]his Court recognizes that the [CTA], which by the very nature of its function is dedicated exclusively to the consideration of tax problems, has necessarily developed an expertise on the subject, and its conclusions will not be overturned unless there has been an abuse or improvident exercise of authority. Such findings can only be disturbed on appeal if they are not supported by substantial evidence or there is a showing of gross error or abuse on the part of the [CTA].34Under the former Section 270, there were two instances when an assessment became final and unappealable: (1) when it was not protested within 30 days from receipt and (2) when the adverse decision on the protest was not appealed to the CTA within 30 days from receipt of the final decision:35Sec. 270. Protesting of assessment.1a\^/phi1.netxxx xxx xxx

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

If the protest is denied in whole or in part, the individual, association or corporation adversely affected by the decision on the protest may appeal to the [CTA] within thirty (30) days from receipt of the said decision; otherwise, the decision shall become final, executory and demandable.

Implications Of A Valid AssessmentConsidering that the October 28, 1988 notices were valid assessments, BPI should have protested the same within 30 days from receipt thereof. The December 10, 1988 reply it sent to the CIR did not qualify as a protest since the letter itself stated that "[a]s soon as this is explained and clarified in a proper letter of assessment,we shall inform you of the taxpayers decision on whether to pay or protest the assessment."36Hence, by its own declaration, BPI did not regard this letter as a protest against the assessments. As a matter of fact, BPI never deemed this a protest since it did not even consider the October 28, 1988 notices as valid or proper assessments.

The inevitable conclusion is that BPIs failure to protest the assessments within the 30-day period provided in the former Section 270 meant that they became final and unappealable. Thus, the CTA correctly dismissed BPIs appeal for lack of jurisdiction. BPI was, from then on, barred from disputing the correctness of the assessments or invoking any defense that would reopen the question of its liability on the merits.37Not only that. There arose a presumption of correctness when BPI failed to protest the assessments:

Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior officers will not be disturbed. All presumptions are in favor of the correctness of tax assessments.38Even if we considered the December 10, 1988 letter as a protest, BPI must nevertheless be deemed to have failed to appeal the CIRs final decision regarding the disputed assessments within the 30-day period provided by law. The CIR, in his May 8, 1991 response, stated that it was his "final decision on the matter." BPI therefore had 30 days from the time it received the decision on June 27, 1991 to appeal but it did not. Instead it filed a request for reconsideration and lodged its appeal in the CTA only on February 18, 1992, way beyond the reglementary period. BPI must now suffer the repercussions of its omission. We have already declared that:

the [CIR] should always indicate to the taxpayer in clear and unequivocal language whenever his action on an assessment questioned by a taxpayer constitutes his final determination on the disputed assessment, as contemplated by Sections 7 and 11 of [RA 1125], as amended.On the basis of his statement indubitably showing that the Commissioner's communicated action is his final decision on the contested assessment, the aggrieved taxpayer would then be able to take recourse to the tax court at the opportune time. Without needless difficulty, the taxpayer would be able to determine when his right to appeal to the tax court accrues.The rule of conduct would also obviate all desire and opportunity on the part of the taxpayer to continually delay the finality of the assessment and, consequently, the collection of the amount demanded as taxes by repeated requests for recomputation and reconsideration.On the part of the [CIR], this would encourage his office to conduct a careful and thorough study of every questioned assessment and render a correct and definite decision thereon in the first instance. This would also deter the [CIR] from unfairly making the taxpayer grope in the dark and speculate as to which action constitutes the decision appealable to the tax court. Of greater import, this rule of conduct would meet a pressing need for fair play, regularity, and orderliness in administrative action.39(emphasis supplied)

Either way (whether or not a protest was made), we cannot absolve BPI of its liability under the subject tax assessments.

We realize that these assessments (which have been pending for almost 20 years) involve a considerable amount of money. Be that as it may, we cannot legally presume the existence of something which was never there. The state will be deprived of the taxes validly due it and the public will suffer if taxpayers will not be held liable for the proper taxes assessed against them:

Taxes are the lifeblood of the government, for without taxes, the government can neither exist nor endure. A principal attribute of sovereignty, the exercise of taxing power derives its source from the very existence of the state whose social contract with its citizens obliges it to promote public interest and common good. The theory behind the exercise of the power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people.40WHEREFORE, the petition is herebyGRANTED.The May 29, 1998 decision of the Court of Appeals in CA-G.R. SP No. 41025 isREVERSEDandSET ASIDE.

SO ORDERED.G.R. No. L-18994 June 29, 1963MELECIO R. DOMINGO, as Commissioner of Internal Revenue,petitioner,vs.HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte,and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late Walter Scott Price,respondents.

Office of the Solicitor General and Atty. G. H. Mantolino for petitioner.Benedicto and Martinez for respondents.LABRADOR,J.:This is a petition forcertiorariandmandamusagainst the Judge of the Court of First Instance of Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul certain orders of the court and for an order in this Court directing the respondent court below to execute the judgment in favor of the Government against the estate of Walter Scott Price for internal revenue taxes.

It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674, January 30, 1960, this Court declared as final and executory the order for the payment by the estate of the estate and inheritance taxes, charges and penalties, amounting to P40,058.55, issued by the Court of First Instance of Leyte in, special proceedings No. 14 entitled "In the matter of the Intestate Estate of the Late Walter Scott Price." In order to enforce the claims against the estate the fiscal presented a petition dated June 21, 1961, to the court below for the execution of the judgment. The petition was, however, denied by the court which held that the execution is not justifiable as the Government is indebted to the estate under administration in the amount of P262,200. The orders of the court below dated August 20, 1960 and September 28, 1960, respectively, are as follows:

Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price, Administratrix of the estate of her late husband Walter Scott Price and Director Zoilo Castrillo of the Bureau of Lands dated September 19, 1956 and acknowledged before Notary Public Salvador V. Esguerra, legal adviser in Malacaang to Executive Secretary De Leon dated December 14, 1956, the note of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo dated August 2, 1958, directing the latter to pay to Mrs. Price the sum ofP368,140.00, and an extract of page 765 of Republic Act No. 2700 appropriating the sum of P262.200.00 for the payment to the Leyte Cadastral Survey, Inc., represented by the administratrix Simeona K. Price, as directed in the above note of the President. Considering these facts, the Court orders that the payment of inheritance taxes in the sum of P40,058.55 due the Collector of Internal Revenue as ordered paid by this Court on July 5, 1960 in accordance with the order of the Supreme Court promulgated July 30, 1960 in G.R. No. L-14674, be deducted from the amount of P262,200.00 due and payable to the Administratrix Simeona K. Price, in this estate, the balance to be paid by the Government to her without further delay. (Order of August 20, 1960)

The Court has nothing further to add to its order dated August 20, 1960 and it orders that the payment of the claim of the Collector of Internal Revenue be deferred until the Government shall have paid its accounts to the administratrix herein amounting to P262,200.00. It may not be amiss to repeat that it is only fair for the Government, as a debtor, to its accounts to its citizens-creditors before it can insist in the prompt payment of the latter's account to it, specially taking into consideration that the amount due to the Government draws interests while the credit due to the present state does not accrue any interest. (Order of September 28, 1960)

The petition to set aside the above orders of the court below and for the execution of the claim of the Government against the estate must be denied for lack of merit. The ordinary procedure by which to settle claims of indebtedness against the estate of a deceased person, as an inheritance tax, is for the claimant to present a claim before the probate court so that said court may order the administrator to pay the amount thereof. To such effect is the decision of thisCourt in Aldamiz vs. Judge of the Court of First Instance of Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus:

. . . a writ of execution is not the proper procedure allowed by the Rules of Court for the payment of debts and expenses of administration. The proper procedure is for the court to order the sale of personal estate or the sale or mortgage of real property of the deceased and all debts or expenses of administrator and with the written notice to all the heirs legatees and devisees residing in the Philippines, according to Rule 89, section 3, and Rule 90, section 2. And when sale or mortgage of real estate is to be made, the regulations contained in Rule 90, section 7, should be complied with.1wph1.tExecution may issue only where the devisees, legatees or heirs have entered into possession of their respective portions in the estate prior to settlement and payment of the debts and expenses of administration and it is later ascertained that there are such debts and expenses to be paid, in which case "the court having jurisdiction of the estate may, by order for that purpose, after hearing, settle the amount of their several liabilities, and order how much and in what manner each person shall contribute, and mayissue executionif circumstances require" (Rule 89, section 6;see alsoRule 74, Section 4; Emphasis supplied.) And this is not the instant case.

The legal basis for such a procedure is the fact that in the testate or intestate proceedings to settle the estate of a deceased person, the properties belonging to the estate are under the jurisdiction of the court and such jurisdiction continues until said properties have been distributed among the heirs entitled thereto. During the pendency of the proceedings all the estate is incustodia legisand the proper procedure is not to allow the sheriff, in case of the court judgment, to seize the properties but to ask the court for an order to require the administrator to pay the amount due from the estate and required to be paid.

Another ground for denying the petition of the provincial fiscal is the fact that the court having jurisdiction of the estate had found that the claim of the estate against the Government has been recognized and an amount of P262,200 has already been appropriated for the purpose by a corresponding law (Rep. Act No. 2700). Under the above circumstances, both the claim of the Government for inheritance taxes and the claim of the intestate for services rendered have already become overdue and demandable is well as fully liquidated. Compensation, therefore, takes place by operation of law, in accordance with the provisions of Articles 1279 and 1290 of the Civil Code, and both debts are extinguished to the concurrent amount, thus:

ART. 1200. When all the requisites mentioned in article 1279 are present, compensation takes effect by operation of law, and extinguished both debts to the concurrent amount, eventhough the creditors and debtors are not aware of the compensation.

It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes against the estate of the deceased Walter Scott Price. Furthermore, the petition forcertiorariandmandamusis not the proper remedy for the petitioner. Appeal is the remedy.

The petition is, therefore, dismissed, without costs.

G.R. No. 165109 December 14, 2009MANUEL N. MAMBA, RAYMUND P. GUZMAN and LEONIDES N. FAUSTO,Petitioners,vs.EDGAR R. LARA, JENERWIN C. BACUYAG, WILSON O. PUYAWAN, ALDEGUNDO Q. CAYOSA, JR., NORMAN A. AGATEP, ESTRELLA P. FERNANDEZ, VILMER V. VILORIA, BAYLON A. CALAGUI, CECILIA MAEVE T. LAYOS, PREFERRED VENTURES CORP., ASSET BUILDERS CORP., RIZAL COMMERCIAL BANKING CORPORATION, MALAYAN INSURANCE CO., and LAND BANK OF THE PHILIPPINES,Respondents.

D E C I S I O N

DEL CASTILLO,J.:The decision to entertain a taxpayers suit is discretionary upon the Court. It can choose to strictly apply the rule or take a liberal stance depending on the controversy involved. Advocates for a strict application of the rule believe that leniency would open floodgates to numerous suits, which could hamper the government from performing its job. Such possibility, however, is not only remote but also negligible compared to what is at stake - "the lifeblood of the State". For this reason, when the issue hinges on the illegal disbursement of public funds, a liberal approach should be preferred as it is more in keeping with truth and justice.

This Petition for Review onCertiorariwith prayer for a Temporary Restraining Order/Writ of Preliminary Injunction, under Rule 45 of the Rules of Court, seeks to set aside the April 27, 2004 Order1of the Regional Trial Court (RTC), Branch 5, Tuguegarao City, dismissing the Petition for Annulment of Contracts and Injunction with prayer for the issuance of a Temporary Restraining Order/Writ of Preliminary Injunction,2docketed as Civil Case No. 6283. Likewise assailed in this Petition is the August 20, 2004 Resolution3of RTC, Branch 1, Tuguegarao City denying the Motion for Reconsideration of the dismissal.

Factual AntecedentsOn November 5, 2001, the Sangguniang Panlalawigan of Cagayan passed Resolution No. 2001-2724authorizing Governor Edgar R. Lara (Gov. Lara) to engage the services of and appoint Preferred Ventures Corporation as financial advisor or consultant for the issuance and flotation of bonds to fund the priority projects of the governor without cost and commitment.

On November 19, 2001, the Sangguniang Panlalawigan, through Resolution No. 290-2001,5ratified the Memorandum of Agreement (MOA)6entered into by Gov. Lara and Preferred Ventures Corporation. The MOA provided that the provincial government of Cagayan shall pay Preferred Ventures Corporation a one-time fee of 3% of the amount of bonds floated.

On February 15, 2002, the Sangguniang Panlalawigan approved Resolution No. 2002-061-A7authorizing Gov. Lara to negotiate, sign and execute contracts or agreements pertinent to the flotation of the bonds of the provincial government in an amount not to exceedP500 million for the construction and improvement of priority projects to be approved by the Sangguniang Panlalawigan.

On May 20, 2002, the majority of the members of the Sangguniang Panlalawigan of Cagayan approved Ordinance No. 19-2002,8authorizing the bond flotation of the provincial government in an amount not to exceedP500 million to fund the construction and development of the new Cagayan Town Center. The Resolution likewise granted authority to Gov. Lara to negotiate, sign and execute contracts and agreements necessary and related to the bond flotation subject to the approval and ratification by theSangguniang Panlalawigan.On October 20, 2003, the Sangguniang Panlalawigan approved Resolution No. 350-20039ratifying the Cagayan Provincial Bond Agreements entered into by the provincial government, represented by Gov. Lara, to wit:

a. Trust Indenture with the Rizal Commercial Banking Corporation (RCBC) Trust and Investment Division and Malayan Insurance Company, Inc. (MICO).

b. Deed of Assignment by way of security with the RCBC and the Land Bank of the Philippines (LBP).

c. Transfer and Paying Agency Agreement with the RCBC Trust and Investment Division.

d. Guarantee Agreement with the RCBC Trust and Investment Division and MICO.

e. Underwriting Agreement with RCBC Capital Corporation.

On even date, the Sangguniang Panlalawigan also approved Resolution No. 351-2003,10ratifying the Agreement for the Planning, Design, Construction, and Site Development of the New Cagayan Town Center11entered into by the provincial government, represented by Gov. Lara and Asset Builders Corporation, represented by its President, Mr. Rogelio P. Centeno.

On May 20, 2003, Gov. Lara issued the Notice of Award to Asset Builders Corporation, giving to the latter the planning, design, construction and site development of the town center project for a fee ofP213,795,732.39.12Proceedings before the Regional Trial CourtOn December 12, 2003, petitioners Manuel N. Mamba, Raymund P. Guzman and Leonides N. Fausto filed a Petition for Annulment of Contracts and Injunction with prayer for a Temporary Restraining Order/Writ of Preliminary Injunction13against Edgar R. Lara, Jenerwin C. Bacuyag, Wilson O. Puyawan, Aldegundo Q. Cayosa, Jr., Norman A. Agatep, Estrella P. Fernandez, Vilmer V. Viloria, Baylon A. Calagui, Cecilia Maeve T. Layos, Preferred Ventures Corporation, Asset Builders Corporation, RCBC, MICO and LBP.1avvphi1At the time of the filing of the petition, Manuel N. Mamba was the Representative of the 3rd Congressional District of the province of Cagayan14while Raymund P. Guzman and Leonides N. Fausto were members of theSangguniang Panlalawiganof Cagayan.15Edgar R. Lara was sued in his capacity as governor of Cagayan,16while Jenerwin C. Bacuyag, Wilson O. Puyawan, Aldegundo Q. Cayosa, Jr., Norman A. Agatep, Estrella P. Fernandez, Vilmer V. Viloria, Baylon A. Calagui and Cecilia Maeve T. Layos were sued as members of theSangguniang Panlalawiganof Cagayan.17Respondents Preferred Ventures Corporation, Asset Builders Corporation, RCBC, MICO and LBP were all impleaded as indispensable or necessary parties.

Respondent Preferred Ventures Corporation is the financial advisor of the province of Cagayan regarding the bond flotation undertaken by the province.18Respondent Asset Builders Corporation was awarded the right to plan, design, construct and develop the proposed town center.19Respondent RCBC, through its Trust and Investment Division, is the trustee of the seven-year bond flotation undertaken by the province for the construction of the town center,20while respondent MICO is the guarantor.21Lastly, respondent LBP is the official depositary bank of the province.22In response to the petition, public respondents filed an Answer with Motion to Dismiss,23raising the following defenses: a) petitioners are not the proper parties or they lack locus standi in court; b) the action is barred by the rule on state immunity from suit and c) the issues raised are not justiciable questions but purely political.

For its part, respondent Preferred Ventures Corporation filed a Motion to Dismiss24on the following grounds: a) petitioners have no cause of action for injunction; b) failure to join an indispensable party; c) lack of personality to sue and d) lack of locus standi. Respondent MICO likewise filed a Motion to Dismiss25raising the grounds of lack of cause of action and legal standing. Respondent RCBC similarly argued in its Motion to Dismiss26that: a) petitioners are not the real parties-in-interest or have no legal standing to institute the petition; b) petitioners have no cause of action as the flotation of the bonds are within the right and power of both respondent RCBC and the province of Cagayan and c) the viability of the construction of a town center is not a justiciable question but a political question.

Respondent Asset Builders Corporation, on the other hand, filed an Answer27interposing special and affirmative defenses of lack of legal standing and cause of action. Respondent LBP also filed an Answer28alleging in the main that petitioners have no cause of action against it as it is not an indispensable party or a necessary party to the case.

Two days after the filing of respondents respective memoranda on the issues raised during the hearing of the special and/or affirmative defenses, petitioners filed a Motion to Admit Amended Petition29attaching thereto the amended petition.30Public respondents opposed the motion for the following reasons: 1) the motion was belatedly filed; 2) the Amended Petition is not sufficient in form and in substance; 3) the motion is patently dilatory and 4) the Amended Petition was filed to cure the defect in the original petition.31Petitioners also filed a Consolidated Opposition to the Motion to Dismiss32followed by supplemental pleadings33in support of their prayer for a writ of preliminary injunction.

On April 27, 2004, the RTC issued the assailed Order denying the Motion to Admit Amended Petition and dismissing the petition for lack of cause of action. It ruled that:

The language of Secs. 2 & 3 of Rule 10 of the 1997 Rules of Civil Procedure dealing on the filing of an amended pleading is quite clear. As such, the Court rules that the motion was belatedly filed. The granting of leave to file amended pleadings is a matter peculiarly within the sound discretion of the trial court. But the rule allowing amendments to pleadings is subject to the general but inflexible limitation that the cause of action or defense shall not be substantially changed or the theory of the case altered to the prejudice of the other party (Avecilla vs. Yatcvo, 103 Phil. 666).

On the assumption that the controversy presents justiciable issues which this Court may take cognizance of, petitioners in the present case who presumably presented legitimate interests in the controversy are not parties to the questioned contract. Contracts produce effect as between the parties who execute them. Only a party to the contract can maintain an action to enforce the obligations arising under said contract (Young vs. CA, 169 SCRA 213). Since a contract is binding only upon the parties thereto, a third person cannot ask for its rescission if it is in fraud of his rights. One who is not a party to a contract has no rights under such contract and even if the contrary may be voidable, its nullity can be asserted only by one who is a party thereto; a third person would have absolutely no personality to ask for the annulment (Wolfson vs. Estate of Martinez, 20 Phil. 340; Ibaez vs. Hongkong & Shanghai Bank, 22 Phil. 572; Ayson vs. CA, G.R. Nos. L-6501 & 6599, May 21, 1955).

It was, however, held that a person who is not a party obliged principally or subsidiarily in a contract may exercise an action for nullity of the contract if he is prejudiced in his rights with respect to one of the contracting parties and can show the detriment which would positively result to him from the contract in which he had no intervention (Baez vs. CA, 59 SCRA 15; Anyong Hsan vs. CA, 59 SCRA 110, 112-113; Leodovica vs. CA, 65 SCRA 154-155). In the case at bar, petitioners failed to show that they were prejudiced in their rights [or that a] detriment x x x would positively result to them. Hence, they lack locus standi in court.

x x x x

To the mind of the Court, procedural matters in the present controversy may be dispensed with, stressing that the instant case is a political question, a question which the court cannot, in any manner, take judicial cognizance. Courts will not interfere with purely political questions because of the principle of separation of powers (Taada vs. Cuenco, 103 Phil. 1051). Political questions are those questions which, under the Constitution, are to be decided by the people in their sovereign capacity or in regard to which full discretionary authority has been delegated to the legislative or [to the] executive branch of the government (Nuclear Free Phils. Coalition vs. NPC, 141 SCRA 307 (1986); Torres vs. Gonzales, 152 SCRA 272; Citizens Alliance for Consumer Protection vs. Energy Regulatory Board, G.R. No. 78888-90, June 23, 1988).

The citation made by the provincial government[, to] which this Court is inclined to agree, is that the matter falls under the discretion of another department, hence the decision reached is in the category of a political question and consequently may not be the subject of judicial jurisdiction (Cruz in Political Law, 1998 Ed., page 81) is correct.

It is [a] well-recognized principle that purely administrative and discretionary functions may not be interfered with by the courts (Adm. Law Test & Cases, 2001 Ed., De Leon, De Leon, Jr.).

The case therefore calls for the doctrine of ripeness for judicial review. This determines the point at which courts may review administrative action. The basic principle of ripeness is that the judicial machinery should be conserved for problems which are real and present or imminent and should not be squandered on problems which are future, imaginary or remote. This case is not ripe for judicial determination since there is no imminently x x x substantial injury to the petitioners.

In other words, the putting up of the New Cagayan Town Center by the province over the land fully owned by it and the concomitant contracts entered into by the same is within the bounds of its corporate power, an undertaking which falls within the ambit of its discretion and therefore a purely political issue which is beyond the province of the court x x x. [Consequently, the court cannot,] in any manner, take judicial cognizance over it. The act of the provincial government was in pursuance of the mandate of the Local Government Code of 1991.

x x x x

Indeed, adjudication of the procedural issues presented for resolution by the present action would be a futile exercise in exegesis.

What defeats the plea of the petitioners for the issuance of a writ of preliminary injunction is the fact that their averments are merely speculative and founded on conjectures. An injunction is not intended to protect contingent or future rights nor is it a remedy to enforce an abstract right (Cerebo vs. Dictado, 160 SCRA 759; Ulang vs. CA, 225 SCRA 637). An injunction, whether preliminary or final, will not issue to protect a right not inin esseand which may never arise, or to restrain an act which does not give rise to a cause of action. The complainants right on title, moreover, must be clear and unquestioned [since] equity, as a rule, will not take cognizance of suits to establish title and will not lend its preventive aid by injunction where the complainants title or right is doubtful or disputed. The possibility of irreparable damage, without proof of violation of an actual existing right, is no ground for injunction being a meredamnum, absque injuria(Talisay-Silay Milling Company, Inc. vs. CFI of Negros Occidental, et. al. 42 SCRA 577, 582).

x x x x

For lack of cause of action, the case should be dismissed.

The facts and allegations [necessarily] suggest also that this court may dismiss the case for want of jurisdiction.

The rule has to be so because it canmotu propiodismiss it as its only jurisdiction is to dismiss it if it has no jurisdiction. This is in line with the ruling in Andaya vs. Abadia, 46 SCAD 1036, G.R. No. 104033, Dec. 27, 1993 where the court may dismiss a complaint even without a motion to dismiss or answer.

Upon the foregoing considerations, the case is hereby dismissed without costs.

SO ORDERED.34Petitioners filed a Motion for Reconsideration35to which respondents filed their respective Oppositions.36Petitioners then filed a Motion to Inhibit, which the court granted. Accordingly, the case was re-raffled to Branch 1 of the RTC of Tuguegarao City.37On August 20, 2004, Branch 1 of the RTC of Tuguegarao City issued a Resolution denying petitioners plea for reconsideration. The court found the motion to be a mere scrap of paper as the notice of hearing was addressed only to the Clerk of Court in violation of Section 5, Rule 15 of the Rules of Court. As to the merits, the court sustained the findings of Branch 5 that petitioners lack legal standing to sue and that the issue involved is political.

Issues

Hence, the present recourse where petitioners argue that:

A. The lower court decided a question of substance in a way not in accord with law and with the applicable decision of the Supreme Court, and

B. The lower court has so far departed from the accepted and usual course of judicial proceedings as to call for an exercise of the power of supervision in that:

I. It deniedlocus standito petitioners;

II. [It] determined that the matter of contract entered into by the provincial government is in the nature of a political question;

III. [It] denied the admission of Amended Petition; and

IV. [It] found a defect of substance in the petitioners Motion for Reconsideration.38Our Ruling

The petition is partially meritorious.

Petitioners have legal standing to sue as taxpayersA taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that the public money is being deflected to any improper purpose, or that there is wastage of public funds through the enforcement of an invalid or unconstitutional law.39A person suing as a taxpayer, however, must show that the act complained of directly involves the illegal disbursement of public funds derived from taxation.40He must also prove that he has sufficient interest in preventing the illegal expenditure of money raised by taxation and that he will sustain a direct injury because of the enforcement of the questioned statute or contract.41In other words, for a taxpayers suit to prosper, two requisites must be met: (1) public funds derived from taxation are disbursed by a political subdivision or instrumentality and in doing so, a law is violated or some irregularity is committed and (2) the petitioner is directly affected by the alleged act.42In light of the foregoing, it is apparent that contrary to the view of the RTC,

a taxpayer need not be a party to the contract to challenge its validity.43As long as taxes are involved, people have a right to question contracts entered into by the government.

In this case, although the construction of the town center would be primarily sourced from the proceeds of the bonds, which respondents insist are not taxpayers money, a government support in the amount ofP187 million would still be spent for paying the interest of the bonds.44In fact, a Deed of Assignment45was executed by the governor in favor of respondent RCBC over the Internal Revenue Allotment (IRA) and other revenues of the provincial government as payment and/or security for the obligations of the provincial government under the Trust Indenture Agreement dated September 17, 2003. Records also show that on March 4, 2004, the governor requested theSangguniang Panlalawiganto appropriate an amount ofP25 million for the interest of the bond.46Clearly, the first requisite has been met.

As to the second requisite, the court, in recent cases, has relaxed the stringent "direct injury test" bearing in mind thatlocus standiis a procedural technicality.47By invoking "transcendental importance", "paramount public interest", or "far-reaching implications", ordinary citizens and taxpayers were allowed to sue even if they failed to show direct injury.48In cases where serious legal issues were raised or where public expenditures of millions of pesos were involved, the court did not hesitate to give standing to taxpayers.49We find no reason to deviate from the jurisprudential trend.

To begin with, the amount involved in this case is substantial. Under the various agreements entered into by the governor, which were ratified by theSangguniang Panlalawigan, the provincial government of Cagayan would incur the following costs:50Compensation to Preferred Ventures -P6,150,000.00

(3% of P205M)51Resolution No. 290-2001

Management and Underwriting Fees -3,075,000.00

(1.5% of P205M)52

Documentary Tax -1,537,500.00

(0.75% of P205M)53

Guarantee Fee54-7,350,000.00

Construction and Design of town center55-213,795,732.39

Total Cost -P231,908,232.39

What is more, the provincial government would be shelling out a total amount ofP187 million for the period of seven years by way of subsidy for the interest of the bonds. Without a doubt, the resolution of the present petition is of paramount importance to the people of Cagayan who at the end of the day would bear the brunt of these agreements.

Another point to consider is that local government units now possess more powers, authority and resources at their disposal,56which in the hands of unscrupulous officials may be abused and misused to the detriment of the public. To protect the interest of the people and to prevent taxes from being squandered or wasted under the guise of government projects, a liberal approach must therefore be adopted in determininglocus standiin public suits.

In view of the foregoing, we are convinced that petitioners have sufficient standing to file the present suit. Accordingly, they should be given the opportunity to present their case before the RTC.

Having resolved the core issue, we shall now proceed to the remaining issues.

The controversy involved is justiciableA political question is a question of policy, which is to be decided by the people in their sovereign capacity or by the legislative or the executive branch of the government to which full discretionary authority has been delegated.57In filing the instant case before the RTC, petitioners seek to restrain public respondents from implementing the bond flotation and to declare null and void all contracts related to the bond flotation and construction of the town center. In the petition before the RTC, they alleged grave abuse of discretion and clear violations of law by public respondents. They put in issue the overpriced construction of the town center; the grossly disadvantageous bond flotation; the irrevocable assignment of the provincial governments annual regular income, including the IRA, to respondent RCBC to cover and secure the payment of the bonds floated; and the lack of consultation and discussion with the community regarding the proposed project, as well as a proper and legitimate bidding for the construction of the town center.

Obviously, the issues raised in the petition do not refer to the wisdom but to the legality of the acts complained of. Thus, we find the instant controversy within the ambit of judicial review. Besides, even if the issues were political in nature, it would still come within our powers of review under the expanded jurisdiction conferred upon us by Section 1, Article VIII of the Constitution, which includes the authority to determine whether grave abuse of discretion amounting to excess or lack of jurisdiction has been committed by any branch or instrumentality of the government.58The Motion to Admit Amended Petition was properly deniedHowever, as to the denial of petitioners Motion to Admit Amended Petition, we find no reason to reverse the same. The inclusion of the province of Cagayan as a petitioner would not only change the theory of the case but would also result in an absurd situation. The provincial government, if included as a petitioner, would in effect be suing itself considering that public respondents are being sued in their official capacity.

In any case, there is no need to amend the petition because petitioners, as we have said, have legal standing to sue as taxpayers.

Section 5, Rule 15 of the Rules of Court was substantially complied withThis brings us to the fourth and final issue.

A perusal of the Motion for Reconsideration filed by petitioners would show that the notice of hearing was addressed only to the Clerk of Court in violation of Section 5, Rule 15 of the Rules of Court, which requires the notice of hearing to be addressed to all parties concerned. This defect, however, did not make the motion a mere scrap of paper. The rule is not a ritual to be followed blindly.59The purpose of a notice of hearing is simply to afford the adverse parties a chance to be heard before a motion is resolved by the court.60In this case, respondents were furnished copies of the motion, and consequently, notified of the scheduled hearing. Counsel for public respondents in fact moved for the postponement of the hearing, which the court granted.61Moreover, respondents were afforded procedural due process as they were given sufficient time to file their respective comments or oppositions to the motion. From the foregoing, it is clear that the rule requiring notice to all parties was substantially complied with.62In effect, the defect in the Motion for Reconsideration was cured.

We cannot overemphasize that procedural rules are mere tools to aid the courts in the speedy, just and inexpensive resolution of cases.63Procedural defects or lapses, if negligible, should be excused in the higher interest of justice as technicalities should not override the merits of the case. Dismissal of cases due to technicalities should also be avoided to afford the parties the opportunity to present their case. Courts must be reminded that the swift unclogging of the dockets although a laudable objective must not be done at the expense of substantial justice.64WHEREFORE, the instant Petition is PARTIALLY GRANTED. The April 27, 2004 Order of Branch 5 and the August 20, 2004 Resolution of Branch 1 of the Regional Trial Court of Tuguegarao City are herebyREVERSEDandSET ASIDEinsofar as the dismissal of the petition is concerned. Accordingly, the case is herebyREMANDEDto the courta quofor further proceedings.

SO ORDERED.

G.R. No. 147188 September 14, 2004COMMISSIONER OF INTERNAL REVENUE,petitioner,vs.THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administrators Lorna Kapunan and Mario Luza Bautista,respondents.

D E C I S I O N

DAVIDE, JR.,C.J.:This Court is called upon to determine in this case whether the tax planning scheme adopted by a corporation constitutes tax evasion that would justify an assessment of deficiency income tax.

The petitioner seeks the reversal of the Decision1of the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 affirming the 3 January 2000 Decision2of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5328,3which held that the respondent Estate of Benigno P. Toda, Jr. is not liable for the deficiency income tax of Cibeles Insurance Corporation (CIC) in the amount ofP79,099,999.22 for the year 1989, and ordered the cancellation and setting aside of the assessment issued by Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January 1995.

The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal Revenue for deficiency income tax arising from an alleged simulated sale of a 16-storey commercial building known as Cibeles Building, situated on two parcels of land on Ayala Avenue, Makati City.

On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands for an amount of not less thanP90 million.4On 30 August 1989, Toda purportedly sold the property forP100 million to Rafael A. Altonaga, who, in turn, sold the same property on the same day to Royal Match Inc. (RMI) forP200 million. These two transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the same notary public.5For the sale of the property to RMI, Altonaga paid capital gains tax in the amount ofP10 million.6On 16 April 1990, CIC filed its corporate annual income tax return7for the year 1989, declaring, among other things, its gain from the sale of real property in the amount ofP75,728.021. After crediting withholding taxes ofP254,497.00, it paidP26,341,2078for its net taxable income ofP75,987,725.

On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa forP12.5 million, as evidenced by a Deed of Sale of Shares of Stocks.9Three and a half years later, or on 16 January 1994, Toda died.

On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice10and demand letter to the CIC for deficiency income tax for the year 1989 in the amount ofP79,099,999.22.

The new CIC asked for a reconsideration, asserting that the assessment should be directed against the old CIC, and not against the new CIC, which is owned by an entirely different set of stockholders; moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal years 1987-1989.11On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators Lorna Kapunan and Mario Luza Bautista, received a Notice of Assessment12dated 9 January 1995 from the Commissioner of Internal Revenue for deficiency income tax for the year 1989 in the amount ofP79,099,999.22, computed as follows:

Income Tax 1989

Net Income per return P75,987,725.00

Add: Additional gain on sale of real property taxable under ordinary corporate income but were substituted with individual capital gains(P200M 100M)100,000,000.00

Total Net Taxable Income per investigationP175,987,725.00

Tax Due thereof at 35%P61,595,703.75

Less: Payment already made

1. Per returnP26,595,704.00

2. Thru Capital Gains Tax made by R.A. Altonaga10,000,000.0036,595,704.00Balance of tax due

P24,999,999.75

Add: 50% Surcharge12,499,999.88

25% Surcharge6,249,999.94

TotalP43,749,999.57

Add: Interest 20% from

4/16/90-4/30/94 (.808)35,349,999.65

TOTAL AMT. DUE & COLLECTIBLE

P79,099,999.22==============

The Estate thereafter filed a letter of protest.13In the letter dated 19 October 1995,14the Commissioner dismissed the protest, stating that a fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the additional gain ofP100 million, which resulted in the change in the income structure of the proceeds of the sale of the two parcels of land and the building thereon to an individual capital gains, thus evading the higher corporate income tax rate of 35%.

On 15 February 1996, the Estate filed a petition for review15with the CTA alleging that the Commissioner erred in holding the Estate liable for income tax deficiency; that the inference of fraud of the sale of the properties is unreasonable and unsupported; and that the right of the Commissioner to assess CIC had already prescribed.

In his Answer16and Amended Answer,17the Commissioner argued that the two transactions actually constituted a single sale of the property by CIC to RMI, and that Altonaga was neither the buyer of the property from CIC nor the seller of the same property to RMI. The additional gain ofP100 million (the difference between the second simulated sale forP200 million and the first simulated sale forP100 million) realized by CIC was taxed at the rate of only 5% purportedly as capital gains tax of Altonaga, instead of at the rate of 35% as corporate income tax of CIC. The income tax return filed by CIC for 1989 with intent to evade payment of the tax was thus false or fraudulent. Since such falsity or fraud was discovered by the BIR only on 8 March 1991, the assessment issued on 9 January 1995 was well within the prescriptive period prescribed by Section 223 (a) of the National Internal Revenue Code of 1986, which provides that tax may be assessed within ten years from the discovery of the falsity or fraud. With the sale being tainted with fraud, the separate corporate personality of CIC should be disregarded. Toda, being the registered owner of the 99.991% shares of stock of CIC and the beneficial owner of the remaining 0.009% shares registered in the name of the individual directors of CIC, should be held liable for the deficiency income tax, especially because the gains realized from the sale were withdrawn by him as cash advances or paid to him as cash dividends. Since he is already dead, his estate shall answer for his liability.

In its decision18of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC committed fraud to deprive the government of the taxes due it. It ruled that even assuming that a pre-conceived scheme was adopted by CIC, the same constituted mere tax avoidance, and not tax evasion. There being no proof of fraudulent transaction, the applicable period for the BIR to assess CIC is that prescribed in Section 203 of the NIRC of 1986, which is three years after the last day prescribed by law for the filing of the return. Thus, the governments right to assess CIC prescribed on 15 April 1993. The assessment issued on 9 January 1995 was, therefore, no longer valid. The CTA also ruled that the mere ownership by Toda of 99.991% of the capital stock of CIC was not in itself sufficient ground for piercing the separate corporate personality of CIC. Hence, the CTA declared that the Estate is not liable for deficiency income tax ofP79,099,999.22 and, accordingly, cancelled and set aside the assessment issued by the Commissioner on 9 January 1995.

In its motion for reconsideration,19the Commissioner insisted that the sale of the property owned by CIC was the result of the connivance between Toda and Altonaga. She further alleged that the latter was a representative, dummy, and a close business associate of the former, having held his office in a property owned by CIC and derived his salary from a foreign corporation (Aerobin, Inc.) duly owned by Toda for representation services rendered. The CTA denied20the motion for reconsideration, prompting the Commissioner to file a petition for review21with the Court of Appeals.

In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the CTA, reasoning that the CTA, being more advantageously situated and having the necessary expertise in matters of taxation, is "better situated to determine the correctness, propriety, and legality of the income tax assessments assailed by the Toda Estate."22Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition invoking the following grounds:

I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE OF THE PROPERTIES OF CIBELES INSURANCE CORPORATION.

II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE PERSONALITY OF CIBELES INSURANCE CORPORATION.

III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER TO ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD PRESCRIBED.

The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by CIC of the Cibeles property was in connivance with its dummy Rafael Altonaga, who was financially incapable of purchasing it. She further points out that the documents themselves prove the fact of fraud in that (1) the two sales were done simultaneously on the same date, 30 August 1989; (2) the Deed of Absolute Sale between Altonaga and RMI was notarized ahead of the alleged sale between CIC and Altonaga, with the former registered in the Notarial Register of Jocelyn H. Arreza Pabelana as Doc.91, Page 20, Book I, Series of 1989; and the latter, as Doc. No.92, Page 20, Book I, Series of 1989, of the same Notary Public; (3) as early as 4 May 1989, CIC receivedP40 million from RMI, and not from Altonaga. The said amount was debited by RMI in its trial balance as of 30 June 1989 as investment in Cibeles Building. The substantial portion ofP40 million was withdrawn by Toda through the declaration of cash dividends to all its stockholders.

For its part, respondent Estate asserts that the Commissioner failed to present the income tax return of Altonaga to prove that the latter is financially incapable of purchasing the Cibeles property.

To resolve the grounds raised by the Commissioner, the following questions are pertinent:

1. Is this a case of tax evasion or tax avoidance?

2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and

3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if any?

We shall discuss these questions in seriatim.

Is this a case of tax evasion or tax avoidance?

Tax avoidance andtax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.23Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being "evil," in "bad faith," "willfull," or "deliberate and not accidental"; and (3) a course of action or failure of action which is unlawful.24All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior to the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC receivedP40 million from RMI,25and not from Altonaga. ThatP40 million was debited by RMI and reflected in its trial balance26as "other inv. Cibeles Bldg." Also, as of 31 July 1989, anotherP40 million was debited and reflected in RMIs trial balance as "other inv. Cibeles Bldg." This would show that the real buyer of the properties was RMI, and not the intermediary Altonaga.lavvphi1.netThe investigation conducted by the BIR disclosed that Altonaga was a close business associate and one of the many trusted corporate executives of Toda. This information was revealed by Mr. Boy Prieto, the assistant accountant of CIC and an old timer in the company.27But Mr. Prieto did not testify on this matter, hence, that information remains to be hearsay and is thus inadmissible in evidence. It was not verified either, since the letter-request for investigation of Altonaga was unserved,28Altonaga having left for the United States of America in January 1990. Nevertheless, that Altonaga was a mere conduit finds support in the admission of respondent Estate that the sale to him was part of the tax planning scheme of CIC. That admission is borne by the records. In its Memorandum, respondent Estate declared:

Petitioner, however, claims there was a "change of structure" of the proceeds of sale. Admitted one hundred percent. But isnt this precisely the definition of tax planning? Change the structure of the funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free transfers of property for stock, changing the structure of the property and the tax to be paid. As long as it is done legally, changing the structure of a transaction to achieve a lower tax is not against the law. It is absolutely allowed.

Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic] cannot be faulted forwanting to reduce the tax from 35% to 5%.29[Underscoring supplied].

The scheme resorted to by CIC in making it appear that there were two sales of the subject properties,i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted with fraud.

Fraudin its general sense, "is deemed to comprise anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage to another, or by which an undue and unconscionable advantage is taken of another."30Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and not the 35% corporate income tax. Altonagas sole purpose of acquiring and transferring title of the subject properties on the same day was to create a tax shelter. Altonaga never controlled the property and did not enjoy the normal benefits and burdens of ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and economic substance. Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view of reducing the consequent income tax liability.lavvphi1.netIn a nutshell, the intermediary transaction,i.e., the sale of Altonaga, which was prompted more on the mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion.31Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated.32The incidence of taxation depends upon the substance of a transaction. The tax consequences arising from gains from a sale of property are not finally to be determined solely by the means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step from the commencement of negotiations to the consummation of the sale is relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title. To permit the true nature of the transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress.33To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention of our tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes.34The two sale transactions should be treated as a single direct sale by CIC to RMI.

Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now 27 (A) of the Tax Reform Act of 1997), which stated as follows:

Sec. 24. Rates of tax on corporations. (a) Tax on domestic corporations.- A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, and partnerships, no matter how created or organized but not including general professional partnerships, in accordance with the following:

Twenty-five percent upon the amount by which the taxable net income does not exceed one hundred thousand pesos; and

Thirty-five percent upon the amount by which the taxable net income exceeds one hundred thousand pesos.

CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual capital gains tax provided for in Section 34 (h) of the NIRC of 198635(now 6% under Section 24 (D) (1) of the Tax Reform Act of 1997) is inapplicable. Hence, the assessment for the deficiency income tax issued by the BIR must be upheld.

Has the period of assessment prescribed?

No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:

Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court after the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for collection thereof .

Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file a return, the period within which to assess tax is ten years from discovery of the fraud, falsification or omission, as the case may be.

It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of the BIR on the tax consequence of the two sale transactions.36Thus, the BIR was amply informed of the transactions even prior to the execution of the necessary documents to effect the transfer. Subsequently, the two sales were openly made with the execution of public documents and the declaration of taxes for 1989. However, these circumstances do not negate the existence of fraud. As earlier discussed those two transactions were tainted with fraud. And even assumingarguendothat there was no fraud, we find that the income tax return filed by CIC for the year 1989 was false. It did not reflect the true or actual amount gained from the sale of the Cibeles property. Obviously, such was done with intent to evade or reduce tax liability.

As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years from the discovery of the falsity. The false return was filed on 15 April 1990, and the falsity thereof was claimed to have been discovered only on 8 March 1991.37The assessment for the 1989 deficiency income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the correct assessment for deficiency income tax was well within the prescriptive period.

Is respondent Estate liable for the 1989 deficiency income tax of Cibeles Insurance Corporation?

A corporation has a juridical personality distinct and separate from the persons owning or composing it. Thus, the owners or stockholders of a corporation may not generally be made to answer for the liabilities of a corporation and vice versa. There are, however, certain instances in which personal liability may arise. It has been held in a number of cases that personal liability of a corporate director, trustee, or officer along, albeit not necessarily, with the corporation may validly attach when:

1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders, or other persons;

2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;

3. He agrees to hold himself personally and solidarily liable with the corporation; or

4. He is made, by specific provision of law, to personally answer for his corporate action.38It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and voluntarily held himself personally liable for all the tax liabilities of CIC and the buyer for the years 1987, 1988, and 1989. Paragraph g of the Deed of Sale of Shares of Stocks specifically provides:

g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or obligations, contingent or otherwise, for taxes, sums of money or insurance claims other than those reported in its audited financial statement as of December 31, 1989, attached hereto as "Annex B" and made a part hereof. The business of Cibeles has at all times been conducted in full compliance with all applicable laws, rules and regulations.SELLER undertakes and agrees to hold the BUYER and Cibeles free from any and all income tax liabilities of Cibeles for the fiscal years 1987, 1988 and 1989.39[Underscoring Supplied].

When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from any all income tax liabilities of Cibeles for the fiscal years 1987, 1988, and 1989," he thereby voluntarily held himself personally liable therefor. Respondent estate cannot, therefore, deny liability for CICs deficiency income tax for the year 1989 by invoking the separate corporate personality of CIC, since its obligation arose from Todas contractual undertaking, as contained in theDeed of Sale of Shares of Stock.WHEREFORE, in view of all the foregoing, the petition is herebyGRANTED. The decision of the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 isREVERSEDandSET ASIDE, and another one is hereby rendered ordering respondent Estate of Benigno P. Toda Jr. to payP79,099,999.22 as deficiency income tax of Cibeles Insurance Corporation for the year 1989, plus legal interest from 1 May 1994 until the amount is fully paid.

Costs against respondent.

SO ORDERED.