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G.R. No. L-13656 January 31, 1962

COLLECTOR OF INTERNAL REVENUE, (now Commissioner), petitioner,

vs.

ALBERTO D. BENIPAYO, respondent.

Office of the Solicitor General for petitioner.

Carlos J. Antiporda for respondent.

DIZON, J.:

This is an appeal taken by the Collector of Internal Revenue from the decision of the Court of Tax Appeals dated January 23, 1948, reversing the one

rendered by the former, thereby relieving respondent Alberto D. Benipayo from the payment of the deficiency amusement tax assessed against him in

the total amount of P12,093.45.

Respondent is the owner and operator of the Lucena Theater located in the municipality of Lucena, Quezon. On October 3, 1953 Internal Revenue

Agent Romeo de Guia investigated respondent's amusement tax liability in connection with the operation of said theater during the period from August

1952 to September, 1953. On October 15, 1953 De Guia submitted his report to the Provincial Revenue Agent to the effect that respondent had

disproportionately issued tax-free 20-centavo children's tickets. His finding was that during the years 1949 to 1951 the average ratio of adults and

children patronizing the Lucena Theater was 3 to 1, i.e., for every three adults entering the theater, one child was also admitted, while during the period

in question, the proportion is reversed - three children to one adult. From this he concluded that respondent must have fraudulently sold two tax-free 20

centavo tickets, in order to avoid payment of the amusement tax prescribed in Section 260 of the National Internal Revenue Code. Based on the

average ratio between adult and children attendance in the past years, Examiner de Guia recommended a deficiency amusement tax assessment

against respondent in the sum of P11,193.45, inclusive of 25% surcharge, plus a suggested compromise penalty of P900.00 for violation of section 260

of the National Internal Revenue Code, or a total sum of P12,093.45 covering the period from August, 1952 to September, 1953 inclusive. On July 14,

1954, petitioner issued a deficiency amusement tax assessment against respondent, demanding from the latter the payment of the total sum ofP12,152.93 within thirty days from receipt thereof. On August 16, 1954, respondent filed the corresponding protest with the Conference Staff of the

Bureau of Internal Revenue. After due hearing, the Conference Staff submitted to petitioner Collector of Internal Revenue its finding to the effect that the

"meager reports of these fieldmen (Examiner de Guia and the Provincial Revenue Agent of Quezon) are mere presumptions and conclusions, devoid of

findings of the fact of the alleged fraudulent practices of the herein taxpayer". In view thereof, and as recommended by the Conference Staff, petitione

referred the case back to the Provincial Revenue Agent of Quezon for further investigation. The report submitted by Provincial Revenue Officer H.I.

Bernardo after this last investigation partly reads as follows:.

The returns from July 1 to July 11, showed that 31.43% of the entire audience of 12,754 consisted of adults, the remaining 68.57% of children. During

this said period due, perhaps, to the absence of agents in the premises, subject taxpayer was able to manipulate the issuance of tickets in the way and

manner alleged in Asst. De Guia's indorsement report mentioned above. But during the period from July 14 to July 24, 1955, when agents of this Office

supervised in the sales of admission tickets the sales for adults soared upwards to 76% while that for children dropped correspondingly to 24%.

It is opined without fear of contradiction that the ratio of three (3) adults to every one (1) child in the audience or a proportion of 75:25 as reckoned in

Asst. De Guia's indorsement report to this Office's new findings of a proportion of 76:24, represents and conveys the true picture of the situation unde

the law of averages, provided that the film being shown is not a children's show. There is no hard and fast rule in this regard, but this findings would

seem to admit no contradiction.

Please note that the new findings of this Office is not a direct proof of what has transpired during the period investigated by Asst. De Guia and now

pending before the Conference Staff", . . (Exh. 3, BIR Record, p. 137-138).

After considering said report, the Conference Staff of the Bureau of Internal Revenue recommended to the Collector of Internal Revenue the issuance o

the deficiency amusement tax assessment in question.

The only issue in this appeal is whether or not there is sufficient evidence in the record showing that respondent, during the period under review, sold

and issued to his adult customers two tax-free 20-centavo children's tickets, instead of one 40-centavo ticket for each adult customer; to cheat or

defraud the Government. On this question the Court of Tax Appeals said the following in the appealed decision:.

To our mind, the appealed decision has no factual basis and must be reversed. An assessment fixes and determines the tax liability of a taxpayer. As

soon as it is served, an obligation arises on the part of the taxpayer concerned to pay the amount assessed and demanded. Hence, assessments shouldnot be based on mere presumptions no matter how reasonable or logical said presumptions may be. Assuming arguendo that the average ratio of adults

and children patronizing the Lucena Theater from 1949 to 1951 was 3 to 1, the same does not give rise to the inference that the same conditions existed

during the years in question (1952 and 1953). The fact that almost the same ratio existed during the month of July, 1955 does not provide a sufficient

inference on the conditions in 1952 and 1953. . .

In order to stand the test of judicial scrutiny, the assessment must be based on actual facts. The presumption of correctness of assessment being a

mere presumption cannot be made to rest on another presumption that the circumstances in 1952 and 1953 are presumed to be the same as those

existing in 1949 to 1951 and July 1955. In the case under consideration there are no substantial facts to support the assessment in question. ...

A review of the records has not disclosed anything sufficient to justify a reversal of the above finding made by the Court of Tax Appeals. It should be

borne in mind that to sustain the deficiency tax assessed against respondent would amount, in effect, to a finding that he had, for a considerable period

of time, cheated and defrauded the government by selling to each adult patron two children's tax-free tickets instead of one ticket subject to the



amusement tax provided for in Section 260 of the National Internal Revenue Code. Fraud is a serious charge and, to be sustained, it must be supported

by clear and convincing proof which, in the present case, is lacking.

The claim that respondent admitted having resorted to the anomalous practice already mentioned is not entirely correct. What respondent appears to

have admitted was that during a certain limited period he had adopted a sort of rebate system applicable to cases where adults and children came in

groups and were al anomalous practice already mentioned is not entirely correct. What respondent appears to have admitted was that during a certain

limited period he had adopted a sort of rebate ystem applicable to cases where adults and children came in group and were all charged 20 centavo

admission tickets. This practice was, however, discontinued when he was informed by the Bureau of Internal Revenue that it was not in accordance with

law.

WHEREFORE, the appealed judgment is hereby affirmed with costs.

COMMISSIONER OF INTERNAL G.R. No. 166387

REVENUE,

Petitioner,

Present:

PUNO, C.J., Chairperson,

CARPIO,

- v e r s u s - CORONA,

AZCUNA and

LEONARDO-DE CASTRO, JJ.

ENRON SUBIC POWER

CORPORATION,

Respondent. Promulgated:

January 19, 2009

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

R E S O L U T I O N

CORONA, J.:

In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Commissioner of Internal Revenue (CIR) assails the

November 24, 2004 decision[1] of the Court of Appeals (CA) annulling the formal assessment notice issued by the CIR against respondent Enron Subic

Power Corporation (Enron) for failure to state the legal and factual bases for such assessment.

Enron, a domestic corporation registered with the Subic Bay Metropolitan Authority as a freeport enterprise,[2] filed its annual income tax return for the

year 1996 on April 12, 1997. It indicated a net loss of P7,684,948. Subsequently, the Bureau of Internal Revenue, through a preliminary five-day letter,[3

informed it of a proposed assessment of an alleged P2,880,817.25 deficiency income tax.[4] Enron disputed the proposed deficiency assessment in its

first protest letter.[5]

On May 26, 1999, Enron received from the CIR a formal assessment notice[6] requiring it to pay the alleged deficiency income tax of P2,880,817.25 for

the taxable year 1996. Enron protested this deficiency tax assessment.[7]

Due to the non-resolution of its protest within the 180-day period, Enron filed a petition for review in the Court of Tax Appeals (CTA). It argued that the

deficiency tax assessment disregarded the provisions of Section 228 of the National Internal Revenue Code (NIRC), as amended,[8] and Section 3.1.4

of Revenue Regulations (RR) No. 12-99[9] by not providing the legal and factual bases of the assessment. Enron likewise questioned the substantive

validity of the assessment.[10]

In a decision dated September 12, 2001, the CTA granted Enron’s petition and ordered the cancellation of its deficiency tax assessment for the year

1996. The CTA reasoned that the assessment notice sent to Enron failed to comply with the requirements of a valid written notice under Section 228 of

the NIRC and RR No. 12-99. The CIR’s motion for reconsideration of the CTA decision was denied in a resolution dated November 12, 2001.

The CIR appealed the CTA decision to the CA but the CA affirmed it. The CA held that the audit working papers did not substantially comply with

Section 228 of the NIRC and RR No. 12-99 because they failed to show the applicability of the cited law to the facts of the assessment. The CIR filed amotion for reconsideration but this was deemed abandoned when he filed a motion for extension to file a petition for review in this Court.

The CIR now argues that respondent was informed of the legal and factual bases of the deficiency assessment against it.

We adopt in toto the findings of fact of the CTA, as affirmed by the CA. In Compagnie Financiere Sucres et Denrees v. CIR,[11] we held:

We reiterate the well-established doctrine that as a matter of practice and principle, [we] will not set aside the conclusion reached by an agency, like the

CTA, especially if affirmed by the [CA]. By the very nature of its function, it has dedicated itself to the study and consideration of tax problems and has

necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority on its part, which is not presen

here.

The CIR errs in insisting that the notice of assessment in question complied with the requirements of the NIRC and RR No. 12-99.



A notice of assessment is:

[A] declaration of deficiency taxes issued to a [t]axpayer who fails to respond to a Pre-Assessment Notice (PAN) within the prescribed period of time, or

whose reply to the PAN was found to be without merit. The Notice of Assessment shall inform the [t]axpayer of this fact, and that the report of

investigation submitted by the Revenue Officer conducting the audit shall be given due course.

The formal letter of demand calling for payment of the taxpayer’s deficiency tax or taxes shall state the fact, the law, rules and regulations or

jurisprudence on which the assessment is based, otherwise the formal letter of demand and the notice of assessment shall be void. (emphasis supplied

[12]

Section 228 of the NIRC provides that the taxpayer shall be informed in writing of the law and the facts on which the assessment is made. Otherwise,

the assessment is void. To implement the provisions of Section 228 of the NIRC, RR No. 12-99 was enacted. Section 3.1.4 of the revenue regulation

reads:

3.1.4. Formal Letter of Demand and Assessment Notice. – The formal letter of demand and assessment notice shall be issued by the Commissioner o

his duly authorized representative. The letter of demand calling for payment of the taxpayer’s deficiency tax or taxes shall state the facts, the law, rules

and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and assessment notice shall be void. The

same shall be sent to the taxpayer only by registered mail or by personal delivery. xxx (emphasis supplied)

It is clear from the foregoing that a taxpayer must be informed in writing of the legal and factual bases of the tax assessment made against him

The use of the word “shall” in these legal provisions indicates the mandatory nature of the requirements laid down therein. We note the CTA’s findings:

In [this] case, [the CIR] merely issued a formal assessment and indicated therein the supposed tax, surcharge, interest and compromise penaltydue thereon. The Revenue Officers of the [the CIR] in the issuance of the Final Assessment Notice did not provide Enron with the written bases of the

law and facts on which the subject assessment is based. [The CIR] did not bother to explain how it arrived at such an assessment. Moreso, he failed to

mention the specific provision of the Tax Code or rules and regulations which were not complied with by Enron.[13]

Both the CTA and the CA concluded that the deficiency tax assessment merely itemized the deductions disallowed and included these in the gross

income. It also imposed the preferential rate of 5% on some items categorized by Enron as costs. The legal and factual bases were, however, not

indicated.

The CIR insists that an examination of the facts shows that Enron was properly apprised of its tax deficiency. During the pre-assessment stage, the CIR

advised Enron’s representative of the tax deficiency, informed it of the proposed tax deficiency assessment through a preliminary five-day letter and

furnished Enron a copy of the audit working paper[14] allegedly showing in detail the legal and factual bases of the assessment. The CIR argues that

these steps sufficed to inform Enron of the laws and facts on which the deficiency tax assessment was based.

We disagree. The advice of tax deficiency, given by the CIR to an employee of Enron, as well as the preliminary five-day letter, were not valid substitutes

for the mandatory notice in writing of the legal and factual bases of the assessment. These steps were mere perfunctory discharges of the CIR’s duties

in correctly assessing a taxpayer.[15] The requirement for issuing a preliminary or final notice, as the case may be, informing a taxpayer of the existence

of a deficiency tax assessment is markedly different from the requirement of what such notice must contain. Just because the CIR issued an advice, a

preliminary letter during the pre-assessment stage and a final notice, in the order required by law, does not necessarily mean that Enron was informed of

the law and facts on which the deficiency tax assessment was made.

The law requires that the legal and factual bases of the assessment be stated in the formal letter of demand and assessment notice. Thus, such canno

be presumed. Otherwise, the express provisions of Article 228 of the NIRC and RR No. 12-99 would be rendered nugatory. The alleged “factual bases

in the advice, preliminary letter and “audit working papers” did not suffice. There was no going around the mandate of the law that the legal and factua

bases of the assessment be stated in writing in the formal letter of demand accompanying the assessment notice.

We note that the old law merely required that the taxpayer be notified of the assessment made by the CIR. This was changed in 1998 and the taxpayer

must now be informed not only of the law but also of the facts on which the assessment is made.[16] Such amendment is in keeping with the

constitutional principle that no person shall be deprived of property without due process.[17] In view of the absence of a fair opportunity for Enron to be

informed of the legal and factual bases of the assessment against it, the assessment in question was void. We reiterate our ruling in Reyes v. Almanzoret al.:[18]

Verily, taxes are the lifeblood of the Government and so should be collected without unnecessary hindrance. However, such collection should be made

in accordance with law as any arbitrariness will negate the very reason for the Government itself.

WHEREFORE, the petition is hereby DENIED. The November 24, 2004 decision of the Court of Appeals is AFFIRMED.

No costs.

SO ORDERED.



COMMISSIONER OF G.R. No. 159694

INTERNAL REVENUE,

Petitioner, Present:

Panganiban, CJ,

- versus - Chairman,

Ynares-Santiago,

Austria-Martinez,

AZUCENA T. REYES, Callejo, Sr., and

Respondent. Chico-Nazario, JJ

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

AZUCENA T. REYES, G.R. No. 163581

Petitioner,

- versus -

COMMISSIONER OF Promulgated:

INTERNAL REVENUE,

Respondent. January 27, 2006

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

DECISION

PANGANIBAN, CJ.:

U

nder the present provisions of the Tax Code and pursuant to elementary due process, taxpayers must be informed in writing of the law and the facts

upon which a tax assessment is based; otherwise, the assessment is void. Being invalid, the assessment cannot in turn be used as a basis for the

perfection of a tax compromise.

The Case

Before us are two consolidated[1] Petitions for Review[2] filed under Rule 45 of the Rules of Court, assailing the August 8, 2003 Decision[3] of the

Court of Appeals (CA) in CA-GR SP No. 71392. The dispositive portion of the assailed Decision reads as follows:

“WHEREFORE, the petition is GRANTED. The assailed decision of the Court of Tax Appeals is ANNULLED and SET ASIDE without prejudice to the

action of the National Evaluation Board on the proposed compromise settlement of the Maria C. Tancinco estate’s tax liability.”[4]

The Facts

The CA narrated the facts as follows:

“On July 8, 1993, Maria C. Tancinco (or ‘decedent’) died, leaving a 1,292 square-meter residential lot and an old house thereon (or ‘subject

property’) located at 4931 Pasay Road, Dasmariñas Village, Makati City.

“On the basis of a sworn information-for-reward filed on February 17, 1997 by a certain Raymond Abad (or ‘Abad’), Revenue District Office No. 50

(South Makati) conducted an investigation on the decedent’s estate (or ‘estate’). Subsequently, it issued a Return Verification Order. But without the

required preliminary findings being submitted, it issued Letter of Authority No. 132963 for the regular investigation of the estate tax case. Azucena T

Reyes (or ‘[Reyes]’), one of the decedent’s heirs, received the Letter of Authority on March 14, 1997.

“On February 12, 1998, the Chief, Assessment Division, Bureau of Internal Revenue (or ‘BIR’), issued a preliminary assessment notice against the

estate in the amount of P14,580,618.67. On May 10, 1998, the heirs of the decedent (or ‘heirs’) received a final estate tax assessment notice and a

demand letter, both dated April 22, 1998, for the amount of P14,912,205.47, inclusive of surcharge and interest.

“On June 1, 1998, a certain Felix M. Sumbillo (or ‘Sumbillo’) protested the assessment [o]n behalf of the heirs on the ground that the subject

property had already been sold by the decedent sometime in 1990.

“On November 12, 1998, the Commissioner of Internal Revenue (or ‘[CIR]’) issued a preliminary collection letter to [Reyes], followed by a Final

Notice Before Seizure dated December 4, 1998.

“On January 5, 1999, a Warrant of Distraint and/or Levy was served upon the estate, followed on February 11, 1999 by Notices of Levy on Rea

Property and Tax Lien against it.



“On March 2, 1999, [Reyes] protested the notice of levy. However, on March 11, 1999, the heirs proposed a compromise settlement of

P1,000,000.00.

“In a letter to [the CIR] dated January 27, 2000, [Reyes] proposed to pay 50% of the basic tax due, citing the heirs’ inability to pay the tax

assessment. On March 20, 2000, [the CIR] rejected [Reyes’s] offer, pointing out that since the estate tax is a charge on the estate and not on the heirs

the latter’s financial incapacity is immaterial as, in fact, the gross value of the estate amounting to P32,420,360.00 is more than sufficient to settle the tax

liability. Thus, [the CIR] demanded payment of the amount of P18,034,382.13 on or before April 15, 2000[;] otherwise, the notice of sale of the subjec

property would be published.

“On April 11, 2000, [Reyes] again wrote to [the CIR], this time proposing to pay 100% of the basic tax due in the amount of P5,313,891.00. She

reiterated the proposal in a letter dated May 18, 2000.

“As the estate failed to pay its tax liability within the April 15, 2000 deadline, the Chief, Collection Enforcement Division, BIR, notified [Reyes] on

June 6, 2000 that the subject property would be sold at public auction on August 8, 2000.

“On June 13, 2000, [Reyes] filed a protest with the BIR Appellate Division. Assailing the scheduled auction sale, she asserted that x x x the

assessment, letter of demand[,] and the whole tax proceedings against the estate are void ab initio. She offered to file the corresponding estate tax

return and pay the correct amount of tax without surcharge [or] interest.

“Without acting on [Reyes’s] protest and offer, [the CIR] instructed the Collection Enforcement Division to proceed with the August 8, 2000 auction

sale. Consequently, on June 28, 2000, [Reyes] filed a [P]etition for [R]eview with the Court of Tax Appeals (or ‘CTA’), docketed as CTA Case No. 6124.

“On July 17, 2000, [Reyes] filed a Motion for the Issuance of a Writ of Preliminary Injunction or Status Quo Order, which was granted by the CTA

on July 26, 2000. Upon [Reyes’s] filing of a surety bond in the amount of P27,000,000.00, the CTA issued a [R]esolution dated August 16, 2000

ordering [the CIR] to desist and refrain from proceeding with the auction sale of the subject property or from issuing a [W]arrant of [D]istraint or [G]arnishment of [B]ank [A]ccount[,] pending determination of the case and/or unless a contrary order is issued.

“[The CIR] filed a [M]otion to [D]ismiss the petition on the grounds (i) that the CTA no longer has jurisdiction over the case[,] because the

assessment against the estate is already final and executory; and (ii) that the petition was filed out of time. In a [R]esolution dated November 23, 2000

the CTA denied [the CIR’s] motion.

“During the pendency of the [P]etition for [R]eview with the CTA, however, the BIR issued Revenue Regulation (or ‘RR’) No. 6-2000 and Revenue

Memorandum Order (or ‘RMO’) No. 42-2000 offering certain taxpayers with delinquent accounts and disputed assessments an opportunity to

compromise their tax liability.

“On November 25, 2000, [Reyes] filed an application with the BIR for the compromise settlement (or ‘compromise’) of the assessment against the

estate pursuant to Sec. 204(A) of the Tax Code, as implemented by RR No. 6-2000 and RMO No. 42-2000.

“On December 26, 2000, [Reyes] filed an Ex-Parte Motion for Postponement of the hearing before the CTA scheduled on January 9, 2001, citing

her pending application for compromise with the BIR. The motion was granted and the hearing was reset to February 6, 2001.

“On January 29, 2001, [Reyes] moved for postponement of the hearing set on February 6, 2001, this time on the ground that she had already paid

the compromise amount of P1,062,778.20 but was still awaiting approval of the National Evaluation Board (or ‘NEB’). The CTA granted the motion and

reset the hearing to February 27, 2001.

“On February 19, 2001, [Reyes] filed a Motion to Declare Application for the Settlement of Disputed Assessment as a Perfected Compromise. In

said motion, she alleged that [the CIR] had not yet signed the compromise[,] because of procedural red tape requiring the initials of four Deputy

Commissioners on relevant documents before the compromise is signed by the [CIR]. [Reyes] posited that the absence of the requisite initials and

signature[s] on said documents does not vitiate the perfected compromise.

“Commenting on the motion, [the CIR] countered that[,] without the approval of the NEB, [Reyes’s] application for compromise with the BIR cannot

be considered a perfected or consummated compromise.

“On March 9, 2001, the CTA denied [Reyes’s] motion, prompting her to file a Motion for Reconsideration Ad Cautelam. In a [R]esolution dated April 10, 2001, the CTA denied the [M]otion for [R]econsideration with the suggestion that[,] for an orderly presentation of her case and to preven

piecemeal resolutions of different issues, [Reyes] should file a [S]upplemental [P]etition for [R]eview[,] setting forth the new issue of whether there was

already a perfected compromise.

“On May 2, 2001, [Reyes] filed a Supplemental Petition for Review with the CTA, followed on June 4, 2001 by its Amplificatory Arguments (for the

Supplemental Petition for Review), raising the following issues:

‘1. Whether or not an offer to compromise by the [CIR], with the acquiescence by the Secretary of Finance, of a tax liability pending in court, that

was accepted and paid by the taxpayer, is a perfected and consummated compromise.

‘2. Whether this compromise is covered by the provisions of Section 204 of the Tax Code (CTRP) that requires approval by the BIR [NEB].’



“Answering the Supplemental Petition, [the CIR] averred that an application for compromise of a tax liability under RR No. 6-2000 and RMO No. 42-2000

requires the evaluation and approval of either the NEB or the Regional Evaluation Board (or ‘REB’), as the case may be.

“On June 14, 2001, [Reyes] filed a Motion for Judgment on the Pleadings; the motion was granted on July 11, 2001. After submission of memoranda

the case was submitted for [D]ecision.

“On June 19, 2002, the CTA rendered a [D]ecision, the decretal portion of which pertinently reads:

‘WHEREFORE, in view of all the foregoing, the instant [P]etition for [R]eview is hereby DENIED. Accordingly, [Reyes] is hereby ORDERED to PAY

deficiency estate tax in the amount of Nineteen Million Five Hundred Twenty Four Thousand Nine Hundred Nine and 78/100 (P19,524,909.78)

computed as follows:

x x x x x x x x x

‘[Reyes] is likewise ORDERED to PAY 20% delinquency interest on deficiency estate tax due of P17,934,382.13 from January 11, 2001 until full

payment thereof pursuant to Section 249(c) of the Tax Code, as amended.’

“In arriving at its decision, the CTA ratiocinated that there can only be a perfected and consummated compromise of the estate’s tax liability[,] if

the NEB has approved [Reyes’s]

application for compromise in accordance with RR No. 6-2000, as implemented by RMO No. 42-2000.

“Anent the validity of the assessment notice and letter of demand against the estate, the CTA stated that ‘at the time the questioned assessmen

notice and letter of demand were issued, the heirs knew very well the law and the facts on which the same were based.’ It also observed that the

petition was not filed within the 30-day reglementary period provided under Sec. 11 of Rep. Act No. 1125 and Sec. 228 of the Tax Code.”[5]

Ruling of the Court of Appeals

In partly granting the Petition, the CA said that Section 228 of the Tax Code and RR 12-99 were mandatory and unequivocal in their requirement

The assessment notice and the demand letter should have stated the facts and the law on which they were based; otherwise, they were deemed void.[6

The appellate court held that while administrative agencies, like the BIR, were not bound by procedural requirements, they were still required by law and

equity to observe substantive due process. The reason behind this requirement, said the CA, was to ensure that taxpayers would be duly apprised of --

and could effectively protest -- the basis of tax assessments against them.[7] Since the assessment and the demand were void, the proceedings

emanating from them were likewise void, and any order emanating from them could never attain finality.

The appellate court added, however, that it was premature to declare as perfected and consummated the compromise of the estate’s tax liability

It explained that, where the basic tax assessed exceeded P1 million, or where the settlement offer was less than the prescribed minimum rates, the

National Evaluation Board’s (NEB) prior evaluation and approval were the conditio sine qua non to the perfection and consummation of any compromise

[8] Besides, the CA pointed out, Section 204(A) of the Tax Code applied to all compromises, whether government-initiated or not.[9] Where the law did

not distinguish, courts too should not distinguish.

Hence, this Petition.[10]

The Issues

In GR No. 159694, petitioner raises the following issues for the Court’s consideration:

“I.

Whether petitioner’s assessment against the estate is valid.

“II.

Whether respondent can validly argue that she, as well as the other heirs, was not aware of the facts and the law on which the assessment in question is

based, after she had opted to propose several compromises on the estate tax due, and even prematurely acting on such proposal by paying 20% of the

basic estate tax due.”[11]

The foregoing issues can be simplified as follows: first, whether the assessment against the estate is valid; and, second, whether the compromise

entered into is also valid.

The Court’s Ruling

The Petition is unmeritorious.



First Issue:

Validity of the Assessment Against the Estate

The second paragraph of Section 228 of the Tax Code[12] is clear and mandatory. It provides as follows:

“Sec. 228. Protesting of Assessment. --

x x x x x x x x x

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

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[13] prior to its amendment by Republic

Act (RA) No. 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 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.

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.

To be simply informed in writing of the investigation being conducted and of the recommendation for the assessment of the estate taxes due is

nothing but a perfunctory discharge of the tax function of correctly assessing a taxpayer. The act cannot be taken to mean that Reyes already knew the

law and the facts on which the assessment was based. It does not at all conform to the compulsory requirement under Section 228. Moreover, the

Letter of Authority received by respondent on March 14, 1997 was for the sheer purpose of investigation and was not even the requisite notice under the

law.

The procedure for protesting an assessment under the Tax Code is found in Chapter III of Title VIII, which deals with remedies. Being procedura

in nature, can its provision then be applied retroactively? The answer is yes.

The general rule is that statutes are prospective. However, statutes that are remedial, or that do not create new or take away vested rights, do no

fall under the general rule against the retroactive operation of statutes.[14] Clearly, Section 228 provides for the procedure in case an assessment is

protested. The provision does not create new or take away vested rights. In both instances, it can surely be applied retroactively. Moreover, RA 8424

does not state, either expressly or by necessary implication, that pending actions are excepted from the operation of Section 228, or that applying it to

pending proceedings would impair vested rights.

Second, the non-retroactive application of Revenue Regulation (RR) No. 12-99 is of no moment, considering that it merely implements the law.

A tax regulation is promulgated by the finance secretary to implement the provisions of the Tax Code.[15] While it is desirable for the governmen

authority or administrative agency to have one immediately issued after a law is passed, the absence of the regulation does not automatically mean tha

the law itself would become inoperative.

At the time the pre-assessment notice was issued to Reyes, RA 8424 already stated that the taxpayer must be informed of both the law and facts

on which the assessment was based. Thus, the CIR should have required the assessment officers of the Bureau of Internal Revenue (BIR) to follow the

clear mandate of the new law. The old regulation governing the issuance of estate tax assessment notices ran afoul of the rule that tax regulations -- old

as they were -- should be in harmony with, and not supplant or modify, the law.[16]

It may be argued that the Tax Code provisions are not self-executory. It would be too wide a stretch of the imagination, though, to still issue a

regulation that would simply require tax officials to inform the taxpayer, in any manner, of the law and the facts on which an assessment was based.That requirement is neither difficult to make nor its desired results hard to achieve.

Moreover, an administrative rule interpretive of a statute, and not declarative of certain rights and corresponding obligations, is given retroactive

effect as of the date of the effectivity of the statute.[17] RR 12-99 is one such rule. Being interpretive of the provisions of the Tax Code, even if it was

issued only on September 6, 1999, this regulation was to retroact to January 1, 1998 -- a date prior to the issuance of the preliminary assessment notice

and demand letter.

Third, neither Section 229 nor RR 12-85 can prevail over Section 228 of the Tax Code.

No doubt, Section 228 has replaced Section 229. The provision on protesting an assessment has been amended. Furthermore, in case o

discrepancy between the law as amended and its implementing but old regulation, the former necessarily prevails.[18] Thus, between Section 228 o

the Tax Code and the pertinent provisions of RR 12-85, the latter cannot stand because it cannot go beyond the provision of the law. The law must stil



be followed, even though the existing tax regulation at that time provided for a different procedure. The regulation then simply provided that notice be

sent to the respondent in the form prescribed, and that no consequence would ensue for failure to comply with that form.

Fourth, petitioner violated the cardinal rule in administrative law that the taxpayer be accorded due process. Not only was the law here

disregarded, but no valid notice was sent, either. A void assessment bears no valid fruit.

The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with tax collection without first establishing a valid

assessment is evidently violative of the cardinal principle in administrative investigations: that taxpayers should be able to present their case and adduce

supporting evidence.[19] In the instant case, respondent has not been informed of the basis of the estate tax liability. Without complying with the

unequivocal mandate of first informing the taxpayer of the government’s claim, there can be no deprivation of property, because no effective protest can

be made.[20] The haphazard shot at slapping an assessment, supposedly based on estate taxation’s general provisions that are expected to be known

by the taxpayer, is utter chicanery.

Even a cursory review of the preliminary assessment notice, as well as the demand letter sent, reveals the lack of basis for -- not to mention the

insufficiency of -- the gross figures and details of the itemized deductions indicated in the notice and the letter. This Court cannot countenance an

assessment based on estimates that appear to have been arbitrarily or capriciously arrived at. Although taxes are

the lifeblood of the government, their assessment and collection “should be made in accordance with law as any arbitrariness will negate the very reason

for government itself.”[21]

Fifth, the rule against estoppel does not apply. Although the government cannot be estopped by the negligence or omission of its agents, the

obligatory provision on protesting a tax assessment cannot be rendered nugatory by a mere act of the CIR .

Tax laws are civil in nature.[22] Under our Civil Code, acts executed against the mandatory provisions of law are void, except when the law itself

authorizes the validity of those acts.[23] Failure to comply with Section 228 does not only render the assessment void, but also finds no validation in any

provision in the Tax Code. We cannot condone errant or enterprising tax officials, as they are expected to be vigilant and law-abiding.

Second Issue:

Validity of Compromise

It would be premature for this Court to declare that the compromise on the estate tax liability has been perfected and consummated, considering

the earlier determination that the assessment against the estate was void. Nothing has been settled or finalized. Under Section 204(A) of the Tax

Code, where the basic tax involved exceeds one million pesos or the settlement offered is less than the prescribed minimum rates, the compromise shal

be subject to the approval of the NEB composed of the petitioner and four deputy commissioners.

Finally, as correctly held by the appellate court, this provision applies to all compromises, whether government-initiated or not. Ubi lex non

distinguit, nec nos distinguere debemos. Where the law does not distinguish, we should not distinguish.

WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED. No pronouncement as to costs.

SO ORDERED.

[G.R. No. 167560, September 17, 2008]

COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. DOMINADOR MENGUITO, RESPONDENT.

D E C I S I O N

AUSTRIA-MARTINEZ, J.:

Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the March 31, 2005 Decision[1] of the Court of

Appeals (CA) which reversed and set aside the Court of Tax Appeals (CTA) April 2, 2002 Decision[2] and October 10, 2002 Resolution[3] ordering

Dominador Menguito (respondent) to pay the Commissioner of Internal Revenue (petitioner) deficiency income and percentage taxes and delinquency

interest.

Based on the Joint Stipulation of Facts and Admissions[4] of the parties, the CTA summarized the factual and procedural antecedents of the case, the

relevant portions of which read:

Petitioner Dominador Menguito [herein respondent] is a Filipino citizen, of legal age, married to Jeanne Menguito and is engaged in the restauran

and/or cafeteria business. For the years 1991, 1992 and 1993, its principal place of business was at Gloriamaris, CCP Complex, Pasay City and later

transferred to Kalayaan Bar (Copper Kettle Cafeteria Specialist or CKCS), Departure Area, Ninoy Aquino International Airport, Pasay City. During the

same years, he also operated a branch at Club John Hay, Baguio City carrying the business name of Copper Kettle Cafeteria Specialist (Joint

Stipulation of Facts and Admissions, p. 133, CTA records).

xxxx

Subsequently, BIR Baguio received information that Petitioner [herein respondent] has undeclared income from Texas Instruments and Club John Hay

prompting the BIR to conduct another investigation. Through a letter dated July 28, 1997, Spouses Dominador Menguito and Jeanne Menguito



(Spouses Menguito) were informed by the Assessment Division of the said office that they have underdeclared sales totaling P48,721,555.96 (Exhibit

11, p. 83, BIR records). This was followed by a Preliminary Ten (10) Day Letter dated August 11, 1997, informing Petitioner [herein respondent] that in

the investigation of his 1991, 1992 and 1993 income, business and withholding tax case, it was found out that there is still due from him the total sum of

P34,193,041.55 as deficiency income and percentage tax.

On September 2, 1997, the assessment notices subject of the instant petition were issued. These were protested by Ms. Jeanne Menguito, through a

letter dated September 28, 1997 (Exhibit 14, p. 112, BIR Records), on the ground that the 40% deduction allowed on their computed gross revenue, is

unrealistic. Ms. Jeanne Menguito requested for a period of thirty (30) days within which to coordinate with the BIR regarding the contested assessment.

On October 10, 1997, BIR Baguio replied, informing the Spouses Menguito that the source of assessment was not through the disallowance of claimed

expenses but on data received from Club John Hay and Texas Instruments Phils., Inc. Said letter gave the spouses ten (10) days to present evidence

(Exhibit 15, p. 110, BIR Records).

In an effort to clear an alleged confusion regarding Copper Kettle Cafeteria Specialist (CKCS) being a sole proprietorship owned by the Spouses, and

Copper Kettle Catering Services, Inc. (CKCS, Inc.) being a corporation with whom Texas Instruments and Club John Hay entered into a contract,

Petitioner [respondent] submitted to BIR Baguio a photocopy of the SEC Registration of Copper Kettle Catering Services, Inc. on March 23, 1999 (pp

134-141, BIR Records).

On April 12, 1999, BIR Baguio wrote a letter to Spouses Menguito, informing the latter that a reinvestigation or reconsideration cannot be given due

course by the mere submission of an uncertified photocopy of the Certificate of Incorporation. Thus, it avers that the amendment issued is still valid and

enforceable.

On May 26, 1999, Petitioner [respondent] filed the present case, praying for the cancellation and withdrawal of the deficiency income tax and percentage

tax assessments on account of prescription, whimsical factual findings, violation of procedural due process on the issuance of assessment notices

erroneous address of notices and multiple credit/ investigation by the Respondent [petitioner] of Petitioner's [respondent's] books of accounts and othe

related records for the same tax year.

Instead of filing an Answer, Respondent [herein petitioner] moved to dismiss the instant petition on July 1, 1999, on the ground of lack of jurisdiction.

According to Respondent [petitioner], the assessment had long become final and executory when Petitioner [respondent] failed to comply with the lette

dated October 10, 1997.

Petitioner opposed said motion on July 21, 1999, claiming that the final decision on Petitioner's [respondent's] protest is the April 12, 1999 letter of the

Baguio Regional Office; therefore, the filing of the action within thirty (30) days from receipt of the said letter was seasonably filed. Moreover, Petitione

[respondent] asserted that granting that the April 12, 1999 letter in question could not be construed to mean as a denial or final decision of the protest,

still Petitioner's [respondent's] appeal was timely filed since Respondent [petitioner] issued a Warrant of Distraint and/or Levy against the Petitioner

[respondent] on May 3, 1999, which warrant constituted a final decision of the Respondent [petitioner] on the protest of the taxpayer.

On September 3, 1999, this Court denied Respondent's [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

Investigation disclosed that for taxable years 1991, 1992 and 1993, petitioner [respondent] filed false or fraudulent income and percentage tax returns

with intent to evade tax by under declaring his sales.

The alleged duplication of investigation of petitioner [respondent] by the BIR Regional Office in Baguio City and by the Revenue District Office in Pasay

City is justified by the finding of fraud on the part of the petitioner [respondent], which is an exception to the provision in the Tax Code that the

examination and inspection of books and records shall be made only once in a taxable year (Section 235, Tax Code). At any rate, petitioner

[respondent], in a letter dated July 18, 1994, waived his right to the consolidation of said investigation.

The aforementioned falsity or fraud was discovered on August 5, 1997. The assessments were issued on September 2, 1997, or within ten (10) years

from the discovery of such falsity or fraud (Section 223, Tax Code). Hence, the assessments have not prescribed.

Petitioner's [respondent's] allegation that the assessments were not properly addressed is rendered moot and academic by his acknowledgment in his

protest letter dated September 28, 1997 that he received the assessments.

Respondent [petitioner] complied with the provisions of Revenue Regulations No. 12-85 by informing petitioner [respondent] of the findings of the

investigation in letters dated July 28, 1997 and August 11, 1997 prior to the issuance of the assessments.

Petitioner [respondent] did not allege in his administrative protest that there was a duplication of investigation, that the assessments have prescribed

that they were not properly addressed, or that the provisions of Revenue Regulations No. 12-85 were not observed. Not having raised them in the

administrative level, petitioner [respondent] cannot raise the same for the first time on appeal (Aguinaldo Industries Corp. vs. Commissioner of Internal

Revenue, 112 SCRA 136).

The assessments were issued in accordance with law and regulations.

All presumptions are in favor of the correctness of tax assessments (CIR vs. Construction Resources of Asia, Inc., 145 SCRA 67), and the burden to

prove otherwise is upon petitioner [respondent].[5] (Emphasis supplied)

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



Accordingly, Petitioner [herein respondent] is ORDERED to PAY the Respondent [herein petitioner] the amount of P11,333,233.94 and P2,573,655.82

as deficiency income and percentage tax liabilities, respectively for taxable years 1991, 1992 and 1993 plus 20% delinquency interest from October 2,

1997 until full payment thereof.

SO ORDERED.[6]

Respondent filed a motion for reconsideration but the CTA denied the same in i ts Resolution of October 10, 2002.[7]

Through a Petition for Review[8] filed with the CA, respondent questioned the CTA Decision and Resolution mainly on the ground that Copper Kettle

Catering Services, Inc. (CKCS, Inc.) was a separate and distinct entity from Copper Kettle Cafeteria Specialist (CKCS); the sales and revenues o

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 Coppe

Kettle Cafeteria Specialist, not Copper Kettle Catering Services, Inc.[10]

Based on the unrefuted[11] CTA summary, the CA rendered the Decision assailed herein, the dispositive portion of which reads:

WHEREFORE, the instant petition is GRANTED. Reversing the assailed Decision dated April 2, 2002 and Resolution dated October 10, 2002, the

deficiency income tax and percentage income tax assessments against petitioner in the amounts of P11,333,233.94 and P2,573,655.82 for taxable

years 1991, 1992 and 1993 plus the 20% delinquency interest thereon are annulled.

SO ORDERED.[12]

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

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

I

The Court of Appeals erred in reversing the decision of the Court of Tax Appeals and in holding that Copper Kettle Cafeteria Specialist owned by

respondent and Copper Kettle Catering Services, Inc. owned and managed by respondent's wife are not one and the same.

II

The Court of Appeals erred in holding that respondent was denied due process for failure of petitioner to validly serve respondent with the post-reporting

and pre-assessment notices as required by law.

On the first issue, the CTA has ruled that CKCS, Inc. and CKCS are one and the same corporation because "[t]he contract between Texas Instruments

and Copper Kettle was signed by 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 Kettle Catering Services, Inc. and Copper Kettle Cafeteria Specialists are not distinct entities

and that the under-declared sales/revenues of Copper Kettle Catering Services, Inc. pertain to Copper Kettle Cafeteria Specialist are belied by the

evidence on record. In the Joint Stipulation of Facts submitted before the tax court, respondent [petitioner] admitted "that petitioner's [herein

respondent's] business name is Copper Kettle Cafeteria Specialist."

Also, the Certification of Club John Hay and Letter dated July 9, 1997 of Texas Instruments both addressed to respondent indicate that these companies

transacted with Copper Kettle Catering Services, Inc., owned and managed by JEANNE G. MENGUITO, NOT petitioner Dominador Menguito. The

alleged under-declared sales income subject of the present assessments were shown to have been earned by Copper Kettle Catering Services, Inc. in

its commercial transaction with Texas Instruments and Camp John Hay; NOT by petitioner's dealing with these companies. In fact, there is nothing on

record which shows that Texas Instruments and Camp John Hay conducted business relations with Copper Kettle Cafeteria Specialist, owned by herein

petitioner Dominador Menguito. In the absence, therefore, of clear and convincing evidence showing that Copper Kettle Cafeteria Specialist and Coppe

Kettle Catering Services, Inc. are one and the same, respondent can NOT validly impute alleged underdeclared sales income earned by Copper Kettle

Catering Services, Inc. as sales income of Copper Kettle Cafeteria Specialist.[15] (Emphasis supplied)

Respondent is adamant that the CA is correct. Many times in the past, the BIR had treated CKCS separately from CKCS, Inc.: from May 1994 to June

1995, the BIR sent audit teams to examine the books of account and other accounting records of CKCS, and based on said audits, respondent was held

liable for deficiency taxes, all of which he had paid.[16] Moreover, the certifications[17] issued by Club John Hay and Texas Instruments identify the

concessionaire operating therein as CKCS, Inc., owned and managed by his spouse Jeanne Menguito, and not CKCS.[18]

Petitioner impugns the findings of the CA, claiming that these are contradicted by evidence on record consisting of a reply to the September 2, 1997

assessment notice of BIR Baguio which Jeanne Menguito wrote on September 28, 1997, to wit:We are in receipt of the assessment notice you have sent us, dated September 2, 1997. Having taken hold of the same only now following our trave

overseas, we were not able to respond immediately and manifest our protest. Also, with the impending termination of our businesses at 19th Tee, Club

John Hay and at Texas Instruments, Loakan, Baguio City, we have already started the transfer of our records and books in Baguio City to Manila that we

will need more time to review and sort the records that may have to be presented relative to the assessment x x x.[19] (Emphasis supplied)

Petitioner insists that said reply confirms that the assessment notice is directed against the businesses which she and her husband, respondent herein

own and operate at Club John Hay and Texas Instruments, and establishes that she is protesting said notice not just for herself but also for respondent

[20]

Moreover, petitioner argues that if it were true that CKCS, Inc. and CKCS are separate and distinct entities, respondent could have easily produced the

articles of incorporation of CKCS, Inc.; instead, what respondent presented was merely a photocopy of the incorporation articles.[21] Worse, petitioner

adds, said document was not offered in evidence before the CTA, but was presented only before the CA.[22]



Petitioner further insists that CKCS, Inc. and CKCS are merely employing the fiction of their separate corporate existence to evade payment of proper

taxes; that the CTA saw through their ploy and rightly disregarded their corporate individuality, treating them instead as one taxable entity with the same

tax base and liability;[23] and that the CA should have sustained the CTA.[24]

In effect, petitioner would have the Court resolve a purely factual issue[25] of whether or not there is substantial evidence that CKCS, Inc. and CKCS are

one and the same taxable entity.

As a general rule, the Court does not venture into a trial of facts in proceedings under Rule 45 of the Rules of Courts, for its only function is to review

errors of law.[26] The Court declines to inquire into errors in the factual assessment of the CA, for the latter's findings are conclusive, especially when

these are synonymous to those of the CTA.[27] But when the CA contradicts the factual findings of the CTA, the Court deems it necessary to determine

whether the CA was justified in doing so, for one basic rule in taxation is that the factual findings of the CTA, when supported by substantial evidence,

will not be disturbed on appeal unless it is shown that the CTA committed gross error in its appreciation of facts.[28]

The Court finds that the CA gravely erred when it ignored the substantial evidence on record and reversed the CTA.

In a number of cases, the Court has shredded the veil of corporate identity and ruled that where a corporation is merely an adjunct, business conduit or

alter ego of another corporation or when they practice fraud on our internal revenue laws,[29] the fiction of their separate and distinct corporate identities

shall be disregarded, and both 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 for the accounts due from or payable to the other;[30] or when the properties or products of one are all sold to

the other, which in turn immediately sells them to the public,[31] as substantial evidence in support of the finding that the two are actually one juridica

taxable personality.

In the present case, overwhelming evidence supports the CTA in disregarding the separate identity of CKCS, Inc. from CKCS and in treating them as

one taxable entity.

First, in respondent's Petition for Review before the CTA, he expressly admitted that he "is engaged in restaurant and/or cafeteria business" and that

"[i]n 1991, 1992 and 1993, he also operated a branch at Club John Hay, Baguio Citywith a business name of Copper Kettle Cafeteria Specialist."[32]

Respondent repeated such admission in the Joint Stipulation.[33] And then in Exhibit "1"[34] for petitioner, a July 18, 1994 letter sent by Jeanne

Menguito to BIR, Baguio City, she stated thus:

"in connection with the investigation of Copper Kettle Cafeteria Specialist which is located at 19th Tee Club John Hay, Baguio City under letter of

authority nos. 0392897, 0392898, and 0392690 dated May 16, 1994, investigating my income, business, and withholding taxes for the years 1991, 1992

and 1993."[35] (Emphasis supplied)

Jeanne Menguito signed the letter as proprietor of Copper Kettle Cafeteria Specialist.[36]

Related to Exhibit "1" is petitioner's Exhibit "14," which is another letter dated September 28, 1997, in which Jeanne Menguito protested the Septembe

2, 1997 assessment notices directed at Copper Kettle Cafeteria Specialist and referred to the latter as "our business at 19th Tee Club John Hay and at

Texas Instruments."[37] Taken along with the Joint Stipulation, Exhibits "A" through "C" and the August 3, 1993 Certification of Camp John Hay, Exhibits

"1" and "14," confirm that respondent, together with his spouse Jeanne Menguito, own, operate and manage a branch of Copper Kettle Cafeteria

Specialist, also called Copper Kettle Catering Services at Camp John Hay.

Moreover, in Exhibits "A" to "A-1,"[38] Exhibits "B" to "B-1"[39] and Exhibits "C" to "C-1"[40] which are lists of concessionaires that operated in Club John

Hay in 1992, 1993 and 1991, respectively,[41] it appears that there is no outlet with the name "Copper Kettle Cafeteria Specialist" as claimed by

respondent. The name that appears in the lists is "19th TEE CAFETERIA (Copper Kettle, Inc.)." However, in the light of the express admission of

respondent that in 1991, 1992 and 1993, he operated a branch called Copper Kettle Cafeteria Specialist in Club John Hay, the entries in Exhibits "A"

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

contradicts this conclusion.

In addition, the August 9, 1993 Certification issued by Club John Hay that "COPPER KETTLE CATERING SERVICES owned and managed by MS.

JEANNE G. MENGUITO is a concessionaire in John Hay since July 1991 up to the present and is operating the outlet 19TH TEE CAFETERIA AND

THE TEE BAR"[42] convincingly establishes that respondent's branch which he refers to as Copper Kettle Cafeteria Specialist at Club John Hay also

appears in the latter's records as "Copper Kettle Catering Services" with an outlet called "19th Tee Cafeteria and The Tee Bar."

Second, in Exhibit "8"[43] and Exhibit "E,"[44] Texas Instruments identified the concessionaire operating its canteen as "Copper Kettle CateringServices, Inc."[45] and/or "COPPER KETTLE CAFETERIA SPECIALIST SVCS."[46] It being settled that respondent's "Copper Kettle Cafeteria

Specialist" is also known as "Copper Kettle Catering Services," and that respondent and Jeanne Menguito both own, manage and act as proprietors of

the business, Exhibit "8" and Exhibit "E" further establish that, through said business, respondent also had taxable transactions with Texas Instruments.

In view of the foregoing facts and circumstances, the Articles of Incorporation of CKCS, Inc. -- a certified true copy of which respondent attached only to

his Reply filed with the CA[47] -- cannot insulate it from scrutiny of its real identity in relation to CKCS. It is noted that said Articles of Incorporation of

CKCS, Inc. was issued in 1989, but documentary evidence indicate that after said date, CKCS, Inc. has also assumed the name CKCS, and vice-versa

The most concrete indication of this practice is the 1991 Quarterly Percentage Tax Returns covering the business name/trade "19th Tee Camp John

Hay." In said returns, the taxpayer is identified as "Copper Kettle Cafeteria Specialist"[48] or CKCS, not CKCS, Inc. Yet, in several documents already

cited, the purported owner of 19th Tee Bar at Club John Hay is CKCS, Inc.



All these pieces of evidence buttress the finding of the CTA that in 1991, 1992 and 1993, respondent, together with his spouse Jeanne Menguito, owned

and operated outlets in Club John Hay and Texas Instruments under the names Copper Kettle Cafeteria Specialist or CKCS and Copper Kettle Catering

Services or Copper Kettle Catering Services, Inc..

Turning now to the second issue.

In respondent's Petition for Review with the CTA, he questioned the validity of the Assessment Notices,[49] all dated September 2, 1997, issued by BIR

Baguio City against him on the following grounds:

The assessment notices, based on income and percentage tax returns filed for 1991, 1992 and 1993, were issued beyond the three-year prescriptive

period under Section 203 of the Tax Code;[50]

The assessment notices were addressed to Copper Kettle Specialist, Club John Hay, Baguio City, despite notice to petitioner that respondent's principa

place of business was at the CCP Complex, Pasay City.[51]

The assessment notices were issued in violation of the requirement of Revenue Regulations No. 12-85, dated November 27, 1985, that the taxpayer be

issued a post-reporting notice and pre-assessment notice before the preliminary findings of deficiency may ripen into a formal assessment;[52] and

The assessment notices did not give respondent a 15-day period to reply to the findings of deficiency.[53]

The Court notes that nowhere in his Petition for Review did respondent deny that he received the September 2, 1997 assessment notices. Instead,

during the trial, respondent's witness, Ma. Theresa Nalda (Nalda), testified that she informed the BIR, Baguio City "that there was no Notice or letter, tha

we did not receive, perhaps, because they were not addressed to Mr. Menguito's head office."[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 on fraud is 10 years, the CTA ruled that the assessment notices issued against respondent on September 2,

1997 were timely because petitioner discovered the falsity in respondent's tax returns for 1991, 1992 and 1993 only on February 19, 1997.[55]

Moreover, in accordance with Section 2 of Revenue Regulation No. 12-85, which requires that assessment notices be sent to the address indicated inthe taxpayer's return, unless the latter gives a notice of change of address, the assessment notices in the present case were sent by petitioner to Camp

John Hay, for this was the address respondent indicated in his tax returns.[56] As to whether said assessment notices were actually received, the CTA

correctly held that since respondent did not testify that he did not receive said notices, it can be presumed that the same were actually sent to and

received by the latter. The Court agrees with the CTA in considering as hearsay the testimony of Nalda that respondent did not receive the notices,

because Nalda was not competent to testify on the matter, as she was employed by respondent only in June 1998, whereas the assessment notices

were sent on September 2, 1997.[57]

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

BIR records show that on July 28, 1997, a letter was issued by BIR Baguio to Spouses Menguito, informing the latter of their supposed underdeclaration

of sales totaling P48,721,555.96 and giving them 5 days to communicate any objection to the results of the investigation (Exhibit 11, p. 83, BIR

Records). Records likewise reveal the issuance of a Preliminary Ten (10) Day Letter on August 11, 1997, informing Petitioner [respondent herein] tha

the sum of P34,193,041.55 is due from him as deficiency income and percentage tax (Exhibit 13, p. 173, BIR Records). Said letter gave the Petitioner

[respondent herein] a period of ten (10) days to submit his objection to the proposed assessment, either personally or in writing, together with any

evidence he may want to present.

x x x x

As to Petitioner's allegation that he was given only ten (10) days to reply to the findings of deficiency instead of fifteen (15) days granted to a taxpayer

under Revenue Regulations No. 12-85, this Court believes that when Respondent [petitioner herein] gave the Petitioner [respondent herein] on Octobe

10, 1997 an additional period of ten (10) days to present documentary evidence or a total of twenty (20) days, there was compliance with Revenue

Regulations No. 12-85 and the latter was amply given opportunity to present his side x x x.[58]

The CTA further held that respondent was estopped from raising procedural issues against the assessment notices, because these were not cited in the

September 28, 1997 letter-protest which his spouse Jeanne Menguito filed with petitioner.[59]

On appeal by respondent,[60] the CA resolved the issue, thus:

Moreover, if the taxpayer denies ever having received an assessment from the BIR, it is incumbent upon the latter to prove by competent evidence tha

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

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

[respondent herein]. Since respondent [petitioner herein] has not adduced sufficient evidence that petitioner [respondent herein] had in fact received thepre-assessment notice and post-reporting notice required by law, it cannot be assumed that petitioner [respondent herein] had been served said notices

[61]

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

The CA is gravely mistaken.

In their Petition for Review with the CTA, respondent expressly stated that "[s]ometime in September 1997, petitioner [respondent herein] received

various assessment notices, all dated 02 September 1997, issued by BIR-Baguio for alleged deficiency income and percentage taxes for taxable years

ending 31 December 1991, 1992 and 1993 x x x."[62] In their September 28, 1997 protest to the September 2, 1997 assessment notices, respondent,

through his spouses Jeanne Menguito, acknowledged that "[they] are in receipt of the assessment notice you have sent us, dated September 2, 1997 x

x x."[63]



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

Nalda.

As to the address indicated on the assessment notices, respondent cannot question the same for it is the said address which appears in its percentage

tax returns.[64] While respondent claims that he had earlier notified petitioner of a change in his business address, no evidence of such written notice

was presented. Under Section 11 of Revenue Regulation No. 12-85, respondent's failure to give written notice of change of address bound him to

whatever communications were sent to the address appearing in the tax returns for the period involved in the investigation.[65]

Thus, what remain in question now are: whether petitioner issued and mailed a post-reporting notice and a pre-assessment notice; and whether

respondent actually received them.

There is no doubt that petitioner failed to prove that it served on respondent a post-reporting notice and a pre-assessment notice. Exhibit "11"[66] of

petitioner is a mere photocopy of a July 28, 1997 letter it sent to respondent, informing him of the initial outcome of the investigation into his sales, and

the release of a preliminary assessment upon completion of the investigation, with notice for the latter to file any objection within five days from receipt of

the letter. "Exhibit "13"[67] of petitioner is also a mere photocopy of an August 11, 1997 Preliminary Ten (10) Day Letter to respondent, informing him

that he had been found to be liable for deficiency income and percentage tax and inviting him to submit a written objection to the proposed assessmen

within 10 days from receipt of notice. But nowhere on the face of said documents can be found evidence that these were sent to and received by

respondent. Nor is there separate evidence, such as a registry receipt of the notices or a certification from the Bureau of Posts, that petitioner actually

mailed said notices.

However, while the lack of a post-reporting notice and pre-assessment notice is a deviation from the requirements under Section 1[68] and Section 2[69

of Revenue Regulation No. 12-85, the same cannot detract from the fact that formal assessments were issued to and actually received by respondents

in accordance with Section 228 of the National Internal Revenue Code which was in effect at the time of assessment.

It should be emphasized that the stringent requirement that an assessment notice be satisfactorily proven to have been issued and released or, if receipt

thereof is denied, that said assessment notice have been served on the taxpayer,[70] applies only to formal assessments prescribed under Section 228of the National Internal Revenue Code, but not to post-reporting notices or pre-assessment notices. The issuance of a valid formal assessment is a

substantive prerequisite to tax collection,[71] for it contains not only a computation of tax liabilities but also a demand for payment within a prescribed

period, thereby signaling the time when penalties and interests begin to accrue against the taxpayer and enabling the latter to determine his remedies

therefor. Due process requires that it must be served on and received by the taxpayer.[72]

A post-reporting notice and pre-assessment notice do not bear the gravity of a formal assessment notice. The post-reporting notice and pre-assessmen

notice merely hint at the initial findings of the BIR against a taxpayer and invites the latter to an "informal" conference or clarificatory meeting. Neithe

notice contains a declaration of the tax liability of the taxpayer or a demand for payment thereof. Hence, the lack of such notices inflicts no prejudice on

the taxpayer for as long as the latter is properly served a formal assessment notice. In the case of respondent, a formal assessment notice was received

by him as acknowledged in his Petition for Review and Joint Stipulation; and, on the basis thereof, he filed a protest with the BIR, Baguio City and

eventually a petition with the CTA.

WHEREFORE, the petition is GRANTED. The March 31, 2005 Decision of the Court of Appeals is REVERSED and SET ASIDE and the April 2, 2002

Decision and October 10, 2002 Resolution of the Court of Tax Appeals are REINSTATED.

SO ORDERED.

COMMISSIONER OF INTERNAL REVENUE,

Petitioner,

- versus -

METRO STAR SUPERAMA, INC.,

Respondent.

G.R. No. 185371

Present:

CARPIO, J., Chairperson,

NACHURA,

PERALTA,

ABAD, and

MENDOZA, JJ.

Promulgated:





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 on May 15, 2003

giving the latter last opportunity to settle its deficiency tax liabilities within ten (10) [days] from receipt thereof, otherwise respondent BIR shall be

constrained to serve and execute the Warrants of 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 May 12, 2003

demanding payment of deficiency value-added tax and withholding tax payment in the amount of P292,874.16.

On July 30, 2004, petitioner filed with the Office of respondent Commissioner a Motion for Reconsideration pursuant to Section 3.1.5 of 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’s Motion for Reconsideration. Petitioner, through counsel received said Decision 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

review[4] with the CTA. The parties then stipulated on the following issues to be decided by the tax court:

1. Whether the respondent complied with the due process requirement as provided under the National Internal Revenue Code and Revenue Regulations

No. 12-99 with regard to the issuance of a deficiency tax assessment;

1.1 Whether petitioner is liable for the respective amounts of P291,069.09 and P1,805.07 as deficiency VAT and withholding tax for the year 1999;

1.2. Whether the assessment has become final and executory 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 the respondent are void for failure to state the law and/or facts upon which they are based.

2.2 Whether petitioner was informed of the law and facts on which the assessment is made in compliance with Section 228 of the National Internal

Revenue Code;

3. Whether or not petitioner, as owner/operator of a movie/cinema house, is subject to VAT on sales of services under Section 108(A) of the Nationa

Internal Revenue Code;

4. Whether or not the assessment is based on the best evidence obtainable pursuant to Section 6(b) of the National Internal Revenue 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 hereby GRANTED. Accordingly, the assailed Decision dated February 8, 2005 is hereby

REVERSED and SET ASIDE and respondent is ORDERED 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 addressee in the

ordinary course of mail, a direct denial of the receipt of mail shifts the burden upon the party favored by the presumption to prove that the mailed letter

was indeed received by the addressee.”[5] It also found that there was no clear showing that Metro Star actually received the alleged PAN, dated

January 16, 2002. It, accordingly, ruled that the Formal Letter of Demand dated April 3, 2002, as well as the Warrant of Distraint and/or Levy dated May

12, 2003 were void, as Metro Star was denied due process.[6]

The CIR sought reconsideration[7] of the decision of the CTA-Second Division, but the motion was denied in the latter’s July 24, 2007 Resolution

[8]

Aggrieved, the CIR filed a petition for review[9] with the CTA-En Banc, but the petition was dismissed after a determination that no new matters

were raised. The CTA-En Banc disposed:



WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE and DISMISSED for lack of merit. Accordingly, the March 21, 2007

Decision and July 27, 2007 Resolution of the CTA Second 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 reconsideration[10] 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 January 16, 2002, and that due process was served nonetheless because the latter received

the Final Assessment Notice (FAN), comes now before this Court with the sole issue of whether or not Metro Star was denied due process.

The general rule is that the Court will not lightly set aside the conclusions reached by the CTA which, by the very nature of its functions, has accordingly

developed an exclusive expertise on the resolution unless there has been an abuse or improvident exercise of authority.[12] In Barcelon, Roxas

Securities, Inc. (now known as UBP Securities, Inc.) v. Commissioner of Internal Revenue,[13] the Court wrote:

Jurisprudence has consistently shown that this Court accords the findings of fact by the CTA with the highest respect. In Sea-Land Service Inc. v. Cour

of Appeals [G.R. No. 122605, 30 April 2001, 357 SCRA 441, 445-446], this Court recognizes that the Court of Tax Appeals, 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 wil

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 no

supported 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 and convincing

proof to the contrary, this Court must presume that the CTA 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 denies ever having received an assessment from the BIR, it is incumbent upon the latterto prove by competent evidence that such notice was indeed received by the addressee. The onus probandi was shifted to respondent to prove by

contrary evidence that the Petitioner received the assessment in the due course of mail. The Supreme Court has consistently held that while a mailed

letter is deemed received by the addressee in the course of mail, this is merely a disputable presumption subject to controversion and a direct denial

thereof shifts the burden to the party favored by the presumption to prove that the mailed letter was indeed received by the addressee (Republic vs.

Court of Appeals, 149 SCRA 351). Thus as held by the Supreme Court in Gonzalo P. Nava vs. Commissioner of Internal Revenue, 13 SCRA 104

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 was mailed. Once

these facts are proved, the presumption is that the letter was received by the addressee as soon as it could have been transmitted to him in the ordinary

course of the mail. But if one of the said 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 registry receipt issued by the Bureau of Posts or the Registry return card which would have

been signed by the Petitioner or its authorized representative. And if said documents cannot be located, Respondent at the very least, should have

submitted to the Court a certification issued by the Bureau of Posts and any other pertinent document which is executed with the intervention of the

Bureau of Posts. This Court does not put much credence to the self serving documentations made by the BIR personnel especially if they are

unsupported by substantial evidence 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. Mere notations 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, without adequate 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 the said period has already prescribed. (Industrial Textile Manufacturing Co. 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 its duty and present any evidence to show that Metro Star indeed received the PAN

dated January 16, 2002. It could have simply presented the registry receipt or the certification from the postmaster that it mailed the PAN, but failed.

Neither did it offer any explanation on why it failed to comply with the requirement of service of the PAN. It merely accepted the letter of Metro Star’s

chairman dated April 29, 2002, that stated that he had received the FAN dated April 3, 2002, but not the PAN; that he was willing to pay the tax as

computed by the CIR; and that he just wanted to clarify some matters with the hope of lessening its tax liability.

This now leads to the question: Is the failure to strictly comply with notice requirements prescribed under Section 228 of the National Internal Revenue

Code of 1997 and Revenue Regulations (R.R.) No. 12-99 tantamount to a denial of due process? Specifically, are the requirements of due process

satisfied if only the FAN stating the computation 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 228 of the Tax Code which reads:

SEC. 228. Protesting of Assessment. - When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he

shall first notify the taxpayer of his findings: provided, however, that a preassessment notice shall not be required in the following cases:

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

(b) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or

(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried

over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding

taxable year; or

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

(e) When the article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare

parts, has been sold, traded or transferred to non-exempt persons.

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

Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to

respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings.

Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the

assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, al

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

If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer

adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the

lapse of one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable. (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 the sending o

a PAN. He must be informed of the facts and the law upon which the assessment is made. The law imposes a substantive, not merely a formal,

requirement. To proceed heedlessly with tax collection without first establishing a valid assessment is evidently violative of the cardinal principle in

administrative investigations - that taxpayers should be able to present their case and adduce supporting evidence.[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 Deficiency Tax Assessment. —

3.1 Mode of procedures in the issuance of a deficiency tax assessment:

3.1.1 Notice for informal conference. — The Revenue Officer who audited the taxpayer's records shall, among others, state in his report whether or not

the taxpayer agrees with his findings that the taxpayer is liable for deficiency tax or taxes. If the taxpayer is not amenable, based on the said Officer's

submitted report of investigation, the taxpayer shall be informed, in writing, by the Revenue District Office or by the Special Investigation Division, as the

case may be (in the case Revenue Regional 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 revenue taxes, for the purpose of "Informal Conference," in order to afford 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 Investigation Division of the

Revenue Regional Office, or the Chief of Division in the National Office, as the case may be, shall endorse the case with the least possible delay to the

Assessment Division of the Revenue Regional Office or to the Commissioner or his duly authorized representative, as the case may be, for appropriate

review and issuance of a deficiency tax assessment, if warranted.

3.1.2 Preliminary Assessment Notice (PAN). — If after review and evaluation by the Assessment Division or by the Commissioner or his duly authorized

representative, as the case may be, it is determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes, the said

Office shall issue to the taxpayer, at least by registered mail, a Preliminary Assessment Notice (PAN) for the proposed assessment, showing in detail

the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is 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, a formal letter ofdemand and assessment notice shall be caused to be issued by the said Office, calling for payment of the taxpayer's deficiency tax liability, inclusive o

the applicable penalties.

3.1.3 Exceptions to Prior Notice of the Assessment. — The notice for informal conference and the preliminary assessment notice shall not be required in

any of the following cases, in which case, issuance of the formal assessment notice for the payment of the taxpayer's deficiency tax liability shall be

sufficient:

(i) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax appearing on the face of the tax return filed by

the taxpayer; or

(ii) When a discrepancy has been determined between the 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 a taxable period was determined to have carried

over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding

taxable year; or

(iv) When the excise tax due on excisable articles has not been paid; or

(v) When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare

parts, has been sold, traded or transferred to non-exempt persons.

3.1.4 Formal Letter of Demand and Assessment Notice. — The formal letter of demand and assessment notice shall be issued by the Commissioner o

his duly authorized representative. The letter of demand calling for payment of the taxpayer's deficiency tax or taxes shall state the facts, the law, rules

and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and assessment notice shall be void (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 authorized representative shall acknowledge receipt thereof in the duplicate copy of the letter of

demand, showing the following: (a) His name; (b) signature; (c) designation and authority to act for and in behalf of the taxpayer, if acknowledged

received by a person other than the taxpayer 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 processrequirement in the issuance of a deficiency tax assessment,” the absence of which renders nugatory any assessment made by the tax authorities. The

use of the word “shall” in subsection 3.1.2 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 the requirements 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 as

required by Section 228 of R.A. No. 8424, the assessment made by the CIR is void.

The case of CIR v. Menguito[16] cited by the CIR in support of its argument that only the non-service of the FAN is fatal to the validity of an assessment

cannot apply to this case because the issue therein was the non-compliance with the provisions of R. R. No. 12-85 which sought to interpret Section 229

of the old tax law. RA No. 8424 has already amended the provision of Section 229 on protesting an assessment. 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 be sent to the

respondent in the form prescribed, and that no consequence would ensue for failure to comply with that form.

The Court need not belabor to discuss the matter of Metro Star’s failure 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 its inherent right to prosecute perceived transgressors of the law on one side, and the constitutional

rights of a citizen to due process of law and the equal protection of the laws on the other, the scales must tilt in favor of the individual, for a citizen’s righ

is amply protected by the Bill of Rights under the Constitution. Thus, while “taxes are the lifeblood 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 collected without unnecessary hindrance. On the other hand, such collection should be

made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently

conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be

achieved.

xxx xxx xxx

It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for the lack of the motive power to activateand operate it. Hence, despite the natural reluctance to 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 in the form of tangible and intangible

benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation

and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and

in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the

awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate x x x that the law has not been observed

[21] (Emphasis supplied).

WHEREFORE, the petition is DENIED.

SO ORDERED.



G.R. No. L-36181 October 23, 1982

MERALCO SECURITIES CORPORATION (now FIRST PHILIPPINE HOLDINGS CORPORATION), petitioner,

vs.

HON. VICTORINO SAVELLANO and ASUNCION BARON VDA. DE MANIAGO, et al., as heirs of the late Juan G. Maniago, respondents.

G.R. No. L-36748 October 23, 1982

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

HON. VICTORINO SAVELLANO and ASUNCION BARON VDA. DE MANIAGO, et al., as heirs of the late Juan G. Maniago, respondents.

G.R. No. L-36181

San Juan, Africa, Gonzales & San Agustin for petitioner.

Ramon A. Gonzales for respondents.

TEEHANKEE, J.:

These are original actions for certiorari to set aside and annul the writ of mandamus issued by Judge Victorino A. Savellano of the Court of First Instance

of Manila in Civil Case No. 80830 ordering petitioner Meralco Securities Corporation (now First Philippine Holdings Corporation) to pay, and petitioner

Commissioner of Internal Revenue to collect from the former, the amount of P51,840,612.00, by way of alleged deficiency corporate income tax, plus

interests and surcharges due thereon and to pay private respondents 25% of the total amount collectible as informer's reward.

On May 22, 1967, the late Juan G. Maniago (substituted in these proceedings by his wife and children) submitted to petitioner Commissioner of Interna

Revenue confidential denunciation against the Meralco Securities Corporation for tax evasion for having paid income tax only on 25 % of the dividends i

received from the Manila Electric Co. for the years 1962-1966, thereby allegedly shortchanging the government of income tax due from 75% of the said

dividends.

Petitioner Commissioner of Internal Revenue caused the investigation of the denunciation after which he found and held that no deficiency corporate

income tax was due from the Meralco Securities Corporation on the dividends it received from the Manila Electric Co., since under the law then

prevailing (section 24[a] of the National Internal Revenue Code) "in the case of dividends received by a domestic or foreign resident corporation liable to

(corporate income) tax under this Chapter . . . .only twenty-five per centum thereof shall be returnable for the purposes of the tax imposed under this

section." The Commissioner accordingly rejected Maniago's contention that the Meralco from whom the dividends were received is "not a domestic

corporation liable to tax under this Chapter." In a letter dated April 5, 1968, the Commissioner informed Maniago of his findings and ruling and therefore

denied Maniago's claim for informer's reward on a non-existent deficiency. This action of the Commissioner was sustained by the Secretary of Finance

in a 4th Indorsement dated May 11, 1971.

On August 28, 1970, Maniago filed a petition for mandamus, and subsequently an amended petition for mandamus, in the Court of First Instance of

Manila, docketed therein as Civil Case No. 80830, against the Commissioner of Internal Revenue and the Meralco Securities Corporation to compel the

Commissioner to impose the alleged deficiency tax assessment on the Meralco Securities Corporation and to award to him the corresponding informer's

reward under the provisions of R.A. 2338.

On October 28, 1978, the Commissioner filed a motion to dismiss, arguing that since in matters of issuance and non-issuance of assessments, he is

clothed under the National Internal Revenue Code and existing rules and regulations with discretionary power in evaluating the facts of a case and since

mandamus win not lie to compel the performance of a discretionary power, he cannot be compelled to impose the alleged tax deficiency assessment

against the Meralco Securities Corporation. He further argued that mandamus may not lie against him for that would be tantamount to a usurpation of

executive powers, since the Office of the Commissioner of Internal Revenue is undeniably under the control of the executive department.

On the other hand, the Meralco Securities Corporation filed its answer, dated January 15, 1971, interposing as special and/or affirmative defenses that

the petition states no cause of action, that the action is premature, that mandamus win not lie to compel the Commissioner of Internal Revenue to make

an assessment and/or effect the collection of taxes upon a taxpayer, that since no taxes have actually been recovered and/or collected, Maniago has noright to recover the reward prayed for, that the action of petitioner had already prescribed and that respondent court has no jurisdiction over the subjec

matter as set forth in the petition, the same being cognizable only by the Court of Tax Appeals.

On January 10, 1973, the respondent judge rendered a decision granting the writ prayed for and ordering the Commissioner of Internal Revenue to

assess and collect from the Meralco Securities Corporation the sum of P51,840,612.00 as deficiency corporate income tax for the period 1962 to 1969

plus interests and surcharges due thereon and to pay 25% thereof to Maniago as informer's reward.

All parties filed motions for reconsideration of the decision but the same were denied by respondent judge in his order dated April 6, 1973, with

respondent judge denying respondents' claim for attorneys fees and for execution of the decision pending appeal.

Hence, the Commissioner filed a separate petition with this Court, docketed as G.R. No. L-36748 praying that the decision of respondent judge dated

January 10, 1973 and his order dated April 6, 1973 be reconsidered for respondent judge has no jurisdiction over the subject matter of the case and that

the issuance or non-issuance of a deficiency assessment is a prerogative of the Commissioner of Internal Revenue not reviewable by mandamus.



The Meralco Securities Corporation (now First Philippine Holdings Corporation) likewise appealed the same decision of respondent judge in G.R. No. L-

36181 and in the Court's resolution dated June 13, 1973, the two cases were ordered consolidated.

We grant the petitions.

Respondent judge has no jurisdiction to take cognizance of the case because the subject matter thereof clearly falls within the scope of cases now

exclusively within the jurisdiction of the Court of Tax Appeals. Section 7 of Republic Act No. 1125, enacted June 16, 1954, granted to the Court of Tax

Appeals exclusive appellate jurisdiction to review by appeal, among others, decisions of the Commissioner of Internal Revenue in cases involving

disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the

National Internal Revenue Code or other law or part of law administered by the Bureau of Internal Revenue. The law transferred to the Court of Tax

Appeals jurisdiction over all cases involving said assessments previously cognizable by courts of first instance, and even those already pending in said

courts. 1 The question of whether or not to impose a deficiency tax assessment on Meralco Securities Corporation undoubtedly comes within the

purview of the words "disputed assessments" or of "other matters arising under the National Internal Revenue Code . . . .In the case of Blaquera vs.

Rodriguez, et al, 2 this Court ruled that "the determination of the correctness or incorrectness of a tax assessment to which the taxpayer is not

agreeable, falls within the jurisdiction of the Court of Tax Appeals and not of the Court of First Instance, for under the provisions of Section 7 of Republic

Act No. 1125, the Court of Tax Appeals has exclusive appellate jurisdiction to review, on appeal, any decision of the Collector of Internal Revenue in

cases involving disputed assessments and other matters arising under the National Internal Revenue Code or other law or part of law administered by

the Bureau of Internal Revenue."

Thus, even assuming arguendo that the right granted the taxpayers affected to question and appeal disputed assessments, under section 7 of Republic

Act No. 1125, may be availed of by strangers or informers like the late Maniago, the most that he could have done was to appeal to the Court of Tax

Appeals the ruling of petitioner Commissioner of Internal Revenue within thirty (30) days from receipt thereof pursuant to section 11 of Republic Act No

1125. 3 He failed to take such an appeal to the tax court. The ruling is clearly final and no longer subject to review by the courts. 4

It is furthermore a well-recognized rule that mandamus only lies to enforce the performance of a ministerial act or duty 5 and not to control theperformance of a discretionary power. 6 Purely administrative and discretionary functions may not be interfered with by the courts. 7 Discretion, as thus

intended, means the power or right conferred upon the office by law of acting officially under certain circumstances according to the dictates of his own

judgment and conscience and not controlled by the judgment or conscience of others. 8 mandamus may not be resorted to so as to interfere with the

manner in which the discretion shall be exercised or to influence or coerce a particular determination. 9

In an analogous case, where a petitioner sought to compel the Rehabilitation Finance Corporation to accept payment of the balance of his indebtedness

with his backpay certificates, the Court ruled that "mandamus does not compel the Rehabilitation Finance Corporation to accept backpay certificates in

payment of outstanding loans. Although there is no provision expressly authorizing such acceptance, nor is there one prohibiting it, yet the duty imposed

by the Backpay Law upon said corporation as to the acceptance or discount of backpay certificates is neither clear nor ministerial, but discretionary

merely, and such special civil action does not issue to control the exercise of discretion of a public officer." 10 Likewise, we have held that courts have

no power to order the Commissioner of Customs to confiscate goods imported in violation of the Import Control Law, R.A. 426, as said forfeiture is

subject to the discretion of the said official, 11 nor may courts control the determination of whether or not an applicant for a visa has a non-immigran

status or whether his entry into this country would be contrary to public safety for it is not a simple ministerial function but an exercise of discretion. 12

Moreover, since the office of the Commissioner of Internal Revenue is charged with the administration of revenue laws, which is the primary

responsibility of the executive branch of the government, mandamus may not he against the Commissioner to compel him to impose a tax assessmen

not found by him to be due or proper for that would be tantamount to a usurpation of executive functions. As we held in the case of Commissioner of

Immigration vs. Arca 13 anent this principle, "the administration of immigration laws is the primary responsibility of the executive branch of the

government. Extensions of stay of aliens are discretionary on the part of immigration authorities, and neither a petition for mandamus nor one for

certiorari can compel the Commissioner of Immigration to extend the stay of an alien whose period to stay has expired.

Such discretionary power vested in the proper executive official, in the absence of arbitrariness or grave abuse so as to go beyond the statutory

authority, is not subject to the contrary judgment or control of others. " "Discretion," when applied to public functionaries, means a power or right

conferred upon them by law of acting officially, under certain circumstances, uncontrolled by the judgment or consciences of others. A purely ministeria

act or duty in contradiction to a discretional act is one which an officer or tribunal performs in a given state of facts, in a prescribed manner, in obedience

to the mandate of a legal authority, without regard to or the exercise of his own judgment upon the propriety or impropriety of the act done. If the law

imposes a duty upon a public officer and gives him the right to decide how or when the duty shall be performed, such duty is discretionary and not

ministerial. The duty is ministerial only when the discharge of the same requires neither the exercise of official discretion or judgment." 14

Thus, after the Commissioner who is specifically charged by law with the task of enforcing and implementing the tax laws and the collection of taxes had

after a mature and thorough study rendered his decision or ruling that no tax is due or collectible, and his decision is sustained by the Secretary, now

Minister of Finance (whose act is that of the President unless reprobated), such decision or ruling is a valid exercise of discretion in the performance o

official duty and cannot be controlled much less reversed by mandamus. A contrary view, whereby any stranger or informer would be allowed to usurp

and control the official functions of the Commissioner of Internal Revenue would create disorder and confusion, if not chaos and total disruption of the

operations of the government.

Considering then that respondent judge may not order by mandamus the Commissioner to issue the assessment against Meralco Securities Corporation

when no such assessment has been found to be due, no deficiency taxes may therefore be assessed and collected against the said corporation. Since

no taxes are to be collected, no informer's reward is due to private respondents as the informer's heirs. Informer's reward is contingent upon the

payment and collection of unpaid or deficiency taxes. An informer is entitled by way of reward only to a percentage of the taxes actually assessed and

collected. Since no assessment, much less any collection, has been made in the instant case, respondent judge's writ for the Commissioner to pay

respondents 25% informer's reward is gross error and without factual nor legal basis.



WHEREFORE, the petitions are hereby granted and the questioned decision of respondent judge dated January 10, 1973 and order dated April 6, 1973

are hereby reversed and set aside. With costs against private respondents.

G.R. No. L-19470 January 30, 1965

GONZALO P. NAVA, petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE, respondent.

E. P. Villar and A. Tordesillas for petitioner.

Office of the Solicitor General for respondent.

REYES, J.B.L., J.:

Gonzalo P. Nava prosecuted this appeal against a decision dated September 25, 1961 by the Court of Tax Appeals (C.T.A. Case No. 568) holding him

liable in the amount of P3,052.00 as deficiency income tax for the year 1950 as well as from its order dated February 10, 1962 denying a motion to

reconsider said decision.

The undisputed facts are: that on May 15, 1951, Nava filed his income tax return for the year 1950, and, on the same date, he was assessed by

respondent Commissioner (formerly Collector) of Internal Revenue in the sum of P4,952.00, based solely on said return. Nava paid one-half of the tax

due, leaving a balance of P2,491.00. Subsequently, Nava offered his backpay certificate to pay said balance, but respondent refused the offer. On July

28, 1953, he requested the respondent to hold in abeyance the collection of said balance until the question of whether or not he was entitled to pay the

same out of his backpay shall have been decided, but this was also rejected by the latter in a reply letter dated January 5, 1954. This rejection was

followed by two more letters or notices demanding payment of the balance thereof, the last of which was dated February 22, 1955.

On March 30, 1955, after investigation of petitioner's 1950 income tax return, respondent Collector issued a deficiency income tax assessment notice

(Exhibit "4") requiring petitioner to pay not later than April 30, 1955 the sum of P9,124.50, that included the balance of P2,491.00, still unpaid under the

original assessment, plus a 50% surcharge. Several notices of this revised assessment are alleged to have been issued to the taxpayer, but Nava

claims to have learned of it for the first time on December 19, 1956, more than five years since the original tax return was filed, and testified to that effect

in the court below. In a letter of January 10, 1957, Nava called attention to the fact that more than six years had elapsed, protested the assessment, and

contended that it was a closed issue. The Director insisted upon his demand that the new assessment be paid (registered letter of Mach 25, 1957

Exhibit "5"). Nava asked for reconsideration, and on June 16, 1958 was informed that reinvestigation would be granted provided the taxpayer waived the

statute of limitations (Exh. "7"), a condition that was rejected (Exh. "8"). Thereupon, the reconsideration of the assessment was denied by the Collector's

letter of July 22, 1958 (Exh. "9"), and on August 8, 1958 Nava filed a petition for review with the Court of Tax Appeals. The latter reduced the deficiency

to P3,052.00, and cancelled the 50% surcharge. The petitioner appealed to this Court.

The principal issue in this appeal is whether the enforcement of the tax assessment has prescribed. The Court of Tax Appeals ruled that it had not

stating that:

The duplicate copy of the income tax assessment notice indicates that it was issued on March 30, 1955 (Exh. 4, page 7, B.I.R. records). "Call-up" letters

were sent to petitioner reminding him of the obligation. These call-up letters or notices were recorded in Exh. C for petitioner (Exh. 3 for respondent

page 6, B.I.R. records), to wit:

1st notice 4/10/56

2nd notice 7/3/56

Final 9/25/56

In addition to the written notice sent to petitioner, he was also personally interviewed. A report on these written notices and personal interviews appears

in the memorandum of an agent of the Bureau of Internal Revenue dated December 10, 1956, the pertinent portion of which reads as follows.

"Several call-up letters and repeated demands have been made to subject taxpayers but in spite of the considerable length of time that has elapsed the

above accounts still remain unsettled. The warrant assemblies of the above-stated tax cases were assigned to Agent A. H. Aguilar and an interview with

Mr. G. P. Nava revealed that the latter refused to pay alleging that these cases come within the purview of the Avelino case, hence, the

B.I.R. has no more right to collect from him." (Exh. D, page 8, B.I.R. records).

Petitioner's claim that he came to know of the assessment only on or about December 19, 1956 can not be given much credence. We are inclined to

believe that the assessment notice dated March 30, 1955 and the several call-up letters sent to him were received by him in due course of mail but that

he ignored them because of his belief that the right of the Government to collect the tax had prescribed in view of the decision in the Avelino case. This

conclusion finds support in a note sent or delivered by petitioner to an employee of the Bureau who interviewed him, wherein he stated:

"This is to certify that I have received today, second final notice from the Bureau of Internal Revenue delivered by Mrs. Canlas. My reply to your said

final notice, as per your request, will be sent to you on or before January 3, 1957, in view of the fact that I may not be able to contact right away my

Accountant." (Exh. E, page 9, B.I.R. records; Emphasis ours.)

The fact that petitioner admitted receipt of the "second final notice" without protest is an indication that he received the previous notices

Assuming that petitioner received the income tax assessment notice dated March 30, 1955 in due course of mail, that is, not later than April 10, 1955

the assessment was made within the five-year period since he filed his income tax return on May 15, 1951, even granting that the ten-year period



applicable to fraud cases does not apply to this case. (The assessment includes the fraud penalty.) Since the deficiency income tax was assessed on or

about April 10, 1955, the Government is authorized to collect the same by distraint or levy or by judicial action within five years from that date, or not

later than April 10, 1960. Judicial action was instituted in the Court of First Instance of Manila in Civil Case No. 32796 for collection of said amount

followed by the institution of the instant appeal in this Court by petitioner himself on August 8, 1958, both within the five-year period. Therefore, we are of

the opinion that the right of the Government to assess and collect said deficiency income tax has not prescribed." (Annex "O", petition, pp. 134-137,

records).

It is to be noted that in its decision the Court of Tax Appeals relied mainly on the duplicate copy of the deficiency income tax notice found in the Bureau

of Internal Revenue file of petitioner Nava (Exhibit "4", page 7, B.I.R. records). On the corresponding blank space for the date of issue of said duplicate

copy was typed "3/30/55". Petitioner Nava denied having received the original copy of said notice. The Revenue Commissioner, on the other hand,

presented a witness (Mr. Pablo Sangil, an employee [clerk] of the B.I.R.) who attempted to establish that the original copy thereof was actually issued or

sent on March 30, 1955. This witness, however, disclaimed having personal knowledge of its issuance or release on said date either by mail or persona

delivery because, according to him, he was assigned in the income tax section of the Bureau of Internal Revenue in October, 1956 only. Sangil also

declared that there is no notation whatsover in said file copy (Exhibit "4"), nor even a slip of paper attached to the records, to show that the original copy

of said exhibit was ever actually issued or sent to the taxpayer. He even admitted that he had no hand in the preparation or sending of written notices or

demand letters of the Bureau of Internal Revenue to the taxpayers, his duties being merely to keep the dockets of taxpayers pertaining to income tax, to

post and transmit papers to the other branches of the Bureau for action, and to keep letters of taxpayers, memorandum and other official matters.

Respondent presented another witness, Mr. Eliseo B. Fernandez, whose duties, as record clerk of the Records Control Section of the Bureau of Interna

Revenue since 1957 (already past the limitation period of this case), are to send mail and to keep a record book of letters which are mailed to the

taxpayers. Insofar as the testimony of this witness is concerned, he only declared as to the fact that there appears in his record book a note (Exhibit

"10") that a letter dated March 15, 1957 was mailed by special delivery with return card to Gonzalo P. Nava. He admitted, however, that he was not the

one who prepared such entry in the record book. What was the nature of the letter does not appear; at any rate, it was mailed beyond the 5-year

limitation period.

The lower court also relied on the supposed notices noted in ink (followed by an illegible initial) in Exhibit "3" for respondent (page 6, B.I.R. records), the

first of which was purportedly sent on April 10, 1956, the second on July 3, 1956, and the final one on August 25, 1956, as well as on the supposed "callup" or demand letters referred to in a memorandum of an agent (Mrs. Canlas) of the Bureau of Internal Revenue. (Exhibit "D", page 8, B.I.R. records).

No witness for the respondent testified to the issuance or sending of any of these supposed written demand letters or notices, nor was there any

duplicate or even a simple copy thereof found in petitioner Nava's Bureau of Internal Revenue file. Although witness Sangil testified as to the meaning of

the dates noted in Exhibit "3", his testimony cannot be given much credence because those supposed notices were sent on or before August 25, 1956 a

the latest, and, as hereinabove pointed out, the witness was assigned in the income tax section of the Bureau of Internal Revenue since October, 1956

only.

Thus, contrary to the finding of the Court of Tax Appeals, respondent utterly failed to prove by substantial evidence that the assessment notice dated

March 30, 1955 and the other supposed written demand letters or notices subsequent thereto were in fact issued or sent to taxpayer Nava. The

presumption that a letter duly directed and mailed was received in the regular course of mail (Sec. 5 [v], Rule 131, revised Rules of Court) cannot be

applied to the case at bar.

The facts to be proved to raise this presumption are (a) that the letter was properly addressed with postage prepaid, and (b) that it was mailed. Once

these facts are proved, the presumption is that the letter was received by the addressee as soon as it could have been transmitted to him in the ordinary

course of the mail. But if one of the said facts fails to appear, the presumption does not lie." (VI, Moran, Comments on the Rules of Court, 1963 ed., 56-

57; citing Enriquez vs. Sun Life Assurance of Canada, 41 Phil. 269) (Emphasis supplied).

Since none of these requirements have been shown, there has been no valid and effective issuance or release of said deficiency income tax

assessment notice dated March 30, 1955 and of the other demand letters or notices subsequent thereto, the latest of which was purportedly sent on

August 25, 1956, and these dates cannot be reckoned with in computing the period of prescription within which a court action to collect the same may be

brought.

The fact that in Exhibit "E" Nava acknowledged receipt of the second final notice personally delivered to him is no proof that he received the first notice

by mail. There is a difference between receiving a second final notice and receiving a final notice for the second time.

It being undisputed that an original assessment of Nava's 1950 income tax return was made on May 15, 1951, and no valid and effective notice of the

re-assessment having been made against the petitioner after that date (May 15, 1951), it is evident that the period under Section 331 of the Tax Code

within which to make a re-assessment expired on May 15, 1956. Since the notice of said deficiency income tax was effectively made on December 19

1956 at the earliest, the judicial action to collect any deficiency tax on Nava's 1950 income tax return has already prescribed under Section 332 (c) of theTax Code, it having been found by the Tax Appeals court that said return was not false or fraudulent.

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. Mere notations 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, without adequate protection or defense.

Having reached the conclusion that the action to collect said deficiency income tax has already prescribed, it is unnecessary to discuss the other issues

raised by petitioner Nava in the instant appeal.1äwphï1.ñët

WHEREFORE, the decision of the Court of Tax Appeals under review is reversed, without costs.



BARCELON, ROXAS SECURITIES, INC. (now known as UBP Securities, Inc.)

Petitioner,

- versus -

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

G. R. No. 157064

Present:

PANGANIBAN, C.J.,

Chairman,

YNARES-SANTIAGO

AUSTRIA-MARTINEZ,

CALLEJO, SR., and

CHICO-NAZARIO, JJ.

Promulgated:

August 7, 2006

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

D E C I S I O N

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari, under Rule 45 of the Rules of Court, seeking to set aside the Decision of the Court of Appeals in CA-

G.R. SP No. 60209 dated 11 July 2002,[1] ordering the petitioner to pay the Government the amount of P826,698.31 as deficiency income tax for the

year 1987 plus 25% surcharge and 20% interest per annum. The Court of Appeals, in its assailed Decision, reversed the Decision of the Court of Tax

Appeals (CTA) dated 17 May 2000[2] in C.T.A. Case No. 5662.

Petitioner Barcelon, Roxas Securities Inc. (now known as UBP Securities, Inc.) is a corporation engaged in the trading of securities. On 14 Apri

1988, petitioner filed its Annual Income Tax Return for taxable year 1987. After an audit investigation conducted by the Bureau of Internal Revenue

(BIR), respondent Commissioner of Internal Revenue (CIR) issued an assessment for deficiency income tax in the amount of P826,698.31 arising from

the disallowance of the item on salaries, bonuses and allowances in the amount of P1,219,093,93 as part of the deductible business expense since

petitioner failed to subject the salaries, bonuses and allowances to withholding taxes. This assessment was covered by Formal Assessment Notice No

FAN-1-87-91-000649 dated 1 February 1991, which, respondent alleges, was sent to petitioner through registered mail on 6 February 1991. However

petitioner denies receiving the formal assessment notice.[3]

On 17 March 1992, petitioner was served with a Warrant of Distraint and/or Levy to enforce collection of the deficiency income tax for the yea

1987. Petitioner filed a formal protest, dated 25 March 1992, against the Warrant of Distraint and/or Levy, requesting for its cancellation. On 3 July

1998, petitioner received a letter dated 30 April 1998 from the respondent denying the protest with finality.[4]

On 31 July 1998, petitioner filed a petition for review with the CTA. After due notice and hearing, the CTA rendered a decision in favor of petitioner on

17 May 2000. The CTA ruled on the primary issue of prescription and found it unnecessary to decide the issues on the validity and propriety of the

assessment. It maintained that while a mailed letter is deemed received by the addressee in the course of mail, this is merely a disputable presumptionIt reasoned that the direct denial of the petitioner shifts the burden of proof to the respondent that the mailed letter was actually received by the

petitioner. The CTA found the BIR records submitted by the respondent immaterial, self-serving, and therefore insufficient to prove that the assessmen

notice was mailed and duly received by the petitioner.[5] The dispositive portion of this decision reads:

WHEREFORE, in view of the foregoing, the 1988 deficiency tax assessment against petitioner is hereby CANCELLED. Respondent is hereby

ORDERED TO DESIST from collecting said deficiency tax. No pronouncement as to costs.[6]

On 6 June 2000, respondent moved for reconsideration of the aforesaid decision but was denied by the CTA in a Resolution dated 25 July 2000.

Thereafter, respondent appealed to the Court of Appeals on 31 August 2001. In reversing the CTA decision, the Court of Appeals found the evidence

presented by the respondent to be sufficient proof that the tax assessment notice was mailed to the petitioner, therefore the legal presumption that it was

received should apply.[7] Thus, the Court of Appeals ruled that:



WHEREFORE, the petition is hereby GRANTED. The decision dated May 17, 2000 as well as the Resolution dated July 25, 2000 are hereby

REVERSED and SET ASIDE, and a new on entered ordering the respondent to pay the amount of P826,698.31 as deficiency income tax for the year

1987 plus 25% surcharge and 20% interest per annum from February 6, 1991 until fully paid pursuant to Sections 248 and 249 of the Tax Code.[8]

Petitioner moved for reconsideration of the said decision but the same was denied by the Court of Appeals in its assailed Resolution dated 30 January

2003.[9]

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

I

WHETHER OR NOT LEGAL BASES EXIST FOR THE COURT OF APPEALS’ FINDING THAT THE COURT OF TAX APPEALS COMMITTED “GROSS

ERROR IN THE APPRECIATION OF FACTS.”

II

WHETHER OR NOT THE COURT OF APPEALS WAS CORRECT IN REVERSING THE SUBJECT DECISION OF THE COURT OF TAX APPEALS.

III

WHETHER OR NOT THE RIGHT OF THE BUREAU OF INTERNAL REVENUE TO ASSESS PETITIONER FOR ALLEGED DEFICIENCY INCOME

TAX FOR 1987 HAS PRESCRIBED.

IV

WHETHER OR NOT THE RIGHT OF THE BUREAU OF INTERNAL REVENUE TO COLLECT THE SUBJECT ALLEGED DEFICIENCY INCOME TAXFOR 1987 HAS PRESCRIBED.

V

WHETHER OR NOT PETITIONER IS LIABLE FOR THE ALLEGED DEFICIENCY INCOME TAX ASSESSMENT FOR 1987.

VI

WHETHER OR NOT THE SUBJECT ASSESSMENT IS VIOLATIVE OF THE RIGHT OF PETITIONER TO DUE PROCESS.[10]

This Court finds the instant Petition meritorious.

The core issue in this case is whether or not respondent’s right to assess petitioner’s alleged deficiency income tax is barred by prescription, the

resolution of which depends on reviewing the findings of fact of the Court of Appeals and the CTA.

While the general rule is that factual findings of the Court of Appeals are binding on this Court, there are, however, recognized exceptions[11] thereto

such as when the findings are contrary to those of the trial court or, in this case, the CTA.[12]

In its Decision, the CTA resolved the issues raised by the parties thus:

Jurisprudence is replete with cases holding that if the taxpayer denies ever having received an assessment from the BIR, it is incumbent upon the latter

to prove by competent evidence that such notice was indeed received by the addressee. The onus probandi was shifted to respondent to prove by

contrary evidence that the Petitioner received the assessment in the due course of mail. The Supreme Court has consistently held that while a mailed

letter is deemed received by the addressee in the course of mail, this is merely a disputable presumption subject to controversion and a direct denial

thereof shifts the burden to the party favored by the presumption to prove that the mailed letter was indeed received by the addressee (Republic vs.

Court of Appeals, 149 SCRA 351). Thus as held by the Supreme Court in Gonzalo P. Nava vs. Commissioner of Internal Revenue, 13 SCRA 104

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 was mailed. Oncethese facts are proved, the presumption is that the letter was received by the addressee as soon as it could have been transmitted to him in the ordinary

course of the mail. But if one of the said 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).”

In the instant case, Respondent utterly failed to discharge this duty. No substantial evidence was ever presented to prove that the assessment notice

No. FAN-1-87-91-000649 or other supposed notices subsequent thereto were in fact issued or sent to the taxpayer. As a matter of fact, it only submitted

the BIR record book which allegedly contains the list of taxpayer’s names, the reference number, the year, the nature of tax, the city/municipality and the

amount (see Exh. 5-a for the Respondent). Purportedly, Respondent intended to show to this Court that all assessments made are entered into a record

book in chronological order outlining the details of the assessment and the taxpayer liable thereon. However, as can be gleaned from the face of the

exhibit, all entries thereon appears to be immaterial and impertinent in proving that the assessment notice was mailed and duly received by Petitioner.

Nothing indicates therein all essential facts that could sustain the burden of proof being shifted to the Respondent. What is essential to prove the fact of

mailing is the registry receipt issued by the Bureau of Posts or the Registry return card which would have been signed by the Petitioner or i ts authorized

representative. And if said documents cannot be located, Respondent at the very least, should have submitted to the Court a certification issued by the



Bureau of Posts and any other pertinent document which is executed with the intervention of the Bureau of Posts. This Court does not put much

credence to the self serving documentations made by the BIR personnel especially if they are unsupported by substantial evidence establishing the fac

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. Mere notations 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, without adequate protection or defense.” (Nava vs. CIR, 13 SCRA

104, January 30, 1965).

x 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 the said period has already prescribed. (Industrial Textile Manufacturing Co. of the

Phils., Inc. vs. CIR CTA Case 4885, August 22, 1996).[13]

Jurisprudence has consistently shown that this Court accords the findings of fact by the CTA with the highest respect. In Sea-Land Service Inc. v. Cour

of Appeals[14] this Court recognizes that the Court of Tax Appeals, 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 Tax Court.[15] In the absence of any clear and convincing proof to the contrary, this Court must presume tha

the CTA rendered a decision which is valid in every respect.

Under Section 203[16] of the National Internal Revenue Code (NIRC), respondent had three (3) years from the last day for the filing of the return to send

an assessment notice to petitioner. In the case of Collector of Internal Revenue v. Bautista,[17] this Court held that an assessment is made within theprescriptive period if notice to this effect is released, mailed or sent by the CIR to the taxpayer within said period. Receipt thereof by the taxpayer within

the prescriptive period is not necessary. At this point, it should be clarified that the rule does not dispense with the requirement that the taxpayer should

actually receive, even beyond the prescriptive period, the assessment notice which was timely released, mailed and sent.

In the present case, records show that petitioner filed its Annual Income Tax Return for taxable year 1987 on 14 April 1988.[18] The last day for filing by

petitioner of its return was on 15 April 1988,[19] thus, giving respondent until 15 April 1991 within which to send an assessment notice. While

respondent avers that it sent the assessment notice dated 1 February 1991 on 6 February 1991, within the three (3)-year period prescribed by law,

petitioner denies having received an assessment notice from respondent. Petitioner alleges that it came to know of the deficiency tax assessment only

on 17 March 1992 when it was served with the Warrant of Distraint and Levy.[20]

In Protector’s Services, Inc. v. Court of Appeals,[21] this Court ruled that when a mail matter is sent by registered mail, there exists a presumption, set

forth under Section 3(v), Rule 131 of the Rules of Court, [22] that it was received in the regular course of mail. The facts to be proved in order to raise

this presumption are: (a) that the letter was properly addressed with postage prepaid; and (b) that it was mailed. While a mailed letter is deemed

received by the addressee in the ordinary course of mail, this is still merely a disputable presumption subject to controversion, and a direct denial of the

receipt thereof shifts the burden upon the party favored by the presumption to prove that the mailed letter was indeed received by the addressee.[23]

In the present case, petitioner denies receiving the assessment notice, and the respondent was unable to present substantial evidence that such notice

was, indeed, mailed or sent by the respondent before the BIR’s right to assess had prescribed and that said notice was received by the petitioner. The

respondent presented the BIR record book where the name of the taxpayer, the kind of tax assessed, the registry receipt number and the date of mailing

were noted. The BIR records custodian, Ingrid Versola, also testified that she made the entries therein. Respondent offered the entry in the BIR record

book and the testimony of its record custodian as entries in official records in accordance with Section 44, Rule 130 of the Rules of Court,[24] which

states that:

Section 44. Entries in official records. - Entries in official records made in the performance of his duty by a public officer of the Philippines, or by a

person in the performance of a duty specially enjoined by law, are prima facie evidence of the facts therein stated.

The foregoing rule on evidence, however, must be read in accordance with this Court’s pronouncement in Africa v. Caltex (Phil.), Inc.,[25] where it has

been held that an entrant must have personal knowledge of the facts stated by him or such facts were acquired by him from reports made by personsunder a legal duty to submit the same.

There are three requisites for admissibility under the rule just mentioned: (a) that the entry was made by a public officer, or by another person

specially enjoined by law to do so; (b) that it was made by the public officer in the performance of his duties, or by such other person in the performance

of a duty specially enjoined by law; and (c) that the public officer or other person had sufficient knowledge of the facts by him stated, which must have

been acquired by him personally or through official information x x x.

In this case, the entries made by Ingrid Versola were not based on her personal knowledge as she did not attest to the fact that she personally prepared

and mailed the assessment notice. Nor was it stated in the transcript of stenographic notes[26] how and from whom she obtained the pertinen

information. Moreover, she did not attest to the fact that she acquired the reports from persons under a legal duty to submit the same. Hence, Rule

130, Section 44 finds no application in the present case. Thus, the evidence offered by respondent does not qualify as an exception to the rule agains

hearsay evidence.



Furthermore, independent evidence, such as the registry receipt of the assessment notice, or a certification from the Bureau of Posts, could have easily

been obtained. Yet respondent failed to present such evidence.

In the case of Nava v. Commissioner of Internal Revenue, [27] this Court stressed on the importance of proving the release, mailing or sending of the

notice.

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. Mere notations 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, without adequate protection or defense.

In the present case, the evidence offered by the respondent fails to convince this Court that Formal Assessment Notice No. FAN-1-87-91-000649 was

released, mailed, or sent before 15 April 1991, or before the lapse of the period of limitation upon assessment and collection prescribed by Section 203

of the NIRC. Such evidence, therefore, is insufficient to give rise to the presumption that the assessment notice was received in the regular course o

mail. Consequently, the right of the government to assess and collect the alleged deficiency tax is barred by prescription.

IN VIEW OF THE FOREGOING, the instant Petition is GRANTED. The assailed Decision of the Court of Appeals in CA-G.R. SP No. 60209 dated 11

July 2002, is hereby REVERSED and SET ASIDE, and the Decision of the Court of Tax Appeals in C.T.A. Case No. 5662, dated 17 May 2000,

cancelling the 1988 Deficiency Tax Assessment against Barcelon, Roxas Securitites, Inc. (now known as UPB Securities, Inc.) for being barred by

prescription, is hereby REINSTATED. No costs.

SO ORDERED.

Documents

taxation law 2