(15) G.R. No.

L-25043

April 26, 1968

ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective behalf and as judicial co-guardians of JOSE
ROXAS, petitioners,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

WHEREFORE, the decision appealed from is hereby affirmed with respect to petitioners Antonio Roxas, Eduardo Roxas, and Jose Roxas who are
hereby ordered to pay the respondent Commissioner of Internal Revenue the amounts of P12,808.00, P12,887.00 and P11,857.00, respectively, as
deficiency income taxes for the years 1953 and 1955, plus 5% surcharge and 1% monthly interest as provided for in Sec. 51(a) of the Revenue Code;
and modified with respect to the partnership Roxas y Cia. in the sense that it should pay only P150.00, as real estate dealer's tax. With costs against
petitioners.
Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court. The Commissioner of Internal Revenue did not appeal.
The issues:

Leido, Andrada, Perez and Associates for petitioners.

Office of the Solicitor General for respondents.

(1) Is the gain derived from the sale of the Nasugbu farm lands an ordinary gain, hence 100% taxable?

BENGZON, J.P., J.:

(2) Are the deductions for business expenses and contributions deductible?

Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren by hereditary succession the following properties:
(1) Agricultural lands with a total area of 19,000 hectares, situated in the municipality of Nasugbu, Batangas province;
(2) A residential house and lot located at Wright St., Malate, Manila; and
(3) Shares of stocks in different corporations.
To manage the above-mentioned properties, said children, namely, Antonio Roxas, Eduardo Roxas and Jose Roxas, formed a partnership called
Roxas y Compania.
AGRICULTURAL LANDS
At the conclusion of the Second World War, the tenants who have all been tilling the lands in Nasugbu for generations expressed their desire to
purchase from Roxas y Cia. the parcels which they actually occupied. For its part, the Government, in consonance with the constitutional mandate to
acquire big landed estates and apportion them among landless tenants-farmers, persuaded the Roxas brothers to part with their landholdings.
Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13,500 hectares to the Government for
distribution to actual occupants for a price of P2,079,048.47 plus P300,000.00 for survey and subdivision expenses.
It turned out however that the Government did not have funds to cover the purchase price, and so a special arrangement was made for the
Rehabilitation Finance Corporation to advance to Roxas y Cia. the amount of P1,500,000.00 as loan. Collateral for such loan were the lands proposed
to be sold to the farmers. Under the arrangement, Roxas y Cia. allowed the farmers to buy the lands for the same price but by installment, and
contracted with the Rehabilitation Finance Corporation to pay its loan from the proceeds of the yearly amortizations paid by the farmers.
In 1953 and 1955 Roxas y Cia. derived from said installment payments a net gain of P42,480.83 and P29,500.71. Fifty percent of said net gain was
reported for income tax purposes as gain on the sale of capital asset held for more than one year pursuant to Section 34 of the Tax Code.
RESIDENTIAL HOUSE

(3) Is Roxas y Cia. liable for the payment of the fixed tax on real estate dealers?
The Commissioner of Internal Revenue contends that Roxas y Cia. could be considered a real estate dealer because it engaged in the business of
selling real estate. The business activity alluded to was the act of subdividing the Nasugbu farm lands and selling them to the farmers-occupants on
installment. To bolster his stand on the point, he cites one of the purposes of Roxas y Cia. as contained in its articles of partnership, quoted below:
4. (a) La explotacion de fincas urbanes pertenecientes a la misma o que pueden pertenecer a ella en el futuro, alquilandoles por los plazos y demas
condiciones, estime convenientes y vendiendo aquellas que a juicio de sus gerentes no deben conservarse;
The above-quoted purpose notwithstanding, the proposition of the Commissioner of Internal Revenue cannot be favorably accepted by Us in this
isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees. Although they paid for their respective
holdings in installment for a period of ten years, it would nevertheless not make the vendor Roxas y Cia. a real estate dealer during the ten-year
amortization period.
It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance
with, but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless. It was the bounden duty of
the Government to pay the agreed compensation after it had persuaded Roxas y Cia. to sell its haciendas, and to subsequently subdivide them among
the farmers at very reasonable terms and prices. However, the Government could not comply with its duty for lack of funds. Obligingly, Roxas y Cia.
shouldered the Government's burden, went out of its way and sold lands directly to the farmers in the same way and under the same terms as would
have been the case had the Government done it itself. For this magnanimous act, the municipal council of Nasugbu passed a resolution expressing the
people's gratitude.
The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg". And, in
order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously. It does not
conform with Our sense of justice in the instant case for the Government to persuade the taxpayer to lend it a helping hand and later on to penalize
him for duly answering the urgent call.

During their bachelor days the Roxas brothers lived in the residential house at Wright St., Malate, Manila, which they inherited from their
grandparents. After Antonio and Eduardo got married, they resided somewhere else leaving only Jose in the old house. In fairness to his brothers,
Jose paid to Roxas y Cia. rentals for the house in the sum of P8,000.00 a year.

In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence, pursuant to Section 34 of the Tax Code the lands sold
to the farmers are capital assets, and the gain derived from the sale thereof is capital gain, taxable only to the extent of 50%.

ASSESSMENTS

DISALLOWED DEDUCTIONS

On June 17, 1958, the Commissioner of Internal Revenue demanded from Roxas y Cia the payment of real estate dealer's tax for 1952 in the amount
of P150.00 plus P10.00 compromise penalty for late payment, and P150.00 tax for dealers of securities for 1952 plus P10.00 compromise penalty for
late payment. The assessment for real estate dealer's tax was based on the fact that Roxas y Cia. received house rentals from Jose Roxas in the
amount of P8,000.00. Pursuant to Sec. 194 of the Tax Code, an owner of a real estate who derives a yearly rental income therefrom in the amount of
P3,000.00 or more is considered a real estate dealer and is liable to pay the corresponding fixed tax.

Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets to a banquet given in honor of Sergio Osmena and P28.00 for San
Miguel beer given as gifts to various persons. The deduction were claimed as representation expenses. Representation expenses are deductible from
gross income as expenditures incurred in carrying on a trade or business under Section 30(a) of the Tax Code provided the taxpayer proves that they
are reasonable in amount, ordinary and necessary, and incurred in connection with his business. In the case at bar, the evidence does not show such
link between the expenses and the business of Roxas y Cia. The findings of the Court of Tax Appeals must therefore be sustained.

The Commissioner of Internal Revenue justified his demand for the fixed tax on dealers of securities against Roxas y Cia., on the fact that said
partnership made profits from the purchase and sale of securities.

The petitioners also claim deductions for contributions to the Pasay City Police, Pasay City Firemen, and Baguio City Police Christmas funds,
Manila Police Trust Fund, Philippines Herald's fund for Manila's neediest families and Our Lady of Fatima chapel at Far Eastern University.

In the same assessment, the Commissioner assessed deficiency income taxes against the Roxas Brothers for the years 1953 and 1955, as follows:

The contributions to the Christmas funds of the Pasay City Police, Pasay City Firemen and Baguio City Police are not deductible for the reason that
the Christmas funds were not spent for public purposes but as Christmas gifts to the families of the members of said entities. Under Section 39(h), a
contribution to a government entity is deductible when used exclusively for public purposes. For this reason, the disallowance must be sustained. On
the other hand, the contribution to the Manila Police trust fund is an allowable deduction for said trust fund belongs to the Manila Police, a
government entity, intended to be used exclusively for its public functions.

1953

1955

Antonio Roxas

P7,010.00

P5,813.00

Eduardo Roxas

7,281.00

5,828.00

Jose Roxas
6,323.00
5,588.00
The deficiency income taxes resulted from the inclusion as income of Roxas y Cia. of the unreported 50% of the net profits for 1953 and 1955
derived from the sale of the Nasugbu farm lands to the tenants, and the disallowance of deductions from gross income of various business expenses
and contributions claimed by Roxas y Cia. and the Roxas brothers. For the reason that Roxas y Cia. subdivided its Nasugbu farm lands and sold them
to the farmers on installment, the Commissioner considered the partnership as engaged in the business of real estate, hence, 100% of the profits
derived therefrom was taxed.
The Roxas brothers protested the assessment but inasmuch as said protest was denied, they instituted an appeal in the Court of Tax Appeals on
January 9, 1961. The Tax Court heard the appeal and rendered judgment on July 31, 1965 sustaining the assessment except the demand for the
payment of the fixed tax on dealer of securities and the disallowance of the deductions for contributions to the Philippine Air Force Chapel and Hijas
de Jesus' Retiro de Manresa. The Tax Court's judgment reads:

The contributions to the Philippines Herald's fund for Manila's neediest families were disallowed on the ground that the Philippines Herald is not a
corporation or an association contemplated in Section 30 (h) of the Tax Code. It should be noted however that the contributions were not made to the
Philippines Herald but to a group of civic spirited citizens organized by the Philippines Herald solely for charitable purposes. There is no question
that the members of this group of citizens do not receive profits, for all the funds they raised were for Manila's neediest families. Such a group of
citizens may be classified as an association organized exclusively for charitable purposes mentioned in Section 30(h) of the Tax Code.
Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady of Fatima chapel at the Far Eastern University on the ground
that the said university gives dividends to its stockholders. Located within the premises of the university, the chapel in question has not been shown
to belong to the Catholic Church or any religious organization. On the other hand, the lower court found that it belongs to the Far Eastern University,
contributions to which are not deductible under Section 30(h) of the Tax Code for the reason that the net income of said university injures to the
benefit of its stockholders. The disallowance should be sustained.

Lastly, Roxas y Cia. questions the imposition of the real estate dealer's fixed tax upon it, because although it earned a rental income of P8,000.00 per
annum in 1952, said rental income came from Jose Roxas, one of the partners. Section 194 of the Tax Code, in considering as real estate dealers
owners of real estate receiving rentals of at least P3,000.00 a year, does not provide any qualification as to the persons paying the rentals. The law,
which states: 1wph1.t

Private respondents filed complaints against petitioners for illegal dismissal with the Regional Office, Ministry of Labor & Employment, San
Fernando, La Union.

. . . "Real estate dealer" includes any person engaged in the business of buying, selling, exchanging, leasing or renting property on his own account as
principal and holding himself out as a full or part-time dealer in real estate or as an owner of rental property or properties rented or offered to rent
for an aggregate amount of three thousand pesos or more a year: . . . (Emphasis supplied) .

IN VIEW OF THE FOREGOING CONSIDERATIONS, respondents Cabugao Ice Plant, Inc., Ilocos Commercial Corporation and/or Alberto Sunio,
are hereby directed to reinstate the complainants to their former positions without loss of seniority privileges and to pay their backwages from
February 1, 1978 to the date when they are actually reinstated

is too clear and explicit to admit construction. The findings of the Court of Tax Appeals or, this point is sustained.1wph1.t

Petitioners appealed to the NLRC, which affirmed the Regional Director's decision and dismissed the appeal for lack of merit on March 24, 1981
reasoning that when RDFC took possession of the property and private respondents were terminated in 1973, the latter already had a vested right to
their security of tenure, and when they were rehired those rights continued. 3

To Summarize, no deficiency income tax is due for 1953 from Antonio Roxas, Eduardo Roxas and Jose Roxas. For 1955 they are liable to pay
deficiency income tax in the sum of P109.00, P91.00 and P49.00, respectively.
WHEREFORE, the decision appealed from is modified. Roxas y Cia. is hereby ordered to pay the sum of P150.00 as real estate dealer's fixed tax for
1952, and Antonio Roxas, Eduardo Roxas and Jose Roxas are ordered to pay the respective sums of P109.00, P91.00 and P49.00 as their individual
deficiency income tax all corresponding for the year 1955. No costs. So ordered.
(17) G.R. No. L-57767 January 31, 1984
ALBERTO S. SUNIO and ILOCOS COMMERCIAL CORPORATION, petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION, NEMESIO VALENTON, SANTOS DEL ROSARIO, VICENTE TAPUCOL, ANDRES
SOLIS, CRESCENCIO SOLLER, CECILIO LABUNI, SOTERO L. TUMANG, in his capacity as Asst. Regional Director for Arbitration,
Regional Office No. 1, Ministry of Labor & Employment, and AMBROSIO B. SISON, in his capacity as Acting Regional Sheriff, Regional
Office No. 1, Ministry of Labor & Employment, respondents.
Yolanda Bustamante for petitioners.
The Solicitor General for respondent NLRC.
Benjamin F. Baterina for private respondents,

MELENCIO-HERRERA, J.:
In this special civil action for certiorari and Prohibition with Preliminary Injunction, petitioners Alberto Sunio and Ilocos Commercial Corporation
seek to set aside the Resolution of March 24, 1981 of the National Labor Relations Commission (NLRC), which affirmed the Decision of the
Assistant Regional Director, dated November 5, 1979, in NLRC Case No. RB-1-1228-78, directing petitioners and Cabugao Ice Plant Incorporated to
reinstate private respondents to their former position without loss of seniority and privileges and to pay them backwages from February 1, 1978 to
the date of their actual reinstatement.
The controversy arose from the following antecedents:
On July 30,1973, EM Ramos & Company, Inc. (EMRACO for brevity) and Cabugao Ice Plant, Inc. (CIPI for short), sister corporations, sold an ice
plant to Rizal Development and Finance Corporation RDFC with a mortgage on the same properties constituted by the latter in favor of the former to
secure the payment of the balance of the purchase price. 1
By virtue of that sale, EMRACO-CIPI terminated the services of all their employees including private respondents herein, and paid them their
separation pay. RDFC hired its own own employees and operated the plant.
On November 28, 1973, RDFC sold the ice plant to petitioner Ilocos Commercial Corporation ICC headed by its President and General Manager,
petitioner Alberto S. Sunio. Petitioners also hired their own employees as private respondents were no longer in the plant. The sale was subject to the
mortgage in favor of EMRACO-CIPI. Both RDFC-ICC failed to pay the balance of the purchase price, as a consequence of which, EMRACO-CIPI
instituted extrajudicial foreclosure proceedings. The properties were sold at public auction on August 30, 1974, the highest bidders being EMRACO
CIPI. On the same date, said companies obtained an ex-parte Writ of Possession from the Court of First Instance of Ilocos Sur in Civil Case No.
3026-V.
On the same date, August 30, 1974, EMRACO-CIPI sold the ice plant to Nilo Villanueva, suspect to the right of redemption of RDFC. Nilo
Villanueva then re-hired private respondents.
On August 27, 1975, RDFC redeemed the ice plant. Because of the gate to Nilo Villanueva, EMRACO-CIPI were unable to turn over possession to
RDFC and/or petitioners, prompting the latter to file a complaint for recovery of possession against EMRACO-CIPI with the then Court of First
Instance of Ilocos Sur (Civil Case No. 81-KC). Nilo Villanueva intervened
Said Court ordered the issuance of a Writ of Preliminary Mandatory Injunction placing RDFC in possession of the ice plant. EMPRACO-CIPI and
Villanueva appealed to the Court of Appeals (CA-GR No. 05880- SP which upheld the questionee, Order. A Petition for certiorari with this Court (L46376) assailing that Resolution was denied for lack of merit or January 6, 1978.
On February 1, 1978, RDFC and petitioners finally obtains possession of the ice plant by virtue of the Mandatory Injunction previously issued, which
ordered defendant "particularly Nilo C. Villanueva and his agents representatives, or any person found in the premises to vacate and surrender the
property in litigation." 2Petitioners did not re-employ private respondents.

On November 5, 1979, the Assistant Regional Director rendered a decision the decretal portion of which reads:

Petitioners are now before us assailing the Asst. Regional Director's Decision, dated November 5, 1979, the Resolution of the NLRC, Second
Division, dated March 24, 1981, as well as the Writ of Execution issued pursuant thereto dated July 14, 1981, for P156,720.80 representing
backwages. They raise as lone issue:
That respondent National Labor Relations Commission and/or Asst. Regional Director Sotero Tumang acted in excess of jurisdiction and/or with
grave abuse of discretion amounting to lack of jurisdiction in rendering the decision and the resolution in NLRC Case No. RB-1-1228-78, and in
ordering the execution of said decision
We issued a Temporary Restraining Order to maintain the status quo, resolved to give due course to the Petition, and required the parties to submit
their respective Briefs. Only petitioners have complied.
Did public respondents' act with grave abuse of on amounting to lack of jurisdiction in ordering the reinstatement of private respondents and the
payment of their backwages?
Petitioners deny any employer-employee relationship with private respondents arguing that no privity of contract exists between them, the latter
being the employees of Nilo Villanueva who re-hired them when he took over the operation of the ice plant from CIPI; that private respondents
should go after Nilo Villanueva for whatever rights they may be entitled to, or the CIPI which is still existing, that no succession of rights and
obligations took place between Villanueva and petitioners as the transfer of possession was a consequence of the exercise of the right of redemption;
that the amount of backwages was determined without petitioners being given a chance to be heard and that granting that respondents are entitled to
the reliefs adjudged, such award cannot be enforced against petitioner Sunio, who was impleaded in the complaint as the General Manager of ICC.
Public respondent, in its Comment, countered that the sale of a business of 'a going concern does not ipso factoterminate employer-employee
relations when the successor-employer continues the business operation of the predecessor-employer in an essentially unchanged manner. Private
respondents argue that the change of management or ownership of a business entity is not one of the just causes for the termination of services of
employees under Article 283 of the Labor Code, as amended. Both respondents additionally claim that petitioner Sunio, as the General Manager of
ICC and owner of one half (1/2) of its interest, is personally liable for his malicious act of illegally dismissing private respondents, for no ground
exists to justify their termination.
We sustain petitioners.
It is true that the sale of a business of a going concern does not ipso facto terminate the employer-employee relations insofar as the successoremployer is concerned, and that change of ownership or management of an establishment or company is not one of the just causes provided by law
for termination of employment. The situation here, however, was not one of simple change of ownership. Of note is the fact that when, on July 30,
1973, EMRACO-CIPI sold the plant to RDFC, CIPI had terminated the services of its employees, including herein private respondents, giving them
their separation pay which they had accepted. When RDFC took over ownership and management, therefore, it hired its own employees, not the
private respondents, who were no longer there. RDFC subsequently sold the property to petitioners on November 28, 1973. But by reason of their
failure to pay the balance of the purchase price, EMRACO-CIPI foreclosed on the mortgage over the ice plant; the property was sold at public
auction to EMRACO-CIPI as the highest bidders, and they eventually re-possessed the plant on August 30, 1974. During all the period that RDFC
and petitioners were operating the plant from July 30, 1973 to August 30, 1974, they had their own employees. CIPI-EMRACO then sold the plant,
also on August 30, 1974, to Nilo Villanueva, subject to RDFC's right of redemption. Nilo Villanueva then rehired private respondents as employees
of the plant, also in 1974.
In 1975, RDFC redeemed the property and demanded possession but EMRACO-CIPI and Nilo Villanueva resisted so that petitioners were compelled
to sue for recovery of possession, obtaining it, however, only in 1978.
Under those circumstances, it cannot be justifiably said that the plant together with its staff and personnel moved from one ownership to another. No
succession of employment rights and obligations can be said to have taken place between EMRACO-CIPI-Nilo Villanueva, on the one hand, and
petitioners on the other. Petitioners eventually acquired possession by virtue of the exercise of their right of redemption and of a Mandatory
Injunction in their favor which ordered Nilo Villanueva and "any person found in the premises" to vacate. What is more, when EMRACO-CIPI sold
the ice plant to RDFC in 1973, private respondents' employment was terminated by EMRACO-CIPI and they were given their separation pay, which
they accepted. During the thirteen months, therefore, that RDFC and petitioners were in possession and operating the plant up to August, 1974, they
hired their own employees, not the private respondents. In fact, it may even be said that private respondents had slept on their rights when they failed
to contest such termination at the time of sale, if they believed they had rights to protect. Further, Nilo Villanueva rehired private respondents in
August, 1974, subject to a resolutory condition. That condition having arisen, the rights of private respondents who claim under him mast be deemed
to have also ceased.
Private respondents can neither successfully invoke security of tenure in their favor. Their tenure should not be reckoned from 1967 because they
were already terminated in 1973. Private respondents were only rehired in 1974 by Nilo Villanueva. Petitioners took over by judicial process in 1978
so that private respondents had actually only four years of rehired employment with Nilo Villanueva, during all of which period, petitioners fought
hard against Nilo Villanueva to recover possession of the plant. Insofar as petitioners are concerned therefore, there was no tenurial security to speak

of that would entitle private respondents to reinstatement and backwages. We come now to the personal liability of petitioner, Sunio, who was made
jointly and severally responsible with petitioner company and CIPI for the payment of the backwages of private respondents. This is reversible error.
The Assistant Regional Director's Decision failed to disclose the reason why he was made personally liable. Respondents, however, alleged as
grounds thereof, his being the owner of one-half (1/2) interest of said corporation, and his alleged arbitrary dismissal of private respondents.
Petitioner Sunio was impleaded in the Complaint his capacity as General Manager of petitioner corporation. where appears to be no evidence on
record that he acted maliciously or in bad faith in terminating the services of private respondents. His act, therefore, was within the scope of his
authority and was a corporate act.
It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of
any other legal entity to which it may be related. 4 Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. 5 Petitioner Sunio, therefore, should not
have been made personally answerable for the payment of private respondents' back salaries.
WHEREFORE, the assailed Decision and Resolution, dated November 5, 1979 and March 24, 1981, respectively, and the consequent Writ of
Execution are hereby SET ASIDE and the Temporary Restraining Order heretofore issued by this Court hereby made permanent. Public respondents
are hereby ordered to return to petitioners the latter's levied properties in their possession. No costs.
SO ORDERED.
(18) COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. JOHN L. MANNING, W.D. McDONALD, E.E. SIMMONS and THE
COURT OF TAX APPEALS, Respondents.
Solicitor General Antonio P. Barredo, Solicitor Lolita O. Gal-lang and Special Attorney Virgilio J. Saldajena for Petitioner.
Manuel O. Chan for Private Respondents.
SYNOPSIS
Under a trust agreement, Julius Reese who owned 24,700 shares of the 25,000 common shares of MANTRASCO, and
the three private respondents who owned the rest, at 100 shares each, deposited all their shares with the Trustees.
The trust agreement provided that upon Reeses death MANTRASCO shall purchase Reeses shares. The trust
agreement was executed in view of Reeses desire that upon his death the Company would continue under the
management of respondents. Upon Reeses death and partial payment by the company of Reesess share, a new
certificate was issued in the name of MANTRASCO, and the certificate indorsed to the Trustees. Subsequently, the
stockholders reverted the 24,700 shares in the Treasury to the capital account of the company as stock dividends to
be distributed to the stockholders. When the entire purchase price of Reeses interest in the company was paid in full
by the latter, the trust agreement was terminated, and the shares held in trust were delivered to the company.
The Bureau of Internal Revenue concluded that the distribution of the 24,700 shares of Reese as stock dividends was
in effect a distribution of the "assets or property of the corporation." It therefore assessed respondents for deficiency
income taxes as well as for fraud penalty and interest charges. The Court of Tax Appeals absolved respondent from
any liability for receiving the questioned stock dividends on the ground that their respective one-third interest in the
Company remained the same before and after the declaration of the stock dividends and only the number of shares
held
by
each
of
them
had
changed.
On a petition for review, the Supreme Court held that the newly acquired shares were not treasury shares; their
declaration as treasury stock dividends was a complete nullity and that the assessment by the Commissioner of fraud
penalty and the imposition of interest charges pursuant to the provision of the Tax Code were made in accordance with
law.
Judgment of the Court of Tax Appeals se aside.

SYLLABUS

1.
PRIVATE CORPORATIONS; SHARES OF STOCKS; TREASURY; SHARES. Treasury shares are stocks issued and
fully paid for and re-acquired by the corporation either by purchase, donation, forfeiture or other means. They are
therefore issued shares, but being in the treasury they do not have the status of outstanding shares. Consequently,
although a treasury share, not having been retired by the corporation re-acquiring it, may be re-issued or sold again,
such share, as long as it is held by the corporation as a treasury share, participates neither in dividends, because
dividends cannot be declared by the corporation to itself, nor in the meetings of the corporations as voting stock, for
otherwise equal distribution of voting powers among stockholders will be effectively lost and the directors will be able
to perpetuate their control of the corporation though it still represent a paid for interest in the property of the
corporation.
2. ID.; ID.; ID.; DECLARATION OF QUESTIONED SHARES AS TREASURY STOCK DIVIDENDS, A NULLITY. Where the
manifest intention of the parties to the trust agreement was, in sum and substance, to treat the shares of a deceased
stockholder as absolutely outstanding shares of said stockholders estate until they were fully paid. the declaration of

said

shares

as

treasury

stock

dividend

was

complete

nullity

and

plainly

violative

of

public

policy.

3. ID.; ID.; STOCK DIVIDEND PAYABLE ONLY FROM RETAINED EARNINGS. A stock dividend, being one payable in
capital stock, cannot be declared out of outstanding corporate stock, but only from retained earnings.
4. ID.; ID.; PURCHASE OF HOLDING RESULTING IN DISTRIBUTION OF EARNINGS TAXABLE. Where by the use of a trust
instrument as a convenient technical device, respondents bestowed unto themselves the full worth and value of a
deceased stockholders corporate holding acquired with the very earnings of the companies, such package device
which obviously is not designed to carry out the usual stock dividend purpose of corporate expansion reinvestment,
e.g., the acquisition of additional facilities and other capital budget items, but exclusively for expanding the capital
base of the surviving stockholders in the company, cannot be allowed to deflect the latters responsibilities toward our
income tax laws. The conclusion is ineluctable that whenever the company parted with a portion of its earnings "to
buy" the corporate holdings of the deceased stockholders, it was in ultimate effect and result making a distribution of
such earnings to the surviving stockholders. All these amounts are consequently subject to income tax as being, in
truth
and
in
fact,
a
flow
of
cash
benefits
to
the
surviving
stockholders.
5. ID.; ID.; ID.; COMMISSIONER ASSESSMENT BASED ON THE TOTAL ACQUISITION COST OF THE ALLEGED TREASURY
STOCK DIVIDENDS, ERROR. Where the surviving stockholders, by resolution, partitioned among themselves, as
treasury stock dividends, the deceased stockholders interest, and earnings of the corporation over a period of years
were used to gradually wipe out the holdings therein of said deceased stockholder, the earnings (which in effect have
been distributed to the surviving stockholders when they appropriated among themselves the deceased stockholders
interest), should be taxed for each of the corresponding years when payments were made to the deceaseds estate on
account of his shares. In other words, the Tax Commissioner may not asses the surviving stockholders, for income tax
purposes, the total acquisition cost of the alleged treasury stock dividends in one lump sum. However, with regard to
payment made with the corporations earnings before the passage of the resolution declaring as stock dividends the
deceased stockholders interest (while indeed those earnings were utilized in those years to gradually pay off the
value of the deceased stockholders holdings), the surviving stockholders should be liable (in the absence of evidence
that prior to the passage of the stockholders resolution the contributed of each of the surviving stockholder rose
corresponding), for income tax purposes, to the extent of the aggregate amount paid by the corporation (prior to such
resolution) to buy off the deceased stockholders shares. The reason is that it was only by virtue of the authority
contained in said resolution that the surviving stockholders actually, albeit illegally, appropriated and petitioned
among
themselves
the
stockholders
equity
representing
the
deceased
stockholders
interest.
6. TAXATION; INCOME TAX; ASSESSMENT OF FRAUD PENALTY AND IMPOSITION OF INTEREST CHARGES IN
ACCORDANCE WITH LAW DESPITE NULLITY OF RESOLUTION AUTHORIZING DISTRIBUTION OF EARNINGS. The fact
that the resolution authorizing the distribution of earnings is null and void is of no moment. Under the National Internal
Revenue Code, income tax is assessed on income received from any property, activity or service that produces
income. The Tax Code stands as an indifferent, neutral party on the matter of where the income comes from. The
action taken by the Commissioner of assessing fraud penalty and imposing interest charges pursuant to the provisions
of the Tax Code is in accordance with law.
2.
DECISION
CASTRO, J.:

This is a petition for review of the decision of the Court of Tax Appeals, in CTA case 1626, which set aside the income
tax assessments issued by the Commissioner of Internal Revenue against John L. Manning, W.D. McDonald and E.E.
Simmons (hereinafter referred to as the respondents), for alleged undeclared stock dividends received in 1958 from
the Manila Trading and Supply Co. (hereinafter referred to as the MANTRASCO) valued at P7,973,660.
In 1952 the MANTRASCO had an authorized capital stock of P2,500,000 divided into 25,000 common shares; 24,700 of
these were owned by Julius S. Reese, and the rest, at 100 shares each, by the three respondents.
On February 29, 1952, in view of Reeses desire that upon his death MANTRASCO and its two subsidiaries, MANTRASCO
(Guam), Inc. and the Port Motors, Inc., would continue under the management of the respondents, a trust agreement
on his and the respondents interests in MANTRASCO was executed by and among Reese (therein referred to as
OWNER), MANTRASCO (therein referred to as COMPANY), the law firm of Ross, Selph, Carrascoso and Janda (therein
referred
to
as
TRUSTEES),
and
the
respondents
(therein
referred
to
as
MANAGERS).
The

trust

agreement

pertinently

provides

as

follows:jgc:chanrobles.com.ph

"1. Upon the execution of this agreement the OWNER shall deposit with the TRUSTEES, duly endorsed and ready for
transfer Twenty-Four Thousand Seven Hundred (24,700) shares of the capital stock of the COMPANY, these shares
being
all
shares
of
the
capital
stock
of
the
COMPANIES
belonging
to
him
.
.
.
"2. Upon the execution of this Agreement the MANAGERS shall deposit with the TRUSTEES, duly endorsed and ready
for transfer, all shares of the capital stock of the COMPANIES belonging to any of them.

"3. (a) The OWNER and the MANAGERS, and each of them, agree that if any of them shall at any time during the life of
this trust acquire any additional shares of stock of any of the COMPANIES, or of any successor company, or any shares
in substitution, exchange or replacement of the shares subject to this agreement, they shall forthwith endorse and
deposit such shares with the TRUSTEES hereunder and such additional or other shares shall become subject to this
agreement; shares deposited by the OWNER and shares received by the TRUSTEES as stock dividends on, or in
substitution, exchange or replacement of, such shares so deposited under this agreement being MANAGERS SHARES.
"(b) All shares deposited under paragraphs 1, 2 and 3(a) hereof shall, during the life of the OWNER, remain in the
name
of
and
shall
be
voted
by
the
respective
parties
making
the
deposit
...
"4. (a) Upon the death of the OWNER and the receipt by the TRUSTEES of the initial payment from the company
purchasing the OWNERS SHARES, the TRUSTEES shall cause the OWNERS SHARES to be transferred into the name of
such company and such company shall thereupon transfer such shares into the name of the TRUSTEES and the
TRUSTEES shall hold such shares until payment for all such shares shall have been made by the company as provided
in this agreement.

when due, the TRUSTEES may terminate this agreement and dispose of all the shares of stock deposited hereunder,
whether or not payment shall have been made for part of such stock, applying the proceeds of such sale or disposition
to
the
unpaid
balance
of
the
purchase
price:jgc:chanrobles.com.ph
"(a) If, upon any such sale or disposition of the stock, the TRUSTEES shall receive an amount in excess of the unpaid
balance of the purchase price agreed to be paid by the COMPANIES for the OWNERS SHARES such excess, after
deducting all expenses, charges and taxes, shall be paid to the then MANAGERS.
x

"(d) Any and all dividends paid on said shares after the death of the OWNER shall be subject to the provisions of this
agreement.
x

"5. (b) It is expressly agreed and understood, however, that the declaration of dividends and amount of earnings
transferred to surplus shall be subject to the approval of the TRUSTEES and the TRUSTEES shall participate to such
extent in the affairs of the COMPANIES as they deem necessary to insure the carrying out of this agreement and the
discharge of the obligations of the COMPANIES and each of them and of the MANAGERS hereunder.
"(c) The TRUSTEES shall designate one or more directors of each of the COMPANIES as they shall consider advisable
and corresponding shares shall be transferred to such directors to qualify them to act.
x

"8. (a) Upon the death of the OWNER, the COMPANIES or any one or more of them shall purchase the OWNERS
SHARES; it being the intent that any of the COMPANIES shall purchase all or a proportionate part of the OWNERS
SHARES
.
.
.
"(b) The purchase price of such shares shall be the book value of such share computed in United States dollars . . .
x

"(d) All dividends paid on stock that had been OWNERS SHARES, from the time of the transfer of such shares by one
or more of the COMPANIES to the TRUSTEES as provided in Article 4 until payment in full for such OWNERS SHARES
shall have been made by each of the COMPANIES which shall have purchased the same, shall be credited as payments
on account of the purchase price of such shares and shall be a prepayment on account of the next due installment or
installments of such purchase price.
x

"(c) The TRUSTEES shall vote all stock standing in their name or the name of their nominees at all meetings and shall
be in all respects entitled to all the rights as owners of said shares, subject, however, to the provisions of this
agreement
of
trust.

"17. Until the delivery to him of the shares purchased by him, no MANAGER, shall sell, assign, mortgage, pledge,
transfer or in anywise encumber or hypothecate such shares or his interest in this agreement.
x

"12. The TRUSTEES may from time to time increase or decrease the unpaid balance of the purchase price of the shares
being purchased by any COMPANY or COMPANIES should they in their exclusive discretion determine that such
increase or decrease would be necessary to carry out the intention of the parties that the Estate and heirs of the
OWNER shall receive the fair value of the shares deposited in Trust as such value existed at the date of the death of
the
OWNER.
.
.
"13. Should the said COMPANIES or any of them be unable or unwilling to comply with their obligations hereunder

"19. After the death of the OWNER and during the period of this trust the COMPANIES shall pay no dividends except as
may be authorized by the TRUSTEES. Dividends on MANAGERS SHARES shall, so long as they shall not be in default
under this agreement, be paid over by the TRUSTEES to the MANAGERS. Dividends on OWNERS SHARES shall be
applied in liquidation of the COMPANIES liabilities hereunder as provided in Article 8(d).
x

"26. The TRUSTEES may, after the death of the OWNER and during the life of this trust, vote any and all shares held in
trust, at any general and special meeting of stockholders for all purposes, including but not limited to wholly or
partially liquidating or reducing the capital of any COMPANY or COMPANIES, authorizing the sale of any or all assets,
and election of directors . . .
x

"28. The COMPANIES and each of them undertake and agree by proper corporate act to reduce their capitalization, sell
or encumber their assets, amend their articles of incorporation, reorganize, liquidate, dissolve and do all other things
the TRUSTEES in their discretion determine to be necessary to enable them to comply with their obligations hereunder
and the TRUSTEES are hereby irrevocably authorized to vote all shares of the COMPANIES and each of them at any
general or special meeting for the accomplishment of such purposes. . . ."cralaw virtua1aw library
On October 19, 1954 Reese died. The projected transfer of his shares in the name of MANTRASCO could not, however,
be immediately effected for lack of sufficient funds to cover initial payment on the shares.
On February 2, 1955, after MANTRASCO made a partial payment of Reeses shares, the certificate for the 24,700
shares in Reeses name was cancelled and a new certificate was issued in the name of MANTRASCO. On the same
date, and in the meantime that Reeses interest had not been fully paid, the new certificate was endorsed to the law
firm of Ross, Selph, Carrascoso and Janda, as trustees for and in behalf of MANTRASCO.
On December 22, 1958, at a special meeting of MANTRASCO stockholders, the following resolution was
passed:jgc:chanrobles.com.ph
"RESOLVED, that the 24,700 shares in the Treasury be reverted back to the capital account of the company as a stock
dividend to be distributed to shareholders of record at the close of business on December 22, 1958, in accordance with
the action of the Board of Directors at its meeting on December 19, 1958 which action is hereby approved and
confirmed."cralaw virtua1aw library
On November 25, 1963 the entire purchase price of Reeses interest in MANTRASCO was finally paid in full by the
latter, On May 4, 1964 the trust agreement was terminated and the trustees delivered to MANTRASCO all the shares
which they were holding in trust.
Meanwhile, on September 14, 1962, an examination of MANTRASCOs books was ordered by the Bureau of Internal
Revenue. The examination disclosed that (a) as of December 31, 1958 the 24,700 shares declared as dividends had
been proportionately distributed to the respondents, representing a total book value or acquisition cost of P7,973,660;
(b) the respondents failed to declare the said stock dividends as part of their taxable income for the year 1958; and (c)
from 1956 to 1961 the following amounts were paid by MANTRASCO to Reeses estate by virtue of the trust
agreement, to wit:chanrob1es virtual 1aw library

Amounts

B. B.I.R. Regulations

Year Liabilities Paid

"SEC. 251. Dividends paid in property. Dividends paid in securities or other property (other than its own stock), in
which the earnings of the corporation have been invested, are income to the recipients to the amount of the full
market value of such property when receivable by individual stockholders . . .

1956 P5,830,587.86 P 2,143,073.00

1957 5,317,137.86 513,450.00
1958 4,824,059.28 493,078.58
1959 4,319,420.14 504,639.14
1960 3,849,720.14 469,700.00
1961 3,811,387.69 38,332.45
On the basis of their examination, the BIR examiners concluded that the distribution of Reeses shares as stock
dividends was in effect a distribution of the "asset or property of the corporation as may be gleaned from the payment
of cash for the redemption of said stock and distributing the same as stock dividend." On April 14, 1965 the
Commissioner of Internal Revenue issued notices of assessment for deficiency income taxes to the respondents for the
year 1958, as follows:chanrob1es virtual 1aw library
J.L. Manning W.D. McDonald E.E. Simmons
Deficiency Income Tax P1,416,469.00 P1,442,719.00 P1,450,434.00
Add 50% surcharge* 723,234.50 721,359.507 25,217.00
1/2% monthly interest from
6-20-59 to 6-20-62 260,364.42 259,689.42 261,078.12

TOTAL AMOUNT DUE
& COLLECTIBLE P2,430,067.92 P2,423,767.92 2,436,729.12
The respondents unsuccessfully challenged the foregoing assessments and, failing to secure a favorable
reconsideration, appealed to the Court of Tax Appeals.
On October 30, 1967 the CTA rendered judgment absolving the respondents from any liability for receiving the
questioned stock dividends on the ground that their respective one-third interest in MANTRASCO remained the same
before and after the declaration of stock dividends and only the number of shares held by each of them had changed.
Hence, the present recourse.
All the parties rely upon the same provisions of the Tax Code and internal revenue regulations to bolster their
respective positions. These are:chanrob1es virtual 1aw library
A. National Internal Revenue Code
"SEC. 83. Distribution of dividends or assets by corporations (a) Definition of Dividends The term dividends
when used in this Title means any distribution made by a corporation to its shareholders out of its earnings or profits
accrued since March first, nineteen hundred and thirteen, and payable to its shareholders, whether in money or in
other property.
"Where a corporation distributes all of its assets in complete liquidation or dissolution the gain realized or loss
sustained by the stockholder, whether individual or corporate, is a taxable income or deductible loss, as the case may
be.
"(b) Stock dividend. A stock dividend representing the transfer of surplus to capital account shall not be subject to
tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to
make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a
taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable
income to the extent that it represents a distribution of earnings or profits accumulated after March first, nineteen
hundred and thirteen."cralaw virtua1aw library

"SEC. 252. Stock dividend. A stock dividend which represents the transfer of surplus to capital account is not subject
to income tax. However, a dividend in stock may constitute taxable income to the recipients thereof notwithstanding
the fact that the officers or directors of the corporation (as defined in section 84) choose to call such distribution as a
stock dividend. The distinction between a stock dividend which does not, and one which does, constitute income
taxable to the shareholders is the distinction between a stock dividend which works no change in the corporate entity,
the same interest in the same corporation being represented after the distribution by more shares of precisely the
same character, and a stock dividend where there either has been change of corporate identity or a change in the
nature of the shares issued as dividends whereby the proportional interest of the shareholder after the distribution is
essentially different from the former interest. A stock dividend constitutes income if it gives the shareholder an interest
different from that which his former stockholdings represented. A stock dividend does not constitute income if the new
shares confer no different rights or interests than did the old the new certificate plus the old representing the same
proportionate interest in the net assets of the corporation as did the old."cralaw virtua1aw library
The parties differ, however, on the taxability of the "treasury" stock dividends received by the respondents.
The respondents anchor their argument on the same basis as the Court of Tax Appeals; whereas the Commissioner
maintains that the full value (P7,973,660) of the shares redeemed from Reese by MANTRASCO which were
subsequently distributed to the respondents as stock dividends in 1958 should be taxed as income of the respondents
for that year, the said distribution being in effect a distribution of cash. The respondents interests in MANTRASCO, he
further argues, were only .4% prior to the declaration of the stock dividends in 1958, but rose to 33 1/3% each after
the said declaration.
In submitting their respective contentions, it is the assumption of both parties that the 24,700 shares declared as
stock dividends were treasury shares. We are however convinced, after a careful study of the trust agreement, that the
said shares were not, on December 22, 1958 or at anytime before or after that date, treasury shares. The reasons are
quite plain.
Although authorities may differ on the exact legal and accounting status of so-called "treasury shares," 1 they are
more or less in agreement that treasury shares are stocks issued and fully paid for and re-acquired by the corporation
either by purchase, donation, forfeiture or other means. 2 Treasury shares are therefore issued shares, but being in the
treasury they do not have the status of outstanding shares. 3 Consequently, although a treasury share, not having
been retired by the corporation re-acquiring it, may be re-issued or sold again, such share, as long as it is held by the
corporation as a treasury share, participates neither in dividends, because dividends cannot be declared by the
corporation to itself, 4 nor in the meetings of the corporation as voting stock, for otherwise equal distribution of voting
powers among stockholders will be effectively lost and the directors will be able to perpetuate their control of the
corporation, 5 though it still represents a paid-for interest in the property of the corporation. 6 The foregoing essential
features of a treasury stock are lacking in the questioned shares. Thus,
(a) under paragraph 4(c) of the trust agreement, the trustees were authorized to vote all stock standing in their names
at all meetings and to exercise all rights "as owners of said shares" this authority is reiterated in paragraphs 26 and
28 of the trust agreement;
(b) under paragraph 4(d), "Any and all dividends paid on said shares after the death of the OWNER shall be subject to
the provisions of this agreement;"
(c) under paragraph 5(b), the amount of retained earnings to be declared as dividends was made subject to the
approval of the trustees of the 24,700 shares;
(d) under paragraph 5(c), the choice of corporate directors was delegated exclusively to the trustees who were also
given the authority to transfer qualifying shares to such directors; and
(e) under paragraph 19, MANTRASCO and its two subsidiaries were expressly prohibited from paying "dividends except
as may be authorized by the TRUSTEES;" in the same paragraph mention was also made of "dividends on OWNERS
SHARES" which shall be applied to the liquidation of the liabilities of the three companies for the price of Reeses
shares.
The manifest intention of the parties to the trust agreement was, in sum and substance, to treat the 24,700 shares of
Reese as absolutely outstanding shares of Reeses estate until they were fully paid. Such being the true nature of the
24,700 shares, their declaration as treasury stock dividend in 1958 was a complete nullity and plainly violative of
public policy. A stock dividend, being one payable in capital stock, cannot be declared out of outstanding corporate
stock, but only from retained earnings: 7

Of pointed relevance is this useful discussion of the nature of a stock dividend: 8

"A stock dividend always involves a transfer of surplus (or profit) to capital stock. Graham and Katz, Accounting in
Law Practice, 2d ed. 1938, No. 70. As the court said in United States v. Siegel, 8 Cir., 1931, 52 F 2d 63, 65, 78 ALR 672:
A stock dividend is a conversion of surplus or undivided profits into capital stock, which is distributed to stockholders
in lieu of a cash dividend. Congress itself has defined the term dividend in No. 115(a) of the Act as meaning any
distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or
profits. In Eisner v. Macomber, 1920, 252 US 189, 40 S Ct 189, 64 L Ed 521, 9 ALR 1570, both the prevailing and the
dissenting opinions recognized that within the meaning of the revenue acts the essence of a stock dividend was the
segregation out of surplus account of a definite portion of the corporate earnings as part of the permanent capital
resources of the corporation by the device of capitalizing the same, and the issuance to the stockholders of additional
shares of stock representing the profits so capitalized."cralaw virtua1aw library
The declaration by the respondents and Reeses trustees of MANTRASCOs alleged treasury stock dividends in favor of
the former, brings, however, into clear focus the ultimate purpose which the parties to the trust instrument aimed to
realize: to make the respondents the sole owners of Reeses interest in MANTRASCO by utilizing the periodic earnings
of that company and its subsidiaries to directly subsidize their purchase of the said interests, and by making it appear
outwardly, through the formal declaration of non-existent stock dividends in the treasury, that they have not received
any income from those firms when, in fact, by that declaration they secured to themselves the means to turn around
as full owners of Reeses shares. In other words, the respondents, using the trust instrument as a convenient technical
device, bestowed unto themselves the full worth and value of Reeses corporate holdings with the use of the very
earnings of the companies. Such package device, obviously not designed to carry out the usual stock dividend purpose
of corporate expansion reinvestment, e.g. the acquisition of additional facilities and other capital budget items, but
exclusively for expanding the capital base of the respondents in MANTRASCO, cannot be allowed to deflect the
respondents responsibilities toward our income tax laws. The conclusion is thus ineluctable that whenever the
companies involved herein parted with a portion of their earnings "to buy" the corporate holdings of Reese, they were
in ultimate effect and result making a distribution of such earnings to the respondents. All these amounts are
consequently subject to income tax as being, in truth and in fact, a flow of cash benefits to the respondents.
We are of the opinion, however, that the Commissioner erred in assessing the respondents the total acquisition cost
(P7,973,660) of the alleged treasury stock dividends in one lump sum. The record shows that the earnings of
MANTRASCO over a period of years were used to gradually wipe out the holdings therein of Reese. Consequently,
those earnings, which we hold, under the facts disclosed in the case at bar, as in effect having been distributed to the
respondents, should be taxed for each of the corresponding years when payments were made to Reeses estate on
account of his 24,700 shares. With regard to payments made with MANTRASCO earnings in 1958 and the years before,
while indeed those earnings were utilized in those years to gradually pay off the value of Reeses holdings in
MANTRASCO, there is no evidence from which it can be inferred that prior to the passage of the stockholders
resolution of December 22, 1958 the contributed equity of each of the respondents rose correspondingly. It was only
by virtue of the authority contained in the said resolution that the respondents actually, albeit illegally, appropriated
and partitioned among themselves the stockholders equity representing Reeses interests in MANTRASCO. As those
payments accrued in favor of the respondents in 1958 they are and should be liable, for income tax purposes, to the
extent of the aggregate amount paid, from 1955 to 1958, by MANTRASCO to buy off Reeses shares.
The fact that the resolution authorizing the distribution of the said earnings is null and void is of no moment. Under the
National Internal Revenue Code, income tax is assessed on income received from any property, activity or service that
produces income. 9 The Tax Code stands as an indifferent, neutral party on the matter of where the income comes
from. 10
Subject to the foregoing qualifications, we find the action taken by the Commissioner in all other respects that is,
the assessment of a fraud penalty and imposition of interest charges pursuant to the provisions of the Tax Code to
be in accordance with law.
ACCORDINGLY, the judgment of the Court of Tax Appeals absolving the respondents from any deficiency income tax
liability is set aside, and this case is hereby remanded to the Court of Tax Appeals for further proceedings. More
specifically, the Court of Tax Appeals shall recompute the income tax liabilities of the respondents in accordance with
this decision and with the Tax Code, and thereafter pronounce and enter judgment accordingly. No costs.

foreign firm be taxable as dividends? Under the facts of this case, has the governments right to assess and collect said
tax prescribed?

The Case

These are the main questions raised in the Petition for Review on Certiorari before us, assailing the October 11, 1993
Decision[1] of the Court of Appeals[2]in CA-GR SP 29502, which dismissed petitioners appeal of the October 19, 1992
Decision[3] of the Court of Tax Appeals[4] (CTA) which had previously sustained petitioners liability for deficiency
income tax, interest and withholding tax. The Court of Appeals ruled:
WHEREFORE, the petition is DISMISSED, with costs against petitioners.[5]
The petition also challenges the November 15, 1993 Court of Appeals (CA) Resolution[6] denying reconsideration.

The Facts

The antecedent facts,[7] as found by the Court of Appeals, are as follows:

The petitioners are 41 non-life insurance corporations, organized and existing under the laws of the Philippines. Upon
issuance by them of Erection, Machinery Breakdown, Boiler Explosion and Contractors All Risk insurance policies, the
petitioners on August 1, 1965 entered into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with
the Munchener Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident foreign insurance
corporation. The reinsurance treaties required petitioners to form a [p]ool. Accordingly, a pool composed of the
petitioners was formed on the same day.
On April 14, 1976, the pool of machinery insurers submitted a financial statement and filed an Information Return of
Organization Exempt from Income Tax for the year ending in 1975, on the basis of which it was assessed by the
Commissioner of Internal Revenue deficiency corporate taxes in the amount of P1,843,273.60, and withholding taxes
in the amount of P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the petitioners, respectively.These
assessments were protested by the petitioners through its auditors Sycip, Gorres, Velayo and Co.
On January 27, 1986, the Commissioner of Internal Revenue denied the protest and ordered the petitioners, assessed
as Pool of Machinery Insurers, to pay deficiency income tax, interest, and with[h]olding tax, itemized as follows:
Net income per information
return P3,737,370.00
===========
The CA ruled in the main that the pool of machinery insurers was a partnership taxable as a corporation, and that the
latters collection of premiums on behalf of its members, the ceding companies, was taxable income. It added that
prescription did not bar the Bureau of Internal Revenue (BIR) from collecting the taxes due, because the taxpayer
cannot be located at the address given in the information return filed. Hence, this Petition for Review before us.[9]

20 AFISCO INSURANCE VS CA
DECISION
PANGANIBAN, J.:

Pursuant to reinsurance treaties, a number of local insurance firms formed themselves into a pool in order to facilitate
the handling of business contracted with a nonresident foreign reinsurance company. May the clearing house or
insurance pool so formed be deemed a partnership or an association that is taxable as a corporation under the
National Internal Revenue Code (NIRC)? Should the pools remittances to the member companies and to the said

The Issues

Before this Court, petitioners raise the following issues:

1.Whether or not the Clearing House, acting as a mere agent and performing strictly administrative functions, and
which did not insure or assume any risk in its own name, was a partnership or association subject to tax as a
corporation;
2.Whether or not the remittances to petitioners and MUNICHRE of their respective shares of reinsurance premiums,
pertaining to their individual and separate contracts of reinsurance, were dividends subject to tax; and
3.Whether or not the respondent Commissioners right to assess the Clearing House had already prescribed.[10]

corporations was made even clearer by the Tax Reform Act of 1997,[21]which amended the Tax Code. Pertinent
provisions of the new law read as follows:
SEC. 27. Rates of Income Tax on Domestic Corporations. -(A) In General. -- Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby
imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines
by every corporation, as defined in Section 22 (B) of this Code, and taxable under this Title as a corporation xxx.
SEC. 22. -- Definition. -- When used in this Title:

The Courts Ruling

The petition is devoid of merit. We sustain the ruling of the Court of Appeals that the pool is taxable as a corporation,
and that the governments right to assess and collect the taxes had not prescribed.

xxx xxx xxx

(B) The term corporation shall include partnerships, no matter how created or organized, joint-stock companies, joint
accounts (cuentas en participacion), associations, or insurance companies, but does not include general professional
partnerships [or] a joint venture or consortium formed for the purpose of undertaking construction projects or
engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium
agreement under a service contract without the Government. General professional partnerships are partnerships
formed by persons for the sole purpose of exercising their common profession, no part of the income of which is
derived from engaging in any trade or business.
xxx xxx xxx."

First Issue:
Pool Taxable as a Corporation

Petitioners contend that the Court of Appeals erred in finding that the pool or clearing house was an informal
partnership, which was taxable as a corporation under the NIRC. They point out that the reinsurance policies were
written by them individually and separately, and that their liability was limited to the extent of their allocated share in
the original risks thus reinsured.[11] Hence, the pool did not act or earn income as a reinsurer.[12] Its role was limited
to its principal function of allocating and distributing the risk(s) arising from the original insurance among the
signatories to the treaty or the members of the pool based on their ability to absorb the risk(s) ceded[;] as well as the
performance of incidental functions, such as records, maintenance, collection and custody of funds, etc.[13]
Petitioners belie the existence of a partnership in this case, because (1) they, the reinsurers, did not share the same
risk or solidary liability;[14] (2)there was no common fund;[15] (3) the executive board of the pool did not exercise
control and management of its funds, unlike the board of directors of a corporation; [16] and (4) the pool or clearing
house was not and could not possibly have engaged in the business of reinsurance from which it could have derived
income for itself.[17]

Thus, the Court in Evangelista v. Collector of Internal Revenue[22] held that Section 24 covered these unregistered
partnerships and even associations or joint accounts, which had no legal personalities apart from their individual
members.[23] The Court of Appeals astutely applied Evangelista:[24]
xxx Accordingly, a pool of individual real property owners dealing in real estate business was considered a corporation
for purposes of the tax in sec. 24 of the Tax Code in Evangelista v. Collector of Internal Revenue, supra. The Supreme
Court said:
The term partnership includes a syndicate, group, pool, joint venture or other unincorporated organization, through or
by means of which any business, financial operation, or venture is carried on. * * * (8 Mertens Law of Federal Income
Taxation, p. 562 Note 63)
Article 1767 of the Civil Code recognizes the creation of a contract of partnership when two or more persons bind
themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits
among themselves.[25] Its requisites are: (1) mutual contribution to a common stock, and (2) a joint interest in the
profits.[26] In other words, a partnership is formed when persons contract to devote to a common purpose either
money, property, or labor with the intention of dividing the profits between themselves. [27] Meanwhile, an association
implies associates who enter into a joint enterprise x x x for the transaction of business.[28]

The Court is not persuaded. The opinion or ruling of the Commission of Internal Revenue, the agency tasked with the
enforcement of tax laws, is accorded much weight and even finality, when there is no showing that it is patently
wrong,[18] particularly in this case where the findings and conclusions of the internal revenue commissioner were
subsequently affirmed by the CTA, a specialized body created for the exclusive purpose of reviewing tax cases, and
the Court of Appeals.[19] Indeed,

In the case before us, the ceding companies entered into a Pool Agreement[29] or an association[30] that would
handle all the insurance businesses covered under their quota-share reinsurance treaty[31] and surplus reinsurance
treaty[32]with Munich. The following unmistakably indicates a partnership or an association covered by Section 24 of
the NIRC:

[I]t has been the long standing policy and practice of this Court to respect the conclusions of quasi-judicial agencies,
such as the Court of Tax Appeals which, by the nature of its functions, is dedicated exclusively 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 its authority.[20]

(1) The pool has a common fund, consisting of money and other valuables that are deposited in the name and credit of
the pool.[33] This common fund pays for the administration and operation expenses of the pool.[34]

This Court rules that the Court of Appeals, in affirming the CTA which had previously sustained the internal revenue
commissioner, committed no reversible error. Section 24 of the NIRC, as worded in the year ending 1975, provides:
SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- A tax is hereby imposed upon the taxable
net income received during each taxable year from all sources by every corporation organized in, or existing under
the laws of the Philippines, no matter how created or organized, but notincluding duly registered general copartnership (compaias colectivas), general professional partnerships, private educational institutions, and building and
loan associations xxx.
Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled them such
as unregistered partnerships and associations. Parenthetically, the NLRCs inclusion of such entities in the tax on

(2) The pool functions through an executive board, which resembles the board of directors of a corporation, composed
of one representative for each of the ceding companies.[35]
(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its work is indispensable,
beneficial and economically useful to the business of the ceding companies and Munich, because without it they would
not have received their premiums.The ceding companies share in the business ceded to the pool and in the expenses
according to a Rules of Distribution annexed to the Pool Agreement.[36] Profit motive or business is, therefore, the
primordial reason for the pools formation. As aptly found by the CTA:
xxx The fact that the pool does not retain any profit or income does not obliterate an antecedent fact, that of the pool
being used in the transaction of business for profit. It is apparent, and petitioners admit, that their association or
coaction was indispensable [to] the transaction of the business. x x x If together they have conducted business, profit
must have been the object as, indeed, profit was earned. Though the profit was apportioned among the members, this
is only a matter of consequence, as it implies that profit actually resulted.[37]

The petitioners reliance on Pascual v. Commissioner[38] is misplaced, because the facts obtaining therein are not on
all fours with the present case. InPascual, there was no unregistered partnership, but merely a co-ownership which
took up only two isolated transactions.[39] The Court of Appeals did not err in applying Evangelista, which involved a
partnership that engaged in a series of transactions spanning more than ten years, as in the case before us.

Second Issue:
Pools Remittances Are Taxable

Petitioners further contend that the remittances of the pool to the ceding companies and Munich are not dividends
subject to tax. They insist that taxing such remittances contravene Sections 24 (b) (I) and 263 of the 1977 NIRC and
would be tantamount to an illegal double taxation, as it would result in taxing the same premium income twice in the
hands of the same taxpayer.[40] Moreover, petitioners argue that since Munich was not a signatory to the Pool
Agreement, the remittances it received from the pool cannot be deemed dividends.[41] They add that even if such
remittances were treated as dividends, they would have been exempt under the previously mentioned sections of the
1977 NIRC,[42] as well as Article 7 of paragraph 1[43] and Article 5 of paragraph 5[44] of the RP-West German Tax
Treaty.[45]
Petitioners are clutching at straws. Double taxation means taxing the same property twice when it should be taxed
only once. That is, xxx taxing the same person twice by the same jurisdiction for the same thing.[46] In the instant
case, the pool is a taxable entity distinct from the individual corporate entities of the ceding companies. The tax on
its income is obviously different from the tax on the dividends received by the said companies. Clearly, there is no
double taxation here.

Third Issue: Prescription

Petitioners also argue that the governments right to assess and collect the subject tax had prescribed. They claim that
the subject information return was filed by the pool on April 14, 1976. On the basis of this return, the BIR telephoned
petitioners on November 11, 1981, to give them notice of its letter of assessment dated March 27, 1981. Thus, the
petitioners contend that the five-year statute of limitations then provided in the NIRC had already lapsed, and that the
internal revenue commissioner was already barred by prescription from making an assessment.[56]
We cannot sustain the petitioners. The CA and the CTA categorically found that the prescriptive period was tolled
under then Section 333 of the NIRC,[57] because the taxpayer cannot be located at the address given in the
information return filed and for which reason there was delay in sending the assessment. [58] Indeed, whether the
governments right to collect and assess the tax has prescribed involves facts which have been ruled upon by the lower
courts. It is axiomatic that in the absence of a clear showing of palpable error or grave abuse of discretion, as in this
case, this Court must not overturn the factual findings of the CA and the CTA.
Furthermore, petitioners admitted in their Motion for Reconsideration before the Court of Appeals that the pool
changed its address, for they stated that the pools information return filed in 1980 indicated therein its present
address. The Court finds that this falls short of the requirement of Section 333 of the NIRC for the suspension of the
prescriptive period. The law clearly states that the said period will be suspended only if the taxpayer informs the
Commissioner of Internal Revenue of any change in the address.
WHEREFORE, the petition is DENIED. The Resolutions of the Court of Appeals dated October 11, 1993 and November
15, 1993 are herebyAFFIRMED. Costs against petitioners.
SO ORDERED.

The tax exemptions claimed by petitioners cannot be granted, since their entitlement thereto remains unproven and
unsubstantiated. It is axiomatic in the law of taxation that taxes are the lifeblood of the nation. Hence, exemptions
therefrom are highly disfavored in law and he who claims tax exemption must be able to justify his claim or right.
[47] Petitioners have failed to discharge this burden of proof. The sections of the 1977 NIRC which they cite are
inapplicable, because these were not yet in effect when the income was earned and when the subject information
return for the year ending 1975 was filed.
Referring to the 1975 version of the counterpart sections of the NIRC, the Court still cannot justify the exemptions
claimed. Section 255 provides that no tax shall xxx be paid upon reinsurance by any company that has already paid
the tax xxx. This cannot be applied to the present case because, as previously discussed, the pool is a taxable entity
distinct from the ceding companies; therefore, the latter cannot individually claim the income tax paid by the former
as their own.
On the other hand, Section 24 (b) (1)[48] pertains to tax on foreign corporations; hence, it cannot be claimed by the
ceding companies which are domestic corporations. Nor can Munich, a foreign corporation, be granted exemption
based solely on this provision of the Tax Code, because the same subsection specifically taxes dividends, the type of
remittances forwarded to it by the pool. Although not a signatory to the Pool Agreement, Munich is patently an
associate of the ceding companies in the entity formed, pursuant to their reinsurance treaties which required the
creation of said pool.

21 G.R. No. L-45425

April 29, 1939

JOSE GATCHALIAN, ET AL., plaintiffs-appellants,

vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.
Guillermo B. Reyes for appellants.
Office of the Solicitor-General Tuason for appellee.
IMPERIAL, J.:
The plaintiff brought this action to recover from the defendant Collector of Internal Revenue the sum of P1,863.44, with legal interest thereon, which
they paid under protest by way of income tax. They appealed from the decision rendered in the case on October 23, 1936 by the Court of First
Instance of the City of Manila, which dismissed the action with the costs against them.
The case was submitted for decision upon the following stipulation of facts:
Come now the parties to the above-mentioned case, through their respective undersigned attorneys, and hereby agree to respectfully submit to this
Honorable Court the case upon the following statement of facts:
1. That plaintiff are all residents of the municipality of Pulilan, Bulacan, and that defendant is the Collector of Internal Revenue of the Philippines;

Under its pool arrangement with the ceding companies, Munich shared in their income and loss. This is manifest from
a reading of Articles 3[49] and 10[50] of the Quota Share Reinsurance Treaty and Articles 3[51] and 10[52] of the
Surplus Reinsurance Treaty. The foregoing interpretation of Section 24 (b) (1) is in line with the doctrine that a tax
exemption must be construed strictissimi juris, and the statutory exemption claimed must be expressed in a language
too plain to be mistaken.[53]

2. That prior to December 15, 1934 plaintiffs, in order to enable them to purchase one sweepstakes ticket valued at two pesos (P2), subscribed and
paid therefor the amounts as follows:

Finally, the petitioners claim that Munich is tax-exempt based on the RP-West German Tax Treaty is likewise
unpersuasive, because the internal revenue commissioner assessed the pool for corporate taxes on the basis of the
information return it had submitted for the year ending 1975, a taxable year when said treaty was not yet in effect.
[54] Although petitioners omitted in their pleadings the date of effectivity of the treaty, the Court takes judicial notice
that it took effect only later, on December 14, 1984.[55]

4. That as a result of the drawing of the sweepstakes on December 15, 1934, the above-mentioned ticket bearing No. 178637 won one of the third
prizes in the amount of P50,000 and that the corresponding check covering the above-mentioned prize of P50,000 was drawn by the National Charity
Sweepstakes Office in favor of Jose Gatchalian & Company against the Philippine National Bank, which check was cashed during the latter part of
December, 1934 by Jose Gatchalian & Company;

3. That immediately thereafter but prior to December 15, 1934, plaintiffs purchased, in the ordinary course of business, from one of the duly
authorized agents of the National Charity Sweepstakes Office one ticket bearing No. 178637 for the sum of two pesos (P2) and that the said ticket
was registered in the name of Jose Gatchalian and Company;

5. That on December 29, 1934, Jose Gatchalian was required by income tax examiner Alfredo David to file the corresponding income tax return
covering the prize won by Jose Gatchalian & Company and that on December 29, 1934, the said return was signed by Jose Gatchalian, a copy of
which return is enclosed as Exhibit A and made a part hereof;

6. That on January 8, 1935, the defendant made an assessment against Jose Gatchalian & Company requesting the payment of the sum of P1,499.94
to the deputy provincial treasurer of Pulilan, Bulacan, giving to said Jose Gatchalian & Company until January 20, 1935 within which to pay the said
amount of P1,499.94, a copy of which letter marked Exhibit B is enclosed and made a part hereof;
7. That on January 20, 1935, the plaintiffs, through their attorney, sent to defendant a reply, a copy of which marked Exhibit C is attached and made a
part hereof, requesting exemption from payment of the income tax to which reply there were enclosed fifteen (15) separate individual income tax
returns filed separately by each one of the plaintiffs, copies of which returns are attached and marked Exhibit D-1 to D-15, respectively, in order of
their names listed in the caption of this case and made parts hereof; a statement of sale signed by Jose Gatchalian showing the amount put up by each
of the plaintiffs to cover up the attached and marked as Exhibit E and made a part hereof; and a copy of the affidavit signed by Jose Gatchalian dated
December 29, 1934 is attached and marked Exhibit F and made part thereof;
8. That the defendant in his letter dated January 28, 1935, a copy of which marked Exhibit G is enclosed, denied plaintiffs' request of January 20,
1935, for exemption from the payment of tax and reiterated his demand for the payment of the sum of P1,499.94 as income tax and gave plaintiffs
until February 10, 1935 within which to pay the said tax;
9. That in view of the failure of the plaintiffs to pay the amount of tax demanded by the defendant, notwithstanding subsequent demand made by
defendant upon the plaintiffs through their attorney on March 23, 1935, a copy of which marked Exhibit H is enclosed, defendant on May 13, 1935
issued a warrant of distraint and levy against the property of the plaintiffs, a copy of which warrant marked Exhibit I is enclosed and made a part
hereof;
10. That to avoid embarrassment arising from the embargo of the property of the plaintiffs, the said plaintiffs on June 15, 1935, through Gregoria
Cristobal, Maria C. Legaspi and Jesus Legaspi, paid under protest the sum of P601.51 as part of the tax and penalties to the municipal treasurer of
Pulilan, Bulacan, as evidenced by official receipt No. 7454879 which is attached and marked Exhibit J and made a part hereof, and requested
defendant that plaintiffs be allowed to pay under protest the balance of the tax and penalties by monthly installments;

The Collector of Internal Revenue collected the tax under section 10 of Act No. 2833, as last amended by section 2 of Act No. 3761, reading as
follows:
SEC. 10. (a) There shall be levied, assessed, collected, and paid annually upon the total net income received in the preceding calendar year from all
sources by every corporation, joint-stock company, partnership, joint account (cuenta en participacion), association or insurance company, organized
in the Philippine Islands, no matter how created or organized, but not including duly registered general copartnership (compaias colectivas), a tax of
three per centum upon such income; and a like tax shall be levied, assessed, collected, and paid annually upon the total net income received in the
preceding calendar year from all sources within the Philippine Islands by every corporation, joint-stock company, partnership, joint account (cuenta
en participacion), association, or insurance company organized, authorized, or existing under the laws of any foreign country, including interest on
bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise: Provided, however, That nothing in this section shall be
construed as permitting the taxation of the income derived from dividends or net profits on which the normal tax has been paid.
The gain derived or loss sustained from the sale or other disposition by a corporation, joint-stock company, partnership, joint account (cuenta en
participacion), association, or insurance company, or property, real, personal, or mixed, shall be ascertained in accordance with subsections (c) and
(d) of section two of Act Numbered Two thousand eight hundred and thirty-three, as amended by Act Numbered Twenty-nine hundred and twentysix.
The foregoing tax rate shall apply to the net income received by every taxable corporation, joint-stock company, partnership, joint account (cuenta en
participacion), association, or insurance company in the calendar year nineteen hundred and twenty and in each year thereafter.

11. That plaintiff's request to pay the balance of the tax and penalties was granted by defendant subject to the condition that plaintiffs file the usual
bond secured by two solvent persons to guarantee prompt payment of each installments as it becomes due;

There is no doubt that if the plaintiffs merely formed a community of property the latter is exempt from the payment of income tax under the law. But
according to the stipulation facts the plaintiffs organized a partnership of a civil nature because each of them put up money to buy a sweepstakes
ticket for the sole purpose of dividing equally the prize which they may win, as they did in fact in the amount of P50,000 (article 1665, Civil Code).
The partnership was not only formed, but upon the organization thereof and the winning of the prize, Jose Gatchalian personally appeared in the
office of the Philippines Charity Sweepstakes, in his capacity as co-partner, as such collection the prize, the office issued the check for P50,000 in
favor of Jose Gatchalian and company, and the said partner, in the same capacity, collected the said check. All these circumstances repel the idea that
the plaintiffs organized and formed a community of property only.

12. That on July 16, 1935, plaintiff filed a bond, a copy of which marked Exhibit K is enclosed and made a part hereof, to guarantee the payment of
the balance of the alleged tax liability by monthly installments at the rate of P118.70 a month, the first payment under protest to be effected on or
before July 31, 1935;

Having organized and constituted a partnership of a civil nature, the said entity is the one bound to pay the income tax which the defendant collected
under the aforesaid section 10 (a) of Act No. 2833, as amended by section 2 of Act No. 3761. There is no merit in plaintiff's contention that the tax
should be prorated among them and paid individually, resulting in their exemption from the tax.

13. That on July 16, 1935 the said plaintiffs formally protested against the payment of the sum of P602.51, a copy of which protest is attached and
marked Exhibit L, but that defendant in his letter dated August 1, 1935 overruled the protest and denied the request for refund of the plaintiffs;

In view of the foregoing, the appealed decision is affirmed, with the costs of this instance to the plaintiffs appellants. So ordered.

14. That, in view of the failure of the plaintiffs to pay the monthly installments in accordance with the terms and conditions of bond filed by them,
the defendant in his letter dated July 23, 1935, copy of which is attached and marked Exhibit M, ordered the municipal treasurer of Pulilan, Bulacan
to execute within five days the warrant of distraint and levy issued against the plaintiffs on May 13, 1935;

22 G.R. No. L-29790 February 25, 1982

15. That in order to avoid annoyance and embarrassment arising from the levy of their property, the plaintiffs on August 28, 1936, through Jose
Gatchalian, Guillermo Tapia, Maria Santiago and Emiliano Santiago, paid under protest to the municipal treasurer of Pulilan, Bulacan the sum of
P1,260.93 representing the unpaid balance of the income tax and penalties demanded by defendant as evidenced by income tax receipt No. 35811
which is attached and marked Exhibit N and made a part hereof; and that on September 3, 1936, the plaintiffs formally protested to the defendant
against the payment of said amount and requested the refund thereof, copy of which is attached and marked Exhibit O and made part hereof; but that
on September 4, 1936, the defendant overruled the protest and denied the refund thereof; copy of which is attached and marked Exhibit P and made a
part hereof; and
16. That plaintiffs demanded upon defendant the refund of the total sum of one thousand eight hundred and sixty three pesos and forty-four centavos
(P1,863.44) paid under protest by them but that defendant refused and still refuses to refund the said amount notwithstanding the plaintiffs' demands.

AGUINALDO INDUSTRIES CORPORATION (FISHING NETS DIVISIONS), petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.

PLANA , J.:
This is a petition for review of the decision and resolution of the Court of Tax Appeals in CTA Case No. 1636 holding the petitioner liable for the
sum of P17,123.93 as deficiency income tax for l957, plus 5% surcharge and 1% monthly interest for late payment from December 15, 1957 until full
payment is made.
As summarized by the respondent Court, the facts are:
... Aguinaldo Industries Corporation is a domestic corporation engaged in two lines of business, namely: (a) the manufacture of fishing nets, a taxexempt industry, and (b) the manufacture of furniture Its business of manufacturing fishing nets is handled by its Fish Nets Division, while the
manufacture of Furniture is operated by its Furniture Division. For accounting purposes, each division is provided with separate books of accounts as
required by the Department of Finance. Under the company's accounting method, the net income from its Fish Nets Division, miscellaneous income
of the Fish Nets Division, and the income of the Furniture Division are computed individually

17. The parties hereto reserve the right to present other and additional evidence if necessary.
Exhibit E referred to in the stipulation is of the following tenor:
To whom it may concern:
I, Jose Gatchalian, a resident of Pulilan, Bulacan, married, of age, hereby certify, that on the 11th day of August, 1934, I sold parts of my shares on
ticket No. 178637 to the persons and for the amount indicated below and the part of may share remaining is also shown to wit:
ticket; and that, therefore, the persons named above are entitled to the parts of whatever prize that might be won by said ticket.
Pulilan, Bulacan, P.I.
(Sgd.) JOSE GATCHALIAN
And a summary of Exhibits D-1 to D-15 is inserted in the bill of exceptions as follows:
RECAPITULATIONS OF 15 INDIVIDUAL INCOME TAX RETURNS FOR 1934 ALL DATED JANUARY 19, 1935 SUBMITTED TO THE
COLLECTOR OF INTERNAL REVENUE.
The legal questions raised in plaintiffs-appellants' five assigned errors may properly be reduced to the two following: (1) Whether the plaintiffs
formed a partnership, or merely a community of property without a personality of its own; in the first case it is admitted that the partnership thus
formed is liable for the payment of income tax, whereas if there was merely a community of property, they are exempt from such payment; and (2)
whether they should pay the tax collectively or whether the latter should be prorated among them and paid individually.

Previously, petitioner acquired a parcel of land in Muntinglupa, Rizal, as site of the fishing net factory. This transaction was entered in the books of
the Fish Nets Division of the Company. Later, when another parcel of land in Marikina Heights was found supposedly more suitable for the needs of
petitioner, it sold the Muntinglupa property, Petitioner derived profit from this sale which was entered in the books of the Fish Nets Division as
miscellaneous income to distinguish it from its tax-exempt income.
For the year 1957, petitioner filed two separate income tax returns one for its Fish Nets Division and another for its Furniture Division. After
investigation of these returns, the examiners of the Bureau of Internal Revenue found that the Fish Nets Division deducted from its gross income for
that year the amount of P61,187.48 as additional remuneration paid to the officers of petitioner. The examiner further found that this amount was
taken from the net profit of an isolated transaction (sale of aforementioned land) not in the course of or carrying on of petitioner's trade or business.
(It was reported as part of the selling expenses of the land in Muntinglupa, Rizal, the details of said transaction being as follows:
Upon recommendation of aforesaid examiner that the said sum of P61,187.48 be disallowed as deduction from gross income, petitioner asserted in its
letter of February 19, 1958, that said amount should be allowed as deduction because it was paid to its officers as allowance or bonus pursuant to
Section 3 of its by-laws which provides as follows:

From the net profits of the business of the Company shall be deducted for allowance of the President 3% for the first Vice President 1 %, for
the second Vice President for the members of the Board of Directors 10% to he divided equally among themselves, for the Secretary of the Board
for the General Manager for two Assistant General Managers
In this connection, petitioner explains that to arrive at the aforesaid 20% it gets 20'7o of the profits from the furniture business and adds (the same) to
20 of the profit of the fish net venture. The P61,187.48 which is the basis of the assessment of P17,133.00 does not even represent the entire 20%,
allocated as allowance in Section 3 of its by-laws but only 20% of the net profit of the non-exempt operation of the Fish Nets Division, that is, 20,%,
of P305,869.89, which is the sum total of P305,802.18 representing profit from the sale of the Muntinglupa land, P45.21 representing interest on
savings accounts, and P90.00 representing dividends from investment of the Fish Nets Division. (Pages 2-5, Decision.)

We now come to the issue regarding the imposition of 5% surcharge and 1% monthly interest for late payment of the deficiency tax on petitioner's
income which was earned in 1957 and assessed on May 30, 19-08.
The applicable law is Section 51 of the Tax Code which, before its amendment by Republic Act 2343 effective June 20, 1959, reads as follows:
SEC. 51. Assessment and payment of income tax Assessment of tax. All assessments shall be made by the Collector of In ternal Revenue and all
persons and corporations subject to tax shall be notified of the amount for which they are respectively liable on or before the first day of May of each
successive year.

Upon the submission of the case for judgment on the basis of the pleadings and BIR official records, the respondent Court rendered the questioned
decision. Subsequently, on a motion for reconsideration filed by petitioner, the respondent Court issued a resolution dated September 30, 1968
imposing a 5% surcharge and 1% monthly interest on the deficiency assessment.

(b) Time of payment. The total amount of tax imposed by this Title shall be paid on or before the fifteenth day of May following the close of the
calendar year, by the person subject to tax, and, in the case of a corporation, by the president, vice- president, or other responsible officer thereof. If
the return is made on the basis of a fiscal year, the total amount of the tax shall be paid on or before the f if teenth day of the fifth month following
the close of the fiscal year.

Dissatisfied, petitioner has come to this Court on errors assigned in its brief.

xxx xxx xxx

Petitioner argues that the profit derived from the sale of its Muntinglupa land is not taxable for it is tax-exempt income, considering that its Fish Nets
Division enjoys tax exemption as a new and necessary industry under Republic Act 901.

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

It must be stressed however that at the administrative level, the petitioner implicitly admitted that the profit it derived from the sale of its
Muntinglupa land, a capital asset, was a taxable gain which was precisely the reason why for tax purposes the petitioner deducted therefrom the
questioned bonus to its corporate officers as a supposed item of expense incurred for the sale of the said land, apart from the P51,723.72 commission
paid by the petitioner to the real estate agent who indeed effected the sale. The BIR therefore had no occasion to pass upon the issue.
To allow a litigant to assume a different posture when he comes before the court and challenge the position he had accepted at the administrative
level, would be to sanction a procedure whereby the court which is supposed to review administrative determinations would not review, but
determine and decide for the first time, a question not raised at the administrative forum. This cannot be permitted, for the same reason that underlies
the requirement of prior exhaustion of administrative remedies to give administrative authorities the prior opportunity to decide controversies within
its competence, and in much the same way that, on the judicial level, issues not raised in the lower court cannot be raised for the first time on appeal.
In the instant case, up to the time the questioned decision of the respondent Court was rendered, the petitioner had always implicitly admitted that the
disputed capital gain was taxable, although subject to the deduction of the bonus paid to its corporate officers. It was only after the said decision had
been rendered and on a motion for reconsideration thereof, that the issue of tax exemption was raised by the petitioner for the first time. It was thus
not one of the issues raised by petitioner in his petition and supporting memorandum in the Court of Tax Appeals.
We therefore hold that petitioner's belated claim for tax exemption was properly rejected.
The remaining issues in this appeal are: (1) whether or not the bonus given to the officers of the petitioner upon the sale of its Muntinglupa land is an
ordinary and necessary business expense deductible for income tax purposes; and (2) whether or not petitioner is hable for surcharge and interest for
late payment.
Anent the first question, the applicable legal provision is Sec. 30 (a) (1) of the Tax Code which reads:
In computing net income there shall be allowed as deductions
(a) Expenses:
(1) In general. All the Ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a
reasonable allowance for personal services actually rendered. ...
On the basis of the foregoing standards, the bonus given to the officers of the petitioner as their share of the profit realized from the sale of
petitioner's Muntinglupa land cannot be deemed a deductible expense for tax purposes, even if the aforesaid sale could be considered as a transaction
for Carrying on the trade or business of the petitioner and the grant of the bonus to the corporate officers pursuant to petitioner's by-laws could, as an
intra-corporate matter, be sustained. The records show that the sale was effected through a broker who was paid by petitioner a commission of
P51,723.72 for his services. On the other hand, there is absolutely no evidence of any service actually rendered by petitioner's officers which could
be the basis of a grant to them of a bonus out of the profit derived from the sale. This being so, the payment of a bonus to them out of the gain
realized from the sale cannot be considered as a selling expense; nor can it be deemed reasonable and necessary so as to make it deductible for tax
purposes. As stated by this Court in Alhambra Cigar and Cigarette Manufacturing Co. vs. Collector of Internal Revenue, G.R. No. L-12026, May 29,
1959, construing Section 30 (a) (1) of the Tax Code:
. . . . whenever a controversy arises on the deductibility, for purposes of income tax, of certain items for alleged compensation of officers of the
taxpayer, two (2) questions become material, namely: (a) Have personal services been actually rendered by said officers? (b) In the affirmative case,
what is the reasonable allowance' therefor

Applying the foregoing provisions, the respondent Court said:

It should be observed that, under the old Section 51 (e), the 5% surcharge and interest on deficiency was imposed from the time the tax became due,
and said interest was imposable in case of non-payment on time, not only on the basic income tax, but also on the deficiency tax, since the deficiency
was part and parcel of the taxpayer's income tax liability. It should further be observed that, although the Commissioner (formerly Collector) of
Internal Revenue, under the old Section 51 (a) was required to assess the tax due, based on the taxpayer's return, and notify the taxpayer of said
assessment, still, under subsection (b) of the same old Section 51, the time prescribed for the payment of tax was fixed, whether or not a notice of the
assessment was given to the taxpayer (See Central Azucarera Don Pedro v. Court of Tax Appeals, et al. G.R. Nos. L-23236 & 23254, May 31, 1967).
Inasmuch as petitioner had filed its income tax return for 1957 on the fiscal year basis ending June 30, 1957, the deficiency income tax in question
should have been paid on or before November 15, 1957-the fifteenth day of the fifth month following the close of the fiscal year (See Sec. 51
(b), supra). It follows that petitioner is liable to the 5% surcharge and 1% monthly interest for late payment, not from June 30, 1958, but from
November 15, 1957. Consequently, the payment of surcharge and interest on deficiency being statutory and therefore mandatory, petitioner is also
hable, aside from the basic tax above mentioned, for the 5% surcharge and 1% monthly interest for late payment of the deficiency income tax from
November 15, 1957 until paid. (CTA Resolution dated Sept. 30, 1968.)
The rule as to when interest and surcharges on delinquency tax payments become chargeable is wen settled and the respondent Court applied it
correctly. Construing the same provisions of the old Section 51 (e) and the Section 51 (d) of the Tax Code, as amended by Republic Act 2343, this
Court held that the interest and surcharges on deficiency taxes are imposable upon failure of the taxpayer to pay the tax on the date fixed in the law
for the payment thereof, which was, under the unamended Section 51 of the Tax Code, the fifteenth day of the fifth month following the close of the
fiscal year in the case of taxpayers whose tax returns were made on the basis of fiscal years. [Commissioner of Internal Revenue vs. Connel Bros.
Co. (Phil.), 40 SCRA 416.]
The rule has to be so because a deficiency tax indicates non-payment of the correct tax, and such deficiency exists not only from the assessment
thereof but from the very time the taxpayer failed to pay the correct amount of tax when it should have been paid (Ibid.) and the imposition thereof is
mandatory even in the absence of fraud or wilful failure to pay the tax is full.
As regards interest, the reason is
The imposition of 1% monthly is but a just compensation to the State for the delay in paying the tax and for the concomitant use by the taxpayer of
funds that rightfully should be in the government s hands. (U.S. vs. Goldstein, 189 F (2d) 752; Ross vs. U.S. 148 Fed. Supp. 330; U.S. vs. Joffray 97
Fed. (2d) 488.) The fact that the interest charged is made proportionate to the period of delay constitutes the best evidence that such interest is not
penal but compensator (Castro vs. Collector of Internal Revenue, G.R. L-12174, Dec. 28, 1662, Resolution on Motion for Reconsideration.)
As regards the prescribed 5% surcharge, this Court has had occasion to cite the reason for the strict enforcement thereof.
Strong reasons of policy support a strict observance of this rule. Tax laws imposing penalties for deliquencies are clearly intended to hasten tax
payments or to punish evasion or neglect of duty in respect thereof. If delays in tax payments are to be condoned for light reasons, the law imposing
penalties for delinquencies would be rendered nugatory, and the maintenance of the government and its multifarious activities would be as precarious
as taxpayers are wining or unwilling to pay their obligations to the state in time. Imperatives of public welfare will not approve of this result. (Jamora
vs. Meer, 74 PhiL 22.)
WHEREFORE, the judgment under review is affirmed in toto. Costs against the petitioner.

Then, this Court quoted with approval the appealed decision:

SO ORDERED.

. . . these extraordinary and unusual amounts paid by petitioner to these directors in the guise and form of compensation for their supposed services
as such, without any relation to the measure of their actual services, cannot be regarded as ordinary and necessary expenses within the meaning of
the law.

23 G.R. Nos. L-28508-9 July 7, 1989

This posture is in line with the doctrine in the law of taxation that the taxpayer must show that its claimed deductions clearly come within the
language of the law since allowances, like exemptions, are matters of legislative grace.

ESSO STANDARD EASTERN, INC., (formerly, Standard-Vacuum Oil Company), petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Padilla Law Office for petitioner.

CRUZ, J.:
On appeal before us is the decision of the Court of Tax Appeals 1 denying petitioner's claims for refund of overpaid income taxes of P102,246.00 for
1959 and P434,234.93 for 1960 in CTA Cases No. 1251 and 1558 respectively.
I
In CTA Case No. 1251, petitioner ESSO deducted from its gross income for 1959, as part of its ordinary and necessary business expenses, the
amount it had spent for drilling and exploration of its petroleum concessions. This claim was disallowed by the respondent Commissioner of Internal
Revenue on the ground that the expenses should be capitalized and might be written off as a loss only when a "dry hole" should result. ESSO then
filed an amended return where it asked for the refund of P323,279.00 by reason of its abandonment as dry holes of several of its oil wells. Also
claimed as ordinary and necessary expenses in the same return was the amount of P340,822.04, representing margin fees it had paid to the Central
Bank on its profit remittances to its New York head office.
On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, disallowing the claimed deduction for the margin fees paid.
In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the year 1960, in the amount of P367,994.00, plus 18% interest thereon of
P66,238.92 for the period from April 18,1961 to April 18, 1964, for a total of P434,232.92. The deficiency arose from the disallowance of the margin
fees of Pl,226,647.72 paid by ESSO to the Central Bank on its profit remittances to its New York head office.
ESSO settled this deficiency assessment on August 10, 1964, by applying the tax credit of P221,033.00 representing its overpayment on its income
tax for 1959 and paying under protest the additional amount of P213,201.92. On August 13, 1964, it claimed the refund of P39,787.94 as
overpayment on the interest on its deficiency income tax. It argued that the 18% interest should have been imposed not on the total deficiency of
P367,944.00 but only on the amount of P146,961.00, the difference between the total deficiency and its tax credit of P221,033.00.
This claim was denied by the CIR, who insisted on charging the 18% interest on the entire amount of the deficiency tax. On May 4,1965, the CIR
also denied the claims of ESSO for refund of the overpayment of its 1959 and 1960 income taxes, holding that the margin fees paid to the Central
Bank could not be considered taxes or allowed as deductible business expenses.
ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959, contending that the margin fees were deductible from gross income either
as a tax or as an ordinary and necessary business expense. It also claimed an overpayment of its tax by P434,232.92 in 1960, for the same reason.
Additionally, ESSO argued that even if the amount paid as margin fees were not legally deductible, there was still an overpayment by P39,787.94 for
1960, representing excess interest.
After trial, the CTA denied petitioner's claim for refund of P102,246.00 for 1959 and P434,234.92 for 1960 but sustained its claim for P39,787.94 as
excess interest. This portion of the decision was appealed by the CIR but was affirmed by this Court in Commissioner of Internal Revenue v.
ESSO, G.R. No. L-28502- 03, promulgated on April 18, 1989. ESSO for its part appealed the CTA decision denying its claims for the refund of the
margin fees P102,246.00 for 1959 and P434,234.92 for 1960. That is the issue now before us.
II
The first question we must settle is whether R.A. 2009, entitled An Act to Authorize the Central Bank of the Philippines to Establish a Margin Over
Banks' Selling Rates of Foreign Exchange, is a police measure or a revenue measure. If it is a revenue measure, the margin fees paid by the petitioner
to the Central Bank on its profit remittances to its New York head office should be deductible from ESSO's gross income under Sec. 30(c) of the
National Internal Revenue Code. This provides that all taxes paid or accrued during or within the taxable year and which are related to the taxpayer's
trade, business or profession are deductible from gross income.
The petitioner maintains that margin fees are taxes and cites the background and legislative history of the Margin Fee Law showing that R.A. 2609
was nothing less than a revival of the 17% excise tax on foreign exchange imposed by R.A. 601. This was a revenue measure formally proposed by
President Carlos P. Garcia to Congress as part of, and in order to balance, the budget for 1959-1960. It was enacted by Congress as such and,
significantly, properly originated in the House of Representatives. During its two and a half years of existence, the measure was one of the major
sources of revenue used to finance the ordinary operating expenditures of the government. It was, moreover, payable out of the General Fund.
On the claimed legislative intent, the Court of Tax Appeals, quoting established principles, pointed out that
We are not unmindful of the rule that opinions expressed in debates, actual proceedings of the legislature, steps taken in the enactment of a law, or the
history of the passage of the law through the legislature, may be resorted to as an aid in the interpretation of a statute which is ambiguous or of
doubtful meaning. The courts may take into consideration the facts leading up to, coincident with, and in any way connected with, the passage of the
act, in order that they may properly interpret the legislative intent. But it is also well-settled jurisprudence that only in extremely doubtful matters of
interpretation does the legislative history of an act of Congress become important. As a matter of fact, there may be no resort to the legislative history
of the enactment of a statute, the language of which is plain and unambiguous, since such legislative history may only be resorted to for the purpose
of solving doubt, not for the purpose of creating it. [50 Am. Jur. 328.]

a more or less inevitable concomitant of their economic development programs. The different measures of exchange control or restriction cover
different phases of foreign exchange transactions, i.e., in quantitative restriction, the control is on the amount of foreign exchange allowable. In the
case of the margin levy, the immediate impact is on the rate of foreign exchange; in fact, its main function is to control the exchange rate without
changing the par value of the peso as fixed in the Bretton Woods Agreement Act. For a member nation is not supposed to alter its exchange rate (at
par value) to correct a merely temporary disequilibrium in its balance of payments. By its nature, the margin levy is part of the rate of exchange as
fixed by the government.
As to the contention that the margin levy is a tax on the purchase of foreign exchange and hence should not form part of the exchange rate, suffice it
to state that We have already held the contrary for the reason that a tax is levied to provide revenue for government operations, while the proceeds of
the margin fee are applied to strengthen our country's international reserves.
Earlier, in Chamber of Agriculture and Natural Resources of the Philippines v. Central Bank, 3 the same idea was expressed, though in connection
with a different levy, through Justice J.B.L. Reyes:
Neither do we find merit in the argument that the 20% retention of exporter's foreign exchange constitutes an export tax. A tax is a levy for the
purpose of providing revenue for government operations, while the proceeds of the 20% retention, as we have seen, are applied to strengthen the
Central Bank's international reserve.
We conclude then that the margin fee was imposed by the State in the exercise of its police power and not the power of taxation.
Alternatively, ESSO prays that if margin fees are not taxes, they should nevertheless be considered necessary and ordinary business expenses and
therefore still deductible from its gross income. The fees were paid for the remittance by ESSO as part of the profits to the head office in the Unites
States. Such remittance was an expenditure necessary and proper for the conduct of its corporate affairs.
The applicable provision is Section 30(a) of the National Internal Revenue Code reading as follows:
SEC. 30. Deductions from gross income in computing net income there shall be allowed as deductions
(a) Expenses:
(1) In general. All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a
reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses while away from home in the
pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for the purpose of
the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.
(2) Expenses allowable to non-resident alien individuals and foreign corporations. In the case of a non-resident alien individual or a foreign
corporation, the expenses deductible are the necessary expenses paid or incurred in carrying on any business or trade conducted within the
Philippines exclusively.
In the case of Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue, 4the Court laid down the rules on the
deductibility of business expenses, thus:
The principle is recognized that when a taxpayer claims a deduction, he must point to some specific provision of the statute in which that deduction
is authorized and must be able to prove that he is entitled to the deduction which the law allows. As previously adverted to, the law allowing
expenses as deduction from gross income for purposes of the income tax is Section 30(a) (1) of the National Internal Revenue which allows a
deduction of 'all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.' An item of
expenditure, in order to be deductible under this section of the statute, must fall squarely within its language.
We come, then, to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense, three conditions are imposed,
namely: (1) the expense must be ordinary and necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid or incurred in
carrying on a trade or business. In addition, not only must the taxpayer meet the business test, he must substantially prove by evidence or records the
deductions claimed under the law, otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and
necessary does not justify its deduction.
While it is true that there is a number of decisions in the United States delving on the interpretation of the terms 'ordinary and necessary' as used in
the federal tax laws, no adequate or satisfactory definition of those terms is possible. Similarly, this Court has never attempted to define with
precision the terms 'ordinary and necessary.' There are however, certain guiding principles worthy of serious consideration in the proper adjudication
of conflicting claims. Ordinarily, an expense will be considered 'necessary' where the expenditure is appropriate and helpful in the development of
the taxpayer's business. It is 'ordinary' when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding
circumstances. The term 'ordinary' does not require that the payments be habitual or normal in the sense that the same taxpayer will have to make
them often; the payment may be unique or non-recurring to the particular taxpayer affected.

Apart from the above consideration, there are at least two cases where we have held that a margin fee is not a tax but an exaction designed to curb the
excessive demands upon our international reserve.

There is thus no hard and fast rule on the matter. The right to a deduction depends in each case on the particular facts and the relation of the payment
to the type of business in which the taxpayer is engaged. The intention of the taxpayer often may be the controlling fact in making the determination.
Assuming that the expenditure is ordinary and necessary in the operation of the taxpayer's business, the answer to the question as to whether the
expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself, which in turn depends on
the extent and permanency of the work accomplished by the expenditure.

In Caltex (Phil.) Inc. v. Acting Commissioner of Customs, 2 the Court stated through Justice Jose P. Bengzon:

In the light of the above explanation, we hold that the Court of Tax Appeals did not err when it held on this issue as follows:

A margin levy on foreign exchange is a form of exchange control or restriction designed to discourage imports and encourage exports, and ultimately,
'curtail any excessive demand upon the international reserve' in order to stabilize the currency. Originally adopted to cope with balance of payment
pressures, exchange restrictions have come to serve various purposes, such as limiting non-essential imports, protecting domestic industry and when
combined with the use of multiple currency rates providing a source of revenue to the government, and are in many developing countries regarded as

Considering the foregoing test of what constitutes an ordinary and necessary deductible expense, it may be asked: Were the margin fees paid by
petitioner on its profit remittance to its Head Office in New York appropriate and helpful in the taxpayer's business in the Philippines? Were the
margin fees incurred for purposes proper to the conduct of the affairs of petitioner's branch in the Philippines? Or were the margin fees incurred for
the purpose of realizing a profit or of minimizing a loss in the Philippines? Obviously not. As stated in the Lopez case, the margin fees are not

expenses in connection with the production or earning of petitioner's incomes in the Philippines. They were expenses incurred in the disposition of
said incomes; expenses for the remittance of funds after they have already been earned by petitioner's branch in the Philippines for the disposal of its
Head Office in New York which is already another distinct and separate income taxpayer.

Internal Revenue for review. Later, on November 6, 1957, he requested the respondent to hold his action on the case
in abeyance until after the Court of Tax Appeals renders its division on a similar case. And on November 7, 1957, the
respondent denied the claim for the refund of the sum of P17,885.01.

xxx

Meanwhile, the Bureau of Internal Revenue considered the transfer of 12,500 shares of stock of La Tondea Inc. to be a
transfer in contemplation of death pursuant to Section 88(b) of the National Internal Revenue Code. Consequently, the
respondent assessed against the petitioner the sum of P191,591.62 as estate and inheritance taxes on the transfer of
said 12,500 shares of stock. The amount of P17,002.74 paid on June 22, 1955 by the petitioner as gift tax, including
interest and surcharge, under Official Receipt No. 2855 was applied to his estate and inheritance tax liability. On the
tax liability of P191,591.62, the petitioner paid the amount of P60,581.80 as interest for delinquency as follows:

Since the margin fees in question were incurred for the remittance of funds to petitioner's Head Office in New York, which is a separate and distinct
income taxpayer from the branch in the Philippines, for its disposal abroad, it can never be said therefore that the margin fees were appropriate and
helpful in the development of petitioner's business in the Philippines exclusively or were incurred for purposes proper to the conduct of the affairs of
petitioner's branch in the Philippines exclusively or for the purpose of realizing a profit or of minimizing a loss in the Philippines exclusively. If at
all, the margin fees were incurred for purposes proper to the conduct of the corporate affairs of Standard Vacuum Oil Company in New York, but
certainly not in the Philippines.
ESSO has not shown that the remittance to the head office of part of its profits was made in furtherance of its own trade or business. The petitioner
merely presumed that all corporate expenses are necessary and appropriate in the absence of a showing that they are illegal or ultra vires. This is
error. The public respondent is correct when it asserts that "the paramount rule is that claims for deductions are a matter of legislative grace and do
not turn on mere equitable considerations ... . The taxpayer in every instance has the burden of justifying the allowance of any deduction claimed." 5
It is clear that ESSO, having assumed an expense properly attributable to its head office, cannot now claim this as an ordinary and necessary expense
paid or incurred in carrying on its own trade or business.
WHEREFORE, the decision of the Court of Tax Appeals denying the petitioner's claims for refund of P102,246.00 for 1959 and P434,234.92 for
1960, is AFFIRMED, with costs against the petitioner.
SO ORDERED.
24 G.R. No. L-16626

October 29, 1966

1,068.97

1% monthly interest on P114,867.24

September 2, 1952 to April 16, 1953

4,287.99

1% monthly interest on P50,832.77

March 31, 1955 to June 22, 1955

1,372.48

Total

Office of the Solicitor General for petitioner.

Manuel B. San Jose for respondent.
REGALA, J.:
This is an appeal by the Government from the decision of the Court of Tax Appeals in CTA Case No. 571 ordering the
petitioner to refund to the respondent the amount of P20,624.01 representing alleged over-payment of income taxes
for the calendar year 1955. The facts are:
Sometime in July, 1950, the late Don Carlos Palanca, Sr. donated in favor of his son, the petitioner, herein shares of
stock in La Tondea, Inc. amounting to 12,500 shares. For failure to file a return on the donation within the statutory
period, the petitioner was assessed the sums of P97,691.23, P24,442.81 and P47,868.70 as gift tax, 25% surcharge
and interest, respectively, which he paid on June 22, 1955.
On March 1, 1956, the petitioner filed with the Bureau of Internal Revenue his income tax return for the calendar year
1955, claiming, among others, a deduction for interest amounting to P9,706.45 and reporting a taxable income of
P65,982.12. On the basis of this return, he was assessed the sum of P21,052.91, as income tax, which he paid, as
follows:
P13,172.41

Payment under Income Tax Receipt No. 677395 dated May 11, 1956

3,939.80

Payment under Income Tax Receipt dated August 14, 1956

3,939.80
P21,052.01

Subsequently, on November 10, 1956, the petitioner filed an amended return for the calendar year 1955, claiming
therein an additional deduction in the amount of P47,868.70 representing interest paid on the donee's gift tax, thereby
reporting a taxable net income of P18,113.42 and a tax due thereon in the sum of P3,167.00. The claim for deduction
was based on the provisions of Section 30(b) (1) of the Tax Code, which authorizes the deduction from gross income of
interest paid within the taxable year on indebtedness. A claim for the refund of alleged overpaid income taxes for the
year 1955 amounting to P17,885.01, which is the difference between the amount of P21,052.01 he paid as income
taxes under his original return and of P3,167.00, was filed together with this amended return. In a communication
dated June 20, 1957, the respondent (BIR) denied the claim for refund.
On August 27, 1957, the petitioner reiterated his claim for refund, and at the same time requested that the case be
elevated to the Appellate Division of the Bureau of Internal Revenue for decision. The reiterated claim was denied on
October 14, 1957.
On November 2, 1957, the petitioner requested that the case be referred to the Conference Staff of the Bureau of

P22,633.69

1% monthly interest on P71,264.77

February 16, 1955 to March 31, 1955

1% monthly interest on P119,155.23

April 16, 1953 to June 22, 1955

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
CARLOS PALANCA, JR., respondent.

Taxes withheld by La Tondea Inc. from Mr. Palanca's wages

1% monthly interest on P76,724.38

September 2, 1952 to February 16, 1955

31,218.67

P60,581.80

On August 12, 1958, the petitioner once more filed an amended income tax return for the calendar year 1955,
claiming, in addition to the interest deduction of P9,076.45 appearing in his original return, a deduction in the amount
of P60,581.80, representing interest on the estate and inheritance taxes on the 12,500 shares of stock, thereby
reporting a net taxable income for 1955 in the amount of P5,400.32 and an income tax due thereon in the sum of
P428.00. Attached to this amended return was a letter of the petitioner, dated August 11, 1958, wherein he requested
the refund of P20,624.01 which is the difference between the amounts of P21,052.01 he paid as income tax under his
original return and of P428.00.
Without waiting for the respondent's decision on this claim for refund, the petitioner filed his petition for review before
this Court on August 13, 1958. On July 24, 1959, the respondent denied the petitioner's request for the refund of the
sum of P20,624.01.
The Commissioner of Internal Revenue now seeks the reversal of the Court of Tax Appeal's ruling on the
aforementioned petition for review. Specifically, he takes issue with the said court's determination that the amount
paid by respondent Palanca for interest on his delinquent estate and inheritance tax is deductible from the gross
income for that year under Section 30 (b) (1) of the Revenue Code, and, that said respondent's claim for refund
therefor has not prescribed.
On the first point, the Commissioner urges that a tax is not an indebtedness. Citing American cases, he argues that
there is a material and fundamental distinction between a "tax" and a "debt." (Meriwether v. Garrett, 102 U.S. 427;
Liberty Mutual Ins. Co. v. Johnson Shipyards Corporation, 5 AFTR pp. 5504, 5507; City of Camden v. Allen, 26 N.J. Law,
p. 398). He adopts the view that "debts are due to the government in its corporate capacity, while taxes are due to the
government in its sovereign capacity. A debt is a sum of money due upon contract express or implied or one which is
evidenced by a judgment. Taxes are imposts levied by government for its support or some special purpose which the
government has recognized." In view of the distinction, then, the Commissioner submits that the deductibility of
"interest on indebtedness" from a person's income tax under Section 30(b) (1) cannot extend to "interest on taxes."
We find for the respondent. While "taxes" and "debts" are distinguishable legal concepts, in certain cases as in the suit
at bar, on account of their nature, the distinction becomes inconsequential. This qualification is recognized even in the
United States. Thus,
The term "debt" is properly used in a comprehensive sense as embracing not merely money due by contract, but
whatever one is bound to render to another, either for contract or the requirements of the law. (Camden vs. Fink Coule
and Coke Co., 61 ALR 584).
Where statutes impose a personal liability for a tax, the tax becomes at least in a broad sense, a debt. (Idem.)
Some American authorities hold that, especially for remedial purposes, Federal taxes are debts. (Tax Commission vs.
National Malleable Castings Co., 35 ALR 1448)
In our jurisdiction, the rule is settled that although taxes already due have not, strictly speaking, the same concept as
debts, they are, however obligations that may be considered as such. (Sambrano vs. Court of Tax Appeals, G.R. no. L8652, March 30, 1957). In a more recent case Commissioner of Internal Revenue vs. Prieto, G.R. No. L-13912,

September 30, 1960, we explicitly announced that while the distinction between "taxes" and "debts" was recognized in
this jurisdiction, the variance in their legal conception does not extend to the interests paid on them, at least insofar as
Section 30 (b) (1) of the National Internal Revenue Code is concerned. Thus,
Under the law, for interest to be deductible, it must be shown that there be an indebtedness, that there should be
interest upon it, and that what is claimed as an interest deduction should have been paid or accrued within the year. It
is here conceded that the interest paid by respondent was in consequence of the late payment of her donor's tax, and
the same was paid within the year it is sought to be deducted. The only question to be determined, as stated by the
parties, is whether or not such interest was paid upon an indebtedness within the contemplation of Section 30(b) (1) of
the Tax Code, the pertinent part of which reads:
Sec. 30. Deductions from gross income In computing net income there shall be allowed as deductions
xxx

xxx

xxx

"Interest:
(1) In general. The amount of interest paid within the taxable year on indebtedness, except on indebtedness
incurred or continued to purchase or carry obligations the interest upon which is exempt from taxation as income
under this Title.
The term "indebtedness" as used in the Tax Code of the United States containing similar provisions as in the abovequoted section has been defined as the unconditional and legally enforceable obligation for the payment of money.
(Federal Taxes Vol. 2, p. 13, 019, Prentice Hall, Inc.; Mertens' Law of Federal Income Taxation, Vol. 4, p. 542.) Within the
meaning of that definition, it is apparent that a tax may be considered an indebtedness. . . . (Emphasis supplied)

We find the petitioner's contention on prescription untenable.

In the first place, the 30-day period under Section 11 of Republic Act 1125 did not even commence to run in this
incident. It should be recalled that while the herein petitioner originally assessed the respondent-claimant for alleged
gift tax liabilities, the said assessment was subsequently abandoned and in its lieu, a new one was prepared and
served on the respondent-taxpayer. In this new assessment, the petitioner charged the said respondent with an
entirely new liability and for a substantially different amount from the first. While initially the petitioner assessed the
respondent for donee's gift tax in the amount of P170,002.74, in the subsequent assessment the latter was asked to
pay P191,591.62 for delinquent estate and inheritance tax. Considering that it is the interest paid on this latterassessed estate and inheritance tax that respondent Palanca is claiming refund for, then the thirty-day period under
the abovementioned section of Republic Act 1125 should be computed from the receipt of the final denial by the
Bureau of Internal Revenue of the said claim. As has earlier been recited, respondent Palanca's claim in this incident
was filed with the Court of Tax Appeals even before it had been denied by the herein petitioner or the Bureau of
Internal Revenue. The case was filed with the said court on August 13, 1958 while the petitioner denied the claim
subject of the said case only on July 24, 1959.
In the second place, the claim at bar refers to the alleged overpayment by respondent Palanca of his 1955 income tax.
Inasmuch as the said account was paid by him by installment, then the computation of the two-year prescriptive
period, under Section 306 of the National Internal Revenue Code, should be from the date of the last installment.
(Antonio Prieto, et al. vs. Collector of Internal Revenue, G.R. No. L-11976, August 29, 1961) Respondent Palanca paid
the last installment on his 1955 income tax account on August 14, 1956. His claim for refund of the alleged
overpayment on it was filed with the court on August 13, 1958. It was, therefore, still timely instituted.

"It follows that the interest paid by herein respondent for the late payment of her donor's tax is deductible from her
gross income under section 30 (b) of the Tax Code above-quoted."

WHEREFORE, the decision appealed from is affirmed in full, without pronouncement on costs.

We do not see any element in this case which can justify a departure from or abandonment of the doctrine in the
Prieto case above. In both this and the said case, the taxpayer sought the allowance as deductible items from the
gross income of the amounts paid by them as interests on delinquent tax liabilities. Of course, what was involved in
the cited case was the donor's tax while the present suit pertains to interest paid on the estate and inheritance tax.
This difference, however, submits no appreciable consequence to the rationale of this Court's previous determination
that interests on taxes should be considered as interests on indebtedness within the meaning of Section 30(b) (1) of
the Tax Code. The interpretation we have placed upon the said section was predicated on the congressional intent, not
on the nature of the tax for which the interest was paid.

25 REP VS MANILA ELECTRIC COMPANY

On the issue of prescription: There were actually two claims for refund filed by the herein respondent, Carlos Palanca,
Jr., anent the case at bar. The first one was on November 10, 1956, when he filed a claim for refund on the interest
paid by him on the donee's gift tax of P17,885.10, as originally demanded by the Bureau of Internal Revenue. The
second one was the one filed by him on August 12, 1958, which was a claim for refund on the interest paid by him on
the estate and inheritance tax assessed by the same Bureau in the amount of P20,624.01. Actually, this second
assessment by the Bureau was for the same transaction as that for which they assessed respondent Palanca the above
donee's gift tax. The Bureau, however, on further consideration, decided that the donation of the stocks in question
was made in contemplation of death, and hence, should be assessed as an inheritance. Thus the second assessment.
The first claim was denied by the petitioner for the first time on June 20, 1957. Thereafter, the said denial was twice
reiterated, on October 14, 1957 and November 7, 1957, upon respondent Palanca's plea for the reconsideration of the
ruling of June 20, 1957. The second claim was filed with the Court of Tax Appeals on August 13, 1958, or even before
the same had been denied by the petitioner. Respondent Palanca's second claim was denied by the latter on July 24,
1959.
The petitioner contends that under Section 11 of Republic Act 1124,1 the herein claimant's claim for refund has
prescribed since the same was filed outside the thirty-day period provided for therein. According to the petitioner, the
said prescriptive period commenced to run on October 14, 1947 when the denial by the Bureau of Internal Revenue of
the respondent Palanca's claim for refund, under his letter of November 10, 1956, became final. Considering that the
case was filed with the Court of Tax Appeals only on August 13, 1958, then it is urged that the same had prescribed.
The petitioner also invokes prescription, at least with respect to the sum of P17,112.21, under Section 306 of the Tax
Code.2 He claims that for the calendar year 1955, respondent Palanca paid his income tax as follows:
Taxes withheld by La Tondea Inc. from Mr. Palanca's wages

P13,172.41

Payment under Income Tax Receipt No. 677395 dated May 11, 1956

3,939.89

Payment under Income Tax Receipt No. 742334 dated August 14,
1956

3,939.89
P21,952.01

Therefore, the petitioner contends, the amounts paid by claimant Palanca under his withheld tax and under Receipt
No. 677395 dated May 11, 1956 may no longer be refunded since the claim therefor was filed in court only on August
13, 1958, or beyond two years of their payment.

DECISION
PUNO, J.:

In third world countries like the Philippines, equal justice will have a synthetic ring unless the economic rights of the
people, especially the poor, are protected with the same resoluteness as their right to liberty. The cases at bar are of
utmost significance for they concern the right of our people to electricity and to be reasonably charged for their
consumption. In configuring the contours of this economic right to a basic necessity of life, the Court shall define the
limits of the power of respondent MERALCO, a giant public utility and a monopoly, to charge our people for their
electric consumption. The question is: should public interest prevail over private profits?
The facts are brief and undisputed. On December 23, 1993, MERALCO filed with the ERB an application for the revision
of its rate schedules. The application reflected an average increase of 21 centavos per kilowatthour (kwh) in its
distribution charge. The application also included a prayer for provisional approval of the increase pursuant to Section
16(c) of the Public Service Act and Section 8 of Executive Order No. 172.
On January 28, 1994, the ERB issued an Order granting a provisional increase of P0.184 per kwh, subject to the
following condition:
In the event, however, that the Board finds, after hearing and submission by the Commission on Audit of an audit
report on the books and records of the applicant that the latter is entitled to a lesser increase in rates, all excess
amounts collected from the applicants customers as a result of this Order shall either be refunded to them or
correspondingly credited in their favor for application to electric bills covering future consumptions. [1]
In the same Order, the ERB requested the Commission on Audit (COA) to conduct an audit and examination of the
books and other records of account of the applicant for such period of time, which in no case shall be less than 12
consecutive months, as it may deem appropriate and to submit a copy thereof to the ERB immediately upon
completion.[2]
On February 11, 1997, the COA submitted its Audit Report SAO No. 95-07 (the COA Report) which contained, among
others, the recommendation not to include income taxes paid by MERALCO as part of its operating expenses for
purposes of rate determination and the use of the net average investment method for the computation of the
proportionate value of the properties used by MERALCO during the test year for the determination of the rate base. [3]
Subsequently, the ERB rendered its decision adopting the above recommendations and authorized MERALCO to
implement a rate adjustment in the average amount of P0.017 per kwh, effective with respect to MERALCOs billing

cycles beginning February 1994. The ERB further ordered that the provisional relief in the amount of P0.184 per
kilowatthour granted under the Boards Order dated January 28, 1994 is hereby superseded and modified and the
excess average amount of P0.167 per kilowatthour starting with [MERALCOs] billing cycles beginning February 1994
until its billing cycles beginning February 1998, be refunded to [MERALCOs] customers or correspondingly credited in
their favor for future consumption.[4]
The ERB held that income tax should not be treated as operating expense as this should be borne by the stockholders
who are recipients of the income or profits realized from the operation of their business hence, should not be passed
on to the consumers.[5] Further, in applying the net average investment method, the ERB adopted the recommendation
of COA that in computing the rate base, only the proportionate value of the property should be included, determined in
accordance with the number of months the same was actually used in service during the test year. [6]
On appeal, the Court of Appeals set aside the ERB decision insofar as it directed the reduction of the MERALCO rates
by an average of P0.167 per kwh and the refund of such amount to MERALCOs customers beginning February 1994
and until its billing cycle beginning February 1998. [7] Separate Motions for Reconsideration filed by the petitioners were
denied by the Court of Appeals.[8]
Petitioners are now before the Court seeking a reversal of the decision of the Court of Appeals by arguing primarily
that the Court of Appeals erred: a) in ruling that income tax paid by MERALCO should be treated as part of its
operating expenses and thus considered in determining the amount of increase in rates imposed by MERALCO and b)
in rejecting the net average investment method used by the COA and the ERB and instead adopted the average
investment method used by MERALCO.
We grant the petition.
The regulation of rates to be charged by public utilities is founded upon the police powers of the State and statutes
prescribing rules for the control and regulation of public utilities are a valid exercise thereof. When private property is
used for a public purpose and is affected with public interest, it ceases to be juris privati only and becomes subject to
regulation. The regulation is to promote the common good. Submission to regulation may be withdrawn by the owner
by discontinuing use; but as long as use of the property is continued, the same is subject to public regulation. [9]
In regulating rates charged by public utilities, the State protects the public against arbitrary and excessive rates while
maintaining the efficiency and quality of services rendered. However, the power to regulate rates does not give the
State the right to prescribe rates which are so low as to deprive the public utility of a reasonable return on
investment. Thus, the rates prescribed by the State must be one that yields a fair return on the public utility upon the
value of the property performing the service and one that is reasonable to the public for the services rendered. [10] The
fixing of just and reasonable rates involves a balancing of the investor and the consumer interests. [11]
In his famous dissenting opinion in the 1923 case of Southwestern Bell Tel. Co. v. Public Service Commission,
[12]
Mr. Justice Brandeis wrote:
The thing devoted by the investor to the public use is not specific property, tangible and intangible, but capital
embarked in an enterprise. Upon the capital so invested, the Federal Constitution guarantees to the utility the
opportunity to earn a fair return The Constitution does not guarantee to the utility the opportunity to earn a return on
the value of all items of property used by the utility, or of any of them.
.
The investor agrees, by embarking capital in a utility, that its charges to the public shall be reasonable. His
company is the substitute for the State in the performance of the public service, thus becoming a public
servant.The compensation which the Constitution guarantees an opportunity to earn is the reasonable cost of
conducting the business.
While the power to fix rates is a legislative function, whether exercised by the legislature itself or delegated through an
administrative agency, a determination of whether the rates so fixed are reasonable and just is a purely judicial
question and is subject to the review of the courts.[13]
The ERB was created under Executive Order No. 172 to regulate, among others, the distribution of energy resources
and to fix rates to be charged by public utilities involved in the distribution of electricity. In the fixing of rates, the only
standard which the legislature is required to prescribe for the guidance of the administrative authority is that
the rate be reasonable and just. It has been held that even in the absence of an express requirement as to
reasonableness, this standard may be implied. [14] What is a just and reasonable rate is a question of fact
calling for the exercise of discretion, good sense, and a fair, enlightened and independent judgment. The

requirement of reasonableness comprehends such rates which must not be so low as to be confiscatory, or too high as
to be oppressive. In determining whether a rate is confiscatory, it is essential also to consider the given situation,
requirements and opportunities of the utility.[15]
Settled jurisprudence holds that factual findings of administrative bodies on technical matters within their area of
expertise should be accorded not only respect but even finality if they are supported by substantial evidence even if
not overwhelming or preponderant.[16] In one case, [17] we cautioned that courts should "refrain from substituting their
discretion on the weight of the evidence for the discretion of the Public Service Commission on questions of fact and
will only reverse or modify such orders of the Public Service Commission when it really appears that the evidence is
insufficient to support their conclusions." [18]
In the cases at bar, findings and conclusions of the ERB on the rate that can be charged by MERALCO to the public
should be respected.[19] The function of the court, in exercising its power of judicial review, is to determine whether
under the facts and circumstances, the final order entered by the administrative agency is unlawful or unreasonable.
[20]
Thus, to the extent that the administrative agency has not been arbitrary or capricious in the exercise of its power,
the time-honored principle is that courts should not interfere. The principle of separation of powers dictates that courts
should hesitate to review the acts of administrative officers except in clear cases of grave abuse of discretion. [21]
In determining the just and reasonable rates to be charged by a public utility, three major factors are
considered by the regulating agency: a) rate of return; b) rate base and c) the return itself or the
computed revenue to be earned by the public utility based on the rate of return and rate base. [22] The rate
of return is a judgment percentage which, if multiplied with the rate base, provides a fair return on the public utility for
the use of its property for service to the public. [23] The rate of return of a public utility is not prescribed by statute but
by administrative and judicial pronouncements. This Court has consistently adopted a 12% rate of return for public
utilities.[24] The rate base, on the other hand, is an evaluation of the property devoted by the utility to the public
service or the value of invested capital or property which the utility is entitled to a return. [25]
In the cases at bar, the resolution of the issues involved hinges on the determination of the kind and the
amount of operating expenses that should be allowed to a public utility to generate a fair return and the
proper valuation of the rate base or the value of the property entitled to a return.
I

Income Tax as Operating Expense Cannot be Allowed For Rate-Determination Purposes

In determining whether or not a rate yields a fair return to the utility, the operating expenses of the utility must be
considered. The return allowed to a public utility in accordance with the prescribed rate must be sufficient to provide
for the payment of such reasonable operating expenses incurred by the public utility in the provision of its services to
the public. Thus, the public utility is allowed a return on capital over and above operating expenses. However, only
such expenses and in such amounts as are reasonable for the efficient operation of the utility should be allowed for
determination of the rates to be charged by a public utility.
The ERB correctly ruled that income tax should not be included in the computation of operating expenses of
a public utility. Income tax paid by a public utility is inconsistent with the nature of operating expenses. In general,
operating expenses are those which are reasonably incurred in connection with business operations to yield revenue or
income. They are items of expenses which contribute or are attributable to the production of income or revenue. As
correctly put by the ERB, operating expenses should be a requisite of or necessary in the operation of a utility,
recurring, and that it redounds to the service or benefit of customers. [26]
Income tax, it should be stressed, is imposed on an individual or entity as a form of excise tax or a tax on the privilege
of earning income.[27] In exchange for the protection extended by the State to the taxpayer, the government collects
taxes as a source of revenue to finance its activities. Clearly, by its nature, income tax payments of a public utility are
not expenses which contribute to or are incurred in connection with the production of profit of a public utility. Income
tax should be borne by the taxpayer alone as they are payments made in exchange for benefits received by the
taxpayer from the State. No benefit is derived by the customers of a public utility for the taxes paid by such entity and
no direct contribution is made by the payment of income tax to the operation of a public utility for purposes of
generating revenue or profit. Accordingly, the burden of paying income tax should be Meralcos alone and should not
be shifted to the consumers by including the same in the computation of its operating expenses.
The principle behind the inclusion of operating expenses in the determination of a just and reasonable rate is to allow

the public utility to recoup the reasonable amount of expenses it has incurred in connection with the services it
provides. It does not give the public utility the license to indiscriminately charge any and all types of expenses
incurred without regard to the nature thereof, i.e., whether or not the expense is attributable to the production of
services by the public utility. To charge consumers for expenses incurred by a public utility which are not related to the
service or benefit derived by the customers from the public utility is unjustified and inequitable.
While the public utility is entitled to a reasonable return on the fair value of the property being used for the service of
the public, no less than the Federal Supreme Court of the United States emphasized: [t]he public cannot properly be
subjected to unreasonable rates in order simply that stockholders may earn dividends If a corporation cannot maintain
such a [facility] and earn dividends for stockholders, it is a misfortune for it and them which the Constitution does not
require to be remedied by imposing unjust burdens on the public.[28]
We are not impressed by the reliance by MERALCO on some American case law allowing the treatment of income tax
paid by a public utility as operating expense for rate-making purposes. Suffice to state that with regard to ratedetermination, the government is not hidebound to apply any particular method or formula. [29] The question of what
constitutes a reasonable return for the public utility is necessarily determined and controlled by its peculiar
environmental milieu. Aside from the financial condition of the public utility, there are other critical factors to consider
for purposes of rate regulation. Among others, they are: particular reasons involved for the request of the rate
increase, the quality of services rendered by the public utility, the existence of competition, the element of risk or
hazard involved in the investment, the capacity of consumers, etc. [30] Rate regulation is the art of reaching a result that
is good for the public utility and is best for the public.
For these reasons, the Court cannot give in to the importunings of MERALCO that we blindly apply the rulings of
American courts on the treatment of income tax as operating expenses in rate regulation cases. An approach allowing
the indiscriminate inclusion of income tax payments as operating expenses may create an undesirable precedent and
serve as a blanket authority for public utilities to charge their income tax payments to operating expenses and
unjustly shift the tax burden to the customer. To be sure, public utility taxation in the United States is going through
the eye of criticism. Some commentators are of the view that by allowing the public utility to collect its income tax
payment from its customers, a form of sales tax is, in effect, imposed on the public for consumption of public utility
services. By charging their income tax payments to their customers, public utilities virtually become tax collectors
rather than taxpayers.[31] In the cases at bar, MERALCO has not justified why its income tax should be treated as an
operating expense to enable it to derive a fair return for its services.
It is also noteworthy that under American laws, public utilities are taxed differently from other types of corporations
and thus carry a heavier tax burden. Moreover, different types of taxes, charges, tolls or fees are assessed on a public
utility depending on the state or locality where it operates. At a federal level, public utilities are subject to corporate
income taxes and Social Security taxesin the same manner as other business corporations. At the state and local
levels, public utilities are subject to a wide variety of taxes, not all of which are imposed on each state. Thus, it is not
unusual to find different taxes or combinations of taxes applicable to respective utility industries within a particular
state.[32] A significant aspect of state and local taxation of public utilities in the United States is that they have been
singled out for special taxation, i.e., they are required to pay one or more taxes that are not levied upon other
industries. In contrast, in this jurisdiction, public utilities are subject to the same tax treatment as any other
corporation and local taxes paid by it to various local government units are substantially the same. The reason for this
is that the power to tax resides in our legislature which may prescribe the limits of both national and local taxation,
unlike in the federal system of the United States where state legislature may prescribe taxes to be levied in their
respective jurisdictions.
MERALCO likewise cites decisions of the ERB[33] allowing the application of a tax recovery clause for the imposition of
an additional charge on consumers for taxes paid by the public utility. A close look at these decisions will show they
are inappropos. In the said cases, the ERB approved the adoption of a formula which will allow the public utility to
recover from its customers taxes already paid by it. However, in the cases at bar, the income tax component added to
the operating expenses of a public utility is based on an estimate or approximate figure of income tax to be paid by
the public utility. It is this estimated amount of income tax to be paid by MERALCO which is included in the amount of
operating expenses and used as basis in determining the reasonable rate to be charged to the customers. Accordingly,
the varying factual circumstances in the said cases prohibit a square application of the rule under the previous ERB
decisions.
II

Use of Net Average Investment Method is Not Unreasonable

In the determination of the rate base, property used in the operation of the public utility must be subject to appraisal
and evaluation to determine the fair value thereof entitled to a fair return. With respect to those properties which have
not been used by the public utility for the entire duration of the test year, i.e., the year subject to audit examination
for rate-making purposes, a valuation method must be adopted to determine the proportionate value of the property.
Petitioners maintain that the net average investment method (also known as actual number of months use method)
recommended by COA and adopted by the ERB should be used, while MERALCO argues that the average investment
method (also known as the trending method) to determine the proportionate value of properties should be applied.
Under the net average investment method, properties and equipment used in the operation of a public utility are
entitled to a return only on the actual number of months they are in service during the period. [34] In contrast, the
average investment method computes the proportionate value of the property by adding the value of the property at
the beginning and at the end of the test year with the resulting sum divided by two. [35]
The ERB did not abuse its discretion when it applied the net average investment method. The reasonableness of net
average investment method is borne by the records of the case. In its report, the COA explained that the computation
of the proportionate value of the property and equipment in accordance with the actual number of months such
property or equipment is in service for purposes of determining the rate base is favored, as against the trending
method employed by MERALCO, to reflect the real status of the property. [36] By using the net average investment
method, the ERB and the COA considered for determination of the rate base the value of properties and equipment
used by MERALCO in proportion to the period that the same were actually used during the period in question. This
treatment is consistent with the settled rule in rate regulation that the determination of the rate base of a public utility
entitled to a return must be based on properties and equipment actually being used or are useful to the operations of
the public utility.[37]
MERALCO does not seriously contest this treatment of actual usage of property but opposes the method of
computation or valuation thereof adopted by the ERB and the COA on the ground that the net average investment
method assumes an ideal situation where a utility, like MERALCO, is able to record in its books within any given month
the value of all the properties actually placed in service during that month. [38] MERALCO contends that immediate
recordal in its books of the property or equipment is not possible as MERALCOs franchise covers a wide area and that
due to the volume of properties and equipment put into service and the amount of paper work required to be
accomplished for recording in the books of the company, it takes three to six months (often longer) before an asset
placed in service is recorded in the books of MERALCO. [39] Hence, MERALCO adopted the average investment method
or the trending method which computes the average value of the property at the beginning and at the end of the test
year to compensate for the irregular recording in its books.
MERALCOS stance is belied by the COA Report which states that the verification of the records, as confirmed by the
Management Staff, disclosed that properties are recorded in the books as these are actually placed in service.
[40]
Moreover, while the case was pending trial before the ERB, the ERB conducted an ocular inspection to examine the
assets in service, records and books of accounts of MERALCO to ascertain the physical existence, ownership, valuation
and usefulness of the assets contained in the COA Report. [41] Thus, MERALCOs contention that the date of recordal in
the books does not reflect the date when the asset is placed in service is baseless.
Further, computing the proportionate value of assets used in service in accordance with the actual number of months
the same is used during the test year is a more accurate method of determining the value of the properties of a public
utility entitled to a return. If, as determined by COA, the date of recordal in the books of MERALCO reflects the actual
date the equipment or property is used in service, there is no reason for the ERB to adopt the trending method applied
by MERALCO if a more precise method is available for determining the proportionate value of the assets placed in
service.
If we were to sustain the application of the trending method, the public utility may easily manipulate the valuation of
its property entitled to a return (rate base) by simply including a highly capitalized asset in the computation of the rate
base even if the same was used for a limited period of time during the test year. With the inexactness of the trending
method and the possibility that the valuation of certain properties may be subject to the control of and abuse by the
public utility, the Court finds no reasonable basis to overturn the recommendation of COA and the decision of the ERB.
MERALCO further insists that the Court should sustain the trending method in view of previous decisions by the Public
Service Commission and of this Court which upheld the use of this method. By refusing to adopt the trending method,
MERALCO argues that the ERB violated the rule on stare decisis.
Again, we are not impressed. It is a settled rule that the goal of rate-making is to arrive at a just and reasonable rate
for both the public utility and the public which avails of the formers products and services. [42] However, what is a just
and reasonable rate cannot be fixed by any immutable method or formula. Hence, it has been held that no public

utility has a vested right to any particular method of valuation. [43]Accordingly, with respect to a determination of the
proper method to be used in the valuation of property and equipment used by a public utility for rate-making
purposes, the administrative agency is not bound to apply any one particular formula or method simply because the
same method has been previously used and applied. In fact, nowhere in the previous decisions cited by MERALCO
which applied the trending method did the Court rule that the same should be the only method to be applied in all
instances.
At any rate, MERALCO has not adequately shown that the rates prescribed by the ERB are unjust or confiscatory as to
deprive its stockholders a reasonable return on investment. In the early case of Ynchausti S.S. Co. v. Public Utility
Commissioner, this Court held: [t]here is a legal presumption that the rates fixed by an administrative agency are
reasonable, and it must be conceded that the fixing of rates by the Government, through its authorized agents,
involves the exercise of reasonable discretion and, unless there is an abuse of that discretion, the courts will not
interfere.[44] Thus, the burden is upon the oppositor, MERALCO, to prove that the rates fixed by the ERB are
unreasonable or otherwise confiscatory as to merit the reversal of the ERB. In the instant cases, MERALCO was unable
to discharge this burden.

credit of P1,140,623.82 from the P12,354,933.00 gross receipts tax that CBC paid for the second quarter of 1994. To
ensure that it filed its claim within the two-year prescriptive period,[6] CBC also filed on the same day a petition for
review with the Court of Tax Appeals. Citing Asian Bank, CBC argued that it was not liable for the gross receipts tax amounting to P1,140,623.82 - on the sums withheld by the Bangko Sentral ng Pilipinas as final withholding tax on
CBCs passive interest income[7] in 1994.
Disputing CBCs claim, the Commissioner asserted that CBC paid the gross receipts tax pursuant to Section 119 (now
Section 121) of the National Internal Revenue Code (Tax Code) and pertinent Bureau of Internal Revenue (BIR)
regulations. The Commissioner argued that the final withholding tax on a banks interest income forms part of its gross
receipts in computing the gross receipts tax. [8] The Commissioner contended that the term gross receipts means the
entire income or receipt, without any deduction.

The Ruling of the Court of Tax Appeals

WHEREFORE, in view of the foregoing, the instant petitions are GRANTED and the decision of the Court of Appeals in
C.A. G.R. SP No. 46888 is REVERSED. Respondent MERALCO is authorized to adopt a rate adjustment in the amount of
P0.017 per kilowatthour, effective with respect to MERALCOs billing cycles beginning February 1994. Further, in
accordance with the decision of the ERB dated February 16, 1998, the excess average amount of P0.167 per
kilwatthour starting with the applicants billing cycles beginning February 1998 is ordered to be refunded to MERALCOs
customers or correspondingly credited in their favor for future consumption.

The Court of Tax Appeals ruled in favor of CBC and held that the 20% final withholding tax on interest income does not
form part of CBCs taxable gross receipts. The tax court based its decision mainly on its earlier ruling in Asian
Bank[9] which the tax court quoted extensively, as follows:
That petitioner is liable for gross receipts tax is not disputed. The question that is now left for our determination is the
basis of the said tax which issue has already been settled in the case cited by petitioner, Asian Bank Corporation
vs. Commissioner of Internal Revenue, supra. In said case, this Court held:

SO ORDERED.

We agree with the petitioner that the 20% final withholding tax on its interest income should not form part of its
taxable gross receipts.

26 CHINA BANKING VS CA

DECISION

Revenue Regulations No. 12-80 dated Nov. 7, 1980 on Taxation of Certain Income Derived from Banking Activities
provides that the rates of tax to be imposed on the gross receipts of such financial institution shall be based on all
items on income actually received, thus:
SEC. 4. xxx

CARPIO, J.:

The Case

Before the Court are the consolidated petitions for review [1] assailing the Decisions[2] of 16 October 2000 and 15
November 2000, and the Resolutions of 25 April 2001 and 8 January 2001 of the Court of Appeals in CA-G.R. SP No.
50790 and in CA-G.R. SP No. 50839, respectively. The Court of Appeals affirmed the Decision [3] of 30 September 1998
and the Resolution of 15 January 1999 of the Court of Tax Appeals in CTA Case No. 5405. The Court of Tax Appeals
granted China Banking Corporation (CBC) a tax refund or credit of P123,278.73 but denied due to insufficiency of
evidence the remainder of CBCs claim for P1,140,623.82.

(e) Gross receipts tax on banks, non-bank financial intermediaries, financing companies, and other non-bank financial
intermediaries not performing quasi-banking activities. - The rates of taxes to be imposed on the gross receipts of such
financial institutions shall be based on all items of income actually received. Mere accrual shall not be considered, but
once payment is received on such accrual or in cases of prepayment, then the amount actually received shall be
included in the tax base of such financial institutions, as provided hereunder. (Underscoring supplied)
From the foregoing, it is but logical to infer that the final tax, not having been received by the petitioner but instead
went to the coffers of the government, should no longer form part of its gross receipts for the purpose of computing
the GRT. This conclusion is in accord with the interpretation of the Supreme Court in the case entitled Collector of
Internal Revenue vs. Manila Jockey Club, 108 Phil. 821, as quoted by this Court in disposing of a similar issue in
the case entitled Compania Maritima vs. Acting Commissioner of Internal Revenue, CTA Case No. 1426 dated
November 14, 1966, thus:
In the second place, the highest tribunal of the land interpreted the term gross receipts to mean all receipts of a
taxpayer excluding those which have been especially earmarked by law or regulation for the government or some
person other than the taxpayer. Thus, it was held:

CBC is a universal banking corporation organized and existing under Philippine law. On 20 July 1994, CBC
paid P12,354,933.00 as gross receipts tax on its income from interests on loan investments, commissions, services,
collection charges, foreign exchange profits and other operating earnings during the second quarter of 1994.

xxx xx. The Government could not have meant to tax as gross receipts of the Manila Jockey Club the % which it directs
same Club to turn over to the Board of Races. The latter being a Government institution, there would be double
taxation, which should be avoided unless the statute admits of no other interpretation. In the same manner, the
Government could not have intended to consider as gross receipts the portion of the funds which it directed the Club
to give, or know the Club would give, to winning horses and Jockeys admitted 5%. It is true that the law says that out
of the total wager funds 12 % shall be set aside as the commission of the track owners but the law itself takes official
notice, and virtually approves or directs payment of the portion that goes to owners of horses as prizes and bonuses of
jockeys, which portion is admittedly 5% out of the 12 % commission. As it did not at that time contemplate the
application of gross receipts revenue principle, the law in making a distribution of the total wager funds, took no
trouble of separating one item from the other; and for convenience, grouped three items under one common
denomination.

On 30 January 1996, the Court of Tax Appeals in Asian Bank Corporation v. Commissioner of Internal
Revenue[4] ruled that the 20% final withholding tax on a banks passive interest income does not form part of its
taxable gross receipts.[5]

Needless to say, gross receipts of the proprietor of the amusement place should not include any money which
although delivered to the amusement place has been especially earmarked by law or regulation for some person other
than the proprietor. (The Commissioner of Internal Revenue vs. Manila Jockey Club, Inc., G.R. Nos. L-13890 & L-13887,
June 30, 1960)

Antecedent Facts

On 19 July 1996, CBC filed with the Commissioner of Internal Revenue (Commissioner) a formal claim for tax refund or

It is to be noted that, under Section 260 of the Tax Code, a racetrack is subject to an amusement tax of 20% of its
gross receipts and the term gross receipts embraces all the receipts of the proprietor, lessee, or operator of the

amusement place. Notwithstanding the broad and all-embracing definition of the term gross receipts found in our
amusement tax law, our Supreme Court did not adopt a literal interpretation of the said term in the case of the Manila
Jockey Club, Inc., x x x.[10]

During the oral arguments of this case on 21 April 2003, the Court ordered the consolidation [21] of the petition filed by
CBC in G.R. No. 146749 and the petition filed by the Commissioner in G.R. No. 147938.

Thus, the Court of Tax Appeals granted CBC a partial refund of P123,778.73 since the tax court found that the
evidence of CBC was sufficient only to support the payment of the gross receipts tax on its medium term
investments. The dispositive portion of the tax courts Decision of 30 September 1998 states as follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered ordering the respondent to REFUND or ISSUE a tax
credit certificate in the reduced amount of P123,778.73 representing the overpaid GRT payments for the second
quarter of 1994. The remaining amount claimed by petitioner is DENIED for insufficiency of evidence.
SO ORDERED.[11]
However, Associate Judge Amancio Q. Saga dissented to the exclusion of the final withholding tax from the banks
taxable gross receipts. He opined that: (1) Section 4(e) of Revenue Regulations No. 12-80 did not prescribe the manner
of computing the tax base for the gross receipts tax but merely authorized the cash basis as the method of accounting
in reporting the interest income; (2) the exclusion was effectively an exemption from tax, and there is no specific
provision of law clearly granting such exemption; (3) no law or regulation specifically earmarked the final withholding
tax for some other person than CBC, thus the Supreme Court decisions cited in Asian Bank are not applicable; and (4)
there is no double taxation if the law imposes different taxes on the same income.
Both CBC and the Commissioner filed motions for reconsideration from the tax courts decision. CBC argued that the
tax court should have given proper weight to the testimony of the witnesses that CBC presented on the computation
and payment of its gross receipts tax. CBC pointed out that the Commissioner did not controvert such testimony. On
the other hand, the Commissioner maintained that the final withholding tax forms part of the taxable gross
receipts. However, the tax court dismissed both motions in its Resolution of 15 January 1999. [12]
The CBC and the Commissioner both filed petitions for review under Rule 43 of the Rules of Court, appealing the tax
courts decision and resolution to the Court of Appeals.

The Issues

The consolidated petitions raise the following issues:

1. Whether the 20% final withholding tax on interest income should form part of CBCs gross receipts in computing the
gross receipts tax on banks;
2. Whether CBC has established by sufficient evidence its right to claim the full refund of P1,140,623.82 representing
alleged overpayment of the gross receipts tax.

The Ruling of the Court

We rule that the amount of interest income withheld in payment of the 20% final withholding tax forms part of CBCs
gross receipts in computing the gross receipts tax on banks.
Section 121[22] of the Tax Code provides as follows:

The Ruling of the Court of Appeals

Sec. 121. Tax on Banks and Non-bank Financial Intermediaries. There shall be collected a tax on gross receipts derived
from sources within the Philippines by all banks and non-bank financial intermediaries in accordance with the following
schedule:
(a) On interest, commissions and discounts from lending activities as well as income from financial leasing, on the
basis of remaining maturities on instruments from which such receipts are derived.

The Court of Appeals did not consolidate the petitions for review filed by CBC and the Commissioner. The parties
apparently failed to move for the consolidation of the two petitions. The 14th Division of the Court of Appeals, in its
Decision of 15 November 2000[13] in CA-G.R. SP No. 50839, affirmed the tax courts ruling on the ground that
substantial evidence supported the factual findings of the tax court. The 13thDivision of the Court of Appeals, in its
Decision of 16 October 2000[14] in CA-G.R. SP No. 50790, also affirmed the tax courts ruling on the ground that the 20%
final withholding tax does not form part of CBCs taxable gross receipts.
The 14th Division of the appellate court denied CBCs subsequent motion for reconsideration in its Resolution of 8
January 2001.[15] Likewise, the 13th Division of the appellate court denied the Commissioners motion for reconsideration
in its Resolution of 25 April 2001.[16]
On 6 February 2001, CBC filed with the Court a petition for review assailing the decision of the Court of Appeals in CAG.R. SP No. 50839, and prayed that the Court render a decision awarding CBCs full claim for the refund
of P1,140,623.82. CBC claimed that since it did not actually receive the final withholding tax, the same should not form
part of its taxable gross receipts. CBC also asserted that it had presented sufficient evidence to prove its overpayment
of the gross receipts tax, and that it had a right to a refund of the full P1,140,623.82 overpayment.
On 25 June 2001, the Commissioner filed with the Court a petition for review questioning the decision of the Court of
Appeals in CA-G.R. SP No. 50790, and prayed that the Court deny CBCs claim for refund. The Commissioner pointed
out that the Court of Appeals had already reversed the Asian Bank decision of the Court of Tax Appeals
in Commissioner of Internal Revenue v. Asian Bank Corporation,[17] promulgated by the Court of
Appeals earlier on 22 November 1999. The Commissioner further manifested that the Court of Tax Appeals
subsequently rendered two decisions reversing its ruling in Asian Bank. In Far East Bank and Trust Co. v.
Commissioner of Internal Revenue[18] and Standard Chartered Bank v. Commissioner of Internal Revenue,
[19]
the tax court ruled[20] that the 20% final withholding tax on a banks interest income forms part of its gross receipts
in computing the gross receipts tax.

Short-term maturity
(not in excess of two [2] years).. 5%
Medium-term maturity
(over two [2] years but not
exceeding four [4] years). 3%
Long-term maturity
(i) over four (4) years but not exceeding
seven (7) years .. 1%
(ii) over seven (7) years) . 0%
(b) On dividends . 0%
(c) On royalties, rentals of property, real or personal, profits from exchange and all other items treated as gross income
under Section 32 of this Code ..... 5%;
Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru pretermination, then
the maturity period shall be reckoned to end as of the date of pretermination for purposes of classifying the
transaction as short, medium or long term and the correct rate of tax shall be applied accordingly.
Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on persons
performing similar banking activities.
The gross receipts tax on banks was first imposed on 1 October 1946 by Republic Act No. 39 (RA No. 39) which
amended Section 249[23] of the Tax Code of 1939. Interest income of banks, without any deduction, formed part of their
taxable gross receipts. From October 1946 to June 1977, there was no withholding tax on interest income from bank
deposits.
On 3 June 1977, Presidential Decree No. 1156 required the withholding at source of a 15% tax on interest on bank
deposits. This tax was a creditable, not a final withholding tax. Despite the withholding of the 15% tax, the entire
interest income, without any deduction, formed part of the banks taxable gross receipts. On 17 September 1980,
Presidential Decree No. 1739 made the withholding tax on interest a final tax at the rate of 15% on savings account,
and 20% on time deposits.[24] Still, from 1980 until the Court of Tax Appeals decision in Asian Bank on 30 January

1996, banks included the entire interest income, without any deduction, in their taxable gross receipts.
In Asian Bank, the Court of Tax Appeals held that the final withholding tax is not part of the banks taxable gross
receipts. The tax court anchored its ruling on Section 4(e) of Revenue Regulations No. 12-80, [25] which stated that the
gross receipts shall be based on all items actually received by the bank. The tax court ruled that the bank does not
actually receive the final withholding tax. As authority, the tax court cited Collector of Internal Revenue v. Manila
Jockey Club,[26] which held that gross receipts of the proprietor should not include any money which although
delivered to the amusement place has been especially earmarked by law or regulation for some person other than the
proprietor. In effect, the tax court considered Section 4(e) of Revenue Regulations No. 12-80 as earmarking by
regulation the final withholding tax in favor of the government. This earmarking, according to the tax court, prevented
the final withholding tax from being actually received by the bank. The tax court adopted the Asian Bank ruling in
succeeding cases involving the same issue.[27]
Subsequently, the Court of Tax Appeals reversed its ruling in Asian Bank. In Far East Bank & Trust Co. v.
Commissioner [28] and Standard Chartered Bank v. Commissioner, [29] both promulgated on 16 November 2001,
the tax court ruled that the final withholding tax forms part of the banks gross receipts in computing the gross receipts
tax. The tax court held that Section 4(e) of Revenue Regulations No. 12-80 did not prescribe the computation of the
gross receipts but merely authorized the determination of the amount of gross receipts on the basis of the method of
accounting being used by the taxpayer.
The tax court also held in Far East Bank and Standard Chartered Bank that the exclusion of the final withholding
tax from gross receipts operates as a tax exemption which the law must expressly grant.No law provides for such
exemption. In addition, the tax court pointed out that Section 7(c) of Revenue Regulations No. 17-84 had already
superseded Section 4(e) of Revenue Regulations No. 12-80. Section 7(c) of Revenue Regulations No. 17-84, the
existing applicable regulation, states:
Section 7. Nature and Treatment of Interest on Deposits and Yield on Deposit Substitutes xxx
(c) If the recipient of the above-mentioned items of income are financial institutions, the same shall be included as
part of the tax base upon which the gross receipts tax is imposed. (Emphasis supplied)
The items of income referred to in Section 7(c) are interest on bank deposits and yield from deposit substitutes.
There are two related legal concepts that come into play in the resolution of the first issue raised in the instant case.
First is the meaning of the term gross receipts. Second is the determination of the circumstance when interest income
becomes part of gross receipts for tax purposes.
The Tax Code does not define the term gross receipts for purposes of the gross receipts tax on banks. Since 1 October
1946 when RA No. 39 first imposed the gross receipts tax on banks until the present, there has been no statutory
definition of the term gross receipts. Absent a statutory definition, the BIR has applied the term in its plain and
ordinary meaning.
On 12 July 1952, four years after RA No. 39 imposed the gross receipts tax on banks, the defunct Board of Tax
Appeals[30] had occasion to interpret the term gross receipts. In National City Bank v. Collector of Internal
Revenue,[31] the bank contended that the amortized premium costs in buying U.S. Government bonds should be
deducted from the interest income from the bonds in computing the banks gross receipts tax. On the other hand, the
Collector of Internal Revenue argued that gross receipts should be interpreted as the whole amount received as
interests without deductions, otherwise, if deductions are made from gross receipts, it will be considered as net
receipts. The Board of Tax Appeals agreed with the Collector, ruling that
Conceding that the premiums amortized form part of the capital invested by the petitioner, to deduct same from the
accrued interests of the bonds would result in the realization of the net interests and not the gross receipts on the
interests earned by the petitioner in its investments as provided for in Section 249 of the Tax Code. The denial,
therefore, of the respondent in allowing the deduction of the amortized premium in the amount of P239,678.41 from
the accrued interest of the bonds, is in order.
The National City Bank ruling remained unchallenged from 1952 until January 1996 when the Court of Tax Appeals
rendered its decision in Asian Bank. In November 2001, however, the same tax court, citingNational City
Bank among other authorities, reversed Asian Bank in the twin cases of Far East Bank and Standard
Chartered Bank.
As commonly understood, the term gross receipts means the entire receipts without any deduction. Deducting any
amount from the gross receipts changes the result, and the meaning, to net receipts. Any deduction from gross

receipts is inconsistent with a law that mandates a tax on gross receipts, unless the law itself makes an exception. As
explained by the Supreme Court of Pennsylvania in Commonwealth of Pennsylvania v. Koppers Company, Inc.,
[32]
Highly refined and technical tax concepts have been developed by the accountant and legal technician primarily
because of the impact of federal income tax legislation. However, this in no way should affect or control the normal
usage of words in the construction of our statutes; and we see nothing that would require us not to include the
proceeds here in question in the gross receipts allocation unless statutorily such inclusion is prohibited. Under the
ordinary basic methods of handling accounts, the term gross receipts, in the absence of any statutory
definition of the term, must be taken to include the whole total gross receipts without any deductions. x
x x. [Citations omitted] (Emphasis supplied)
Likewise, in Laclede Gas Co. v. City of St. Louis,[33] the Supreme Court of Missouri held:
The word gross appearing in the term gross receipts, as used in the ordinance, must have been and was there used as
the direct antithesis of the word net. In its usual and ordinary meaning gross receipts of a business is the
whole and entire amount of the receipts without deduction. x x x On the contrary net receipts usually are the
receipts which remain after deductions are made from the gross amount thereof of the expenses and cost of doing
business, including fixed charges and depreciation. Gross receipts become net receipts after certain proper deductions
are made from the gross. And in the use of the words gross receipts, the instant ordinance, of course, precluded
plaintiff from first deducting its costs and expenses of doing business, etc., in arriving at the higher base figure upon
which it must pay the 5% tax under this ordinance. (Emphasis supplied)
Absent a statutory definition, the term gross receipts is understood in its plain and ordinary meaning. Words in a
statute are taken in their usual and familiar signification, with due regard to their general and popular use. [34] The
Supreme Court of Hawaii held in Bishop Trust Company v. Burns[35] that x x x It is fundamental that in construing or interpreting a statute, in order to ascertain the intent of the legislature, the
language used therein is to be taken in the generally accepted and usual sense. Courts will presume that the words in
a statute were used to express their meaning in common usage. This principle is equally applicable to a tax
statute. [Citations omitted] (Emphasis supplied)
The Tax Code does not also define the term gross receipts for purposes of the common carriers tax, [36] the international
carriers tax,[37] the tax on radio and television franchises, [38] and the tax on finance companies.[39] All these business
taxes under Title V of the Tax Code are based on gross receipts. Despite the absence of a statutory definition, these
taxes have been collected in this country for over half a century on the general and common understanding that they
are based on all receipts without any deduction.
Since 1 October 1946 when RA No. 39 first imposed the gross receipts tax on banks under Section 249 of the Tax Code,
the legislature has re-enacted several times this section of the Tax Code. On 24 December 1972, Presidential Decree
No. 69, which enacted into law the Omnibus Tax Bill of 1972, re-enacted Section 249 of the Tax Code. Then on 11
June 1977, Presidential Decree No. 1158, otherwise known as the National Internal Revenue Code of 1977, reenacted Section 249 as Section 119 of the Tax Code. Finally on 11 December 1997, Republic Act No. 8424, otherwise
known as the Tax Reform Act of 1997, re-enacted Section 119 as the present Section 121 of the Tax
Code. Throughout these re-enactments, the legislature has not provided a statutory definition of the term gross
receipts for purposes of the gross receipts tax on banks, common carriers, international carriers, radio and television
operators, and finance companies.
Under Revenue Regulations Nos. 12-80 and 17-84, as well as in several numbered rulings, [40] the BIR has consistently
ruled that the term gross receipts does not admit of any deduction. This interpretation has remained unchanged
throughout the various re-enactments of the present Section 121 of the Tax Code. The only conclusion that can be
drawn is that the legislature has adopted the BIRs interpretation, following the principle of legislative approval by reenactment. In Inte-provincial Autobus Co., Inc. v. Collector of Internal Revenue,[41] the Court declared:
Another reason for sustaining the validity of the regulation may be found in the principle of legislative approval by reenactment. The regulations were approved on September 16, 1924. When the National Internal Revenue Code was
approved on February 18, 1939, the same provisions on stamp tax, bills of lading and receipts were reenacted. There
is a presumption that the Legislature reenacted the law on the tax with full knowledge of the contents of the
regulations then in force regarding bills of lading and receipts, and that it approved or confirmed them because they
carry out the legislative purpose.
The presumption is that the legislature is familiar with the contemporaneous interpretation of a statute given by the
administrative agency tasked to enforce the statute. [42] The subsequent re-enactments of the present Section 121 of
the Tax Code, without changes on the term interpreted by the BIR, confirm that the BIRs interpretation carries out the
legislative purpose.

However, for the amusement tax, which is also a business tax under the same Title V, the Tax Code makes a special
definition of the term gross receipts. The term gross receipts for amusement tax purposes embraces all receipts of the
proprietor, lessee or operator of the amusement place. [43] The Tax Code further adds that [s]aid gross receipts also
include income from television, radio and motion picture rights, if any. [44] This definition merely confirms that the term
gross receipts embraces the entire receipts without any deduction or exclusion, as the term is generally and commonly
understood.
Even without a statutory definition, the term gross receipts will have to exclude any deduction of the withholding
tax. Otherwise, other items of income in Section 121 would also be subject to deductions despite the absence of a
specific provision of law excluding any portion of such items of income from taxable gross receipts. Section 121 refers
not only to interest income, but also to dividends, x x x rentals of property, real or personal, profits from exchange
and all other items treated as gross income under Section 32 of this Code.
Under Revenue Regulations No. 13-78,[45] rental income received by a bank is subject to a creditable withholding
tax. Under Section 121, such rental income, without any deduction of the withholding tax, forms part of the banks
taxable gross receipts. The amount of the creditable withholding tax is indubitably part of the banks rental
income. The creditable withholding tax is merely an advance payment by the bank of its tax on the rental income. The
amount of the withholding tax comes from the banks rental income and its payment extinguishes the banks tax
liability. The amount deducted by the payor-lessee and remitted to the government, representing the creditable
withholding tax, is money the bank owns that is used to pay the banks tax liability. The amount deducted and remitted
as creditable withholding tax patently comes from the banks rental income, and correctly forms part of the banks
gross receipts.
In the same manner, the amount of the final withholding tax on interest income should not be deducted from the
banks interest income for purposes of the gross receipts tax. The final withholding tax on interest, like the creditable
withholding tax on rentals, comes from the banks income and is money the bank owns that is used to pay the banks
tax liability. The final withholding tax and the creditable withholding tax constitute payment by the bank to extinguish
a tax obligation to the government. The bank can only pay with money it owns, or with money it is authorized to
spend. In either case, such money comes from the banks revenues or receipts, and certainly not from the
governments coffers.
CBCs argument will create tax exemptions where none exist. If the amount of the final withholding tax is excluded
from taxable gross receipts, then the amount of the creditable withholding tax should also be excluded from taxable
gross receipts. For that matter, any withholding tax should be excluded from taxable gross receipts because such
withholding would qualify as earmarking by regulation. Under Section 57(B) of the Tax Code, the Commissioner, with
the approval of the Secretary of Finance, may by regulation impose a withholding tax on other items of income to
facilitate the collection of the income tax. Every time the Commissioner expands the withholding tax, he will create tax
exemptions where the law provides for none. Obviously, the Court cannot allow this.
Under Section 27(D)(4) of the Tax Code, dividends received by a domestic corporation from another corporation are
not subject to the corporate income tax. Such intracorporate dividends are some of the passive incomes that are
subject to the 20% final tax, just like interest on bank deposits. Intracorporate dividends, being already subject to the
final tax on income, no longer form part of the banks gross income under Section 32 of the Tax Code for purposes of
the corporate income tax. However, Section 121 expressly states that dividends shall form part of the banks gross
receipts for purposes of the gross receipts tax on banks. This is the same treatment given to the banks interest income
that is subject to the final withholding tax. Such interest income, being already subject to the final tax, no longer forms
part of the banks gross income for purposes of the corporate income tax. Section 121, however, expressly includes
such interest income as part of the banks gross receipts for purposes of the gross receipts tax.
Whether an item of income is excluded from gross income or is subject to the final withholding tax has no bearing on
its inclusion in gross receipts if Section 121 expressly includes such income as part of gross receipts. As held
in Commonwealth of Pennsylvania, [t]he exemption of dividends and interest from taxation, through their
exclusion from net income to be allocated, does not also exclude those items from the gross receipts from business
activity of the corporation.[46]
There is a policy objective why no deductions, exemptions or exclusions are normally allowed in a gross receipts
tax. The gross receipts tax, as opposed to the income tax, was devised to maintain simplicityin tax collection and to
assure a steady source of state revenue even during periods of economic slowdown. [47] Such a policy frowns upon
erosion of the tax base. Deductions, exemptions or exclusions complicate the tax system and lessen the tax
collection. By its nature, a gross receipts tax applies to the entire receipts without any deduction, exemption or
exclusion, unless the law clearly provides otherwise.

CBC cites Collector of Internal Revenue v. Manila Jockey Club[48] as authority that the final withholding tax on
interest income does not form part of a banks gross receipts because the final tax is earmarked by regulation for the
government. CBCs reliance on the Manila Jockey Club is misplaced. In this case the Court stated that Republic Act
No. 309 and Executive Order No. 320 apportioned the total amount of the bets in horse races as follows:
87 1/2% as dividends to holders of winning tickets; 12 % as commission of the Manila Jockey Club, of which % was
assigned to the Board of Races and 5% was distributed as prizes for owners of winning horses and authorized bonuses
for jockeys.[49]
A subsequent law, Republic Act No. 1933 (RA No. 1933), amended the sharing by ordering the distribution of the bets
as follows:
Sec. 19. Distribution of receipts. The total wager funds or gross receipts from the sale of pari-mutuel tickets shall
be apportioned as follows: eighty-seven and one-half per centum shall be distributed in the form of dividends
among the holders of win, place and show horses, as the case may be, in the regular races; six and one-half per
centum shall be set aside as the commission of the person, racetrack, racing club, or any other entity
conducting the races; five and one-half per centum shall be set aside for the payment of stakes or prizes for win,
place and show horses and authorized bonuses for jockeys; and one-half per centum shall be paid to a special fund to
be used by the Games and Amusements Board to cover its expenses and such other purposes authorized under this
Act. x x x. (Emphasis supplied)
Under the distribution of receipts expressly mandated in Section 19 of RA No. 1933, the gross receipts apportioned to
Manila Jockey Club referred only to its own 6 % commission. There is no dispute that the 51/2% share of the horseowners and jockeys, and the % share of the Games and Amusement Board, do not form part of Manila Jockey Clubs
gross receipts. RA No. 1933 took effect on 22 June 1957, three years before the Court decided Manila Jockey Club on
30 June 1960.
Even under the earlier law, Manila Jockey Club did not own the entire 12 % commission. Manila Jockey Club owned, and
could keep and use, only 7% of the total bets. Manila Jockey Club merely held in trust the balance of 5 % for the
benefit of the Board of Races and the winning horse owners and jockeys, the real owners of the 5 % share.
The Court in Manila Jockey Club quoted with approval the following Opinion of the Secretary of Justice made prior to
RA No. 1933:
There is no question that the Manila Jockey Club, Inc. owns only 7-1/2% [sic] of the total bets registered
by the Totalizer. This portion represents its share or commission in the total amount of money it handles and goes to
the funds thereof as its own property which it may legally disburse for its own purposes. The 5% [sic] does not
belong to the club. It is merely held in trust for distribution as prizes to the owners of winning horses. It
is destined for no other object than the payment of prizes and the club cannot otherwise appropriate this portion
without incurring liability to the owners of winning horses. It can not be considered as an item of expense because the
sum used for the payment of prizes is not taken from the funds of the club but from a certain portion of the total bets
especially earmarked for that purpose.[50] (Emphasis supplied)
Consequently, the Court ruled that the 5 % balance of the commission, not being owned by Manila Jockey Club, did not
form part of its gross receipts for purposes of the amusement tax. Manila Jockey Club correctly paid the amusement
tax based only on its own 7% commission under RA No. 309 and Executive Order No. 320.
Manila Jockey Club does not support CBCs contention but rather the Commissioners position. The Court ruled
in Manila Jockey Club that receipts not owned by the Manila Jockey Club but merely held by it in trust did not form
part of Manila Jockey Clubs gross receipts. Conversely, receipts owned by the Manila Jockey Club would form part of its
gross receipts.
In the instant case, CBC owns the interest income which is the source of payment of the final withholding tax. The
government subsequently becomes the owner of the money constituting the final tax when CBC pays the final
withholding tax to extinguish its obligation to the government. This is the consideration for the transfer of ownership of
the money from CBC to the government. Thus, the amount constituting the final tax, being originally owned by
CBC as part of its interest income, should form part of its taxable gross receipts.
In Commissioner v. Tours Specialists, Inc.,[51] the Court excluded from gross receipts money entrusted by foreign
tour operators to Tours Specialists to pay the hotel accommodation of tourists booked in various local hotels. The Court
declared that Tours Specialists did not own such entrusted funds and thus the funds were not subject to the 3%
contractors tax payable by Tours Specialists. The Court held:
x x x [G]ross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer

which do not belong to them and do not redound to the taxpayers benefit; and it is not necessary that there must be a
law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax
Code.
x x x [T]he room charges entrusted by the foreign travel agencies to the private respondent do not form part of its
gross receipts within the definition of the Tax Code. The said receipts never belonged to the private
respondent.The private respondent never benefited from their payment to the local hotels. x x x [T]his
arrangement was only to accommodate the foreign travel agencies. (Emphasis supplied)
Unless otherwise provided by law, ownership is essential in determining whether interest income forms part of
taxable gross receipts. Ownership is the circumstance that makes interest income part of the taxable gross receipts of
the taxpayer. When the taxpayer acquires ownership of money representing interest, the money constitutes income or
receipt of the taxpayer.
In contrast, the trustee or agent does not own the money received in trust and such money does not constitute income
or receipt for which the trustee or agent is taxable. This is a fundamental concept in taxation. Thus, funds received by
a money remittance agency for transfer and delivery to the beneficiary do not constitute income or gross receipts of
the money remittance agency. Similarly, a travel agency that collects ticket fares for an airline does not include the
ticket fare in its gross income or receipts. In these cases, the money remittance agency or travel agency does not
acquire ownership of the funds received.
Moreover, when Section 121 of the Tax Code includes interest as part of gross receipts, it refers to the entire interest
earned and owned by the bank without any deduction. Interest means the gross amount paid by the borrower to the
lender as consideration for the use of the lenders money. Section 2(h) of Revenue Regulations No. 12-80, now Section
2(i) of Revenue Regulations No. 17-84, defines the term interest as the amount which a depository bank (borrower)
may pay on savings and time deposit in accordance with rates authorized by the Central Bank of the Philippines. This
definition does not allow any deduction. The entire interest paid by the depository bank, without any deduction, is
what forms part of the lending banks gross receipts.
To illustrate, assume that the gross amount of the interest income is P100. The lending bank owns this entire P100
since this is the amount the depository bank pays the lending bank for use of the lenders money. In its books the
depository bank records an interest expense of P100 and claims a deduction for interest expense of P100. The 20%
final withholding tax[52] on this interest income is P20, which the law requires the depository bank to withhold and remit
directly to the government. The depository bank withholds the final tax in trust for the government which then
becomes the owner of the P20. The final tax is the legal liability of the lending bank as recipient of the interest
income. The payment of the P20 final tax extinguishes the tax liability of the lending bank. The interest income that
the depository bank turns over physically to the lending bank is P80, the net receipt after deducting the P20 final tax.
Still, the interest income that forms part of the lending banks gross receipts for purposes of the gross receipts tax
is P100 because the total amount earned by the lending bank from its passive investment is P100, not P80.
Stated differently, the lending bank paid P20 as final tax which is 20% of the interest income it received. Logically, the
lending banks interest income is P100 to arrive at a P20 final withholding tax. Since what the law includes in gross
receipts is the interest income, then it is P100 and not P80 which forms part of the lending banks gross receipts. If the
lending banks interest income is only P80, then its 20% final withholding tax should only be P16.
CBC also relies on the Tax Courts ruling in Asian Bank that Section 4(e) of Revenue Regulations No. 12-80 authorizes
the exclusion of the final tax from the banks taxable gross receipts. Section 4(e) provides that:
Sec. 4. x x x
(e) Gross receipts tax on banks, non-bank financial intermediaries, financing companies, and other non-bank financial
intermediaries not performing quasi-banking functions. - The rates of taxes to be imposed on the gross receipts of
such financial institutions shall be based on all items of income actually received. Mere accrual shall not be
considered, but once payment is received on such accrual or in cases of prepayment, then the amount actually
received shall be included in the tax base of such financial institutions, as provided hereunder: x x x. (Emphasis
supplied by Tax Court)
Section 4(e) states that the gross receipts shall be based on all items of income actually received. The tax court
in Asian Bank concluded that it is but logical to infer that the final tax, not having been received by petitioner but
instead went to the coffers of the government, should no longer form part of its gross receipts for the purpose of
computing the GRT.
The Tax Court erred glaringly in interpreting Section 4(e) of Revenue Regulations No. 12-80. Income may be taxable
either at the time of its actual receipt or its accrual, depending on the accounting method of the taxpayer. Section 4(e)
merely provides for an exception to the rule, making interest income taxable for gross receipts tax

purposes only upon actual receipt. Interest is accrued, and not actually received, when the interest is due and
demandable but the borrower has not actually paid and remitted the interest, whether physically or
constructively. Section 4(e) does not exclude accrued interest income from gross receipts but merely postpones its
inclusion until actual payment of the interest to the lending bank. This is clear when Section 4(e) states that [m]ere
accrual shall not be considered, but once payment is received on such accrual or in case of prepayment,
then the amount actually received shall be included in the tax base of such financial institutions x x x.
Actual receipt of interest income is not limited to physical receipt. Actual receipt may either be physical receipt or
constructive receipt.[53] When the depository bank withholds the final tax to pay the tax liability of the lending bank,
there is prior to the withholding a constructive receipt by the lending bank of the amount withheld. From the amount
constructively received by the lending bank, the depository bank deducts the final withholding tax and remits it to the
government for the account of the lending bank. Thus, the interest income actually received by the lending
bank, both physically and constructively, is the net interest plus the amount withheld as final tax.
The concept of a withholding tax on income obviously and necessarily implies that the amount of the tax withheld
comes from the income earned by the taxpayer. [54] Since the amount of the tax withheld constitutes income earned by
the taxpayer, then that amount manifestly forms part of the taxpayers gross receipts. Because the amount withheld
belongs to the taxpayer, he can transfer its ownership to the government in payment of his tax liability. The amount
withheld indubitably comes from income of the taxpayer, and thus forms part of his gross receipts.
In addition, Section 8 of Revenue Regulations No. 12-80 expressly states that interest income, even if subject to the
final withholding tax and excluded from gross income for income tax purposes, should still form part of the banks
taxable gross receipts. Section 8 of Revenue Regulations No. 12-80 provides that
Section 8. Nature and Treatment of Interest on Deposits and Yield on Deposit Substitutes
(a) The interest earned on Philippine currency, bank deposits and yield from deposit substitutes subjected to the
withholding taxes in accordance with these regulations need not be included in the gross income in computing
the depositors/investors income tax liability in accordance with the provision of Section 29(b), (c) and (d) of the Tax
Code.
(b) x x x
(c) If the recipient of the above-mentioned items of income are financial institutions, the same shall be
included as part of the tax base upon which the gross receipts tax is imposed. (Emphasis supplied)
Thus, interest earned by banks, even if subject to the final tax and excluded from taxable gross income, forms part of
its gross receipts for gross receipts tax purposes. The interest earned refers to the gross interest without deduction
since the regulations do not provide for any deduction. The gross interest, without deduction, is the amount the
borrower pays, and the income the lender earns, for the use by the borrower of the lenders money. The amount of the
final tax plainly comes from the interest earned and is consequently part of the banks taxable gross receipts.
In PLDT v. Collector of Internal Revenue,[55] the Court ruled that PLDTs gross receipts included the uncollected fees
from customers because PLDT already earned the uncollected fees. The Court declared that fees earned, even if not
collected, formed part of PLDTs gross receipts for purposes of the franchise tax. Construing gross receipts x x x as
meaning the same as gross earnings, the Court refused to allow deductions of uncollected or bad accounts from the
gross receipts in computing the franchise tax.
Presidential Decree No. 1739 (PD No. 1739), which took effect on 17 September 1980, made the withholding tax on
interest from bank deposits a final tax. To implement PD No. 1739, the then Ministry of Finance, upon recommendation
of the BIR, issued Revenue Regulations No. 12-80 to govern the manner of taxation of certain income derived from
banking activities as provided for by Presidential Decree No. 1739. Subsequently, Presidential Decree No. 1959, which
took effect on 10 October 1984, amended PD No. 1739. The Ministry of Finance, upon recommendation of the BIR,
issued on 12 October 1984 Revenue Regulations No. 17-84 to govern the manner of taxation of interest income
derived from deposit and deposit substitutes as provided for by Presidential Decree No. 1959. Thus, as early as 12
October 1984 Revenue Regulations No. 17-84 had supplanted Revenue Regulations No. 12-80.
Among the changes introduced by PD No. 1959 was the reduction of the final withholding tax on time deposits and
yield on deposit substitutes to 15% from the 20% rate in PD No. 1739. Revenue Regulations No. 17-84 readopted
verbatim Section 2(h) on the definition of interest, [56] as well as Section 8(c) on the computation of the taxable base of
the banks gross receipts,[57] found in Revenue Regulations No. 12-80. However, Revenue Regulations No. 17-84
did not readopt Section 4(e) of Revenue Regulations No. 12-80, which was the regulation cited in Asian Bank as basis
for excluding the final withholding tax from the banks taxable gross receipts. As early as 12 years before the tax court
decided Asian Bank, the revenue regulations already required interest income, whether actually received or merely
accrued, to form part of the banks taxable gross receipts.

On the other hand, Section 7 of Revenue Regulations No. 17-84, which replaced Section 4 of Revenue Regulations No.
12-80, provides that
Section 7. Nature and Treatment of Interest on Deposits and Yield on Deposit Substitutes.

expressed in the statute, and must be clearly established by the taxpayer claiming the right thereto. Thus, taxation is
the rule and the claimant must show that his demand is within the letter as well as the spirit of the law. (Citations and
quotations omitted)

(a) The interest earned on Philippine Currency bank deposits and yield from deposit substitutes subjected to the
withholding taxes in accordance with these regulations need not be included in the gross income in computing
the depositor's/investor's income tax liability in accordance with the provision of Section 29(b), (c) and (d) of the
National Internal Revenue Code, as amended.

To overcome this presumption, CBC must point to a specific provision of law allowing the deduction of the final
withholding tax from its taxable gross receipts. CBC has failed to cite any provision of law allowing the final tax as an
exemption, deduction or exclusion. Thus, CBCs claim has no legal leg to stand on.

(b) Only interest paid or accrued on bank deposits, or yield from deposit substitutes declared for purposes of imposing
the withholding taxes in accordance with these regulations shall be allowed as interest expense deductible for
purposes of computing taxable net income of the payor.

In Asian Bank, the Court of Tax Appeals quoted Manila Jockey Club that the legislature could not have intended the
Board of Races % share to be subjected to the amusement tax because it would constitute double taxation. The Court
in Manila Jockey Club explained that double taxation x x x should be avoided unless the statute admits of no other
interpretation. This statement was not the ratio decidendiin Manila Jockey Club. There, the Court found that the
Board of Races % share, and the horse-owners and jockeys 5% share, were not owned by the Manila Jockey Club and
thus did not form part of the Manila Jockey Clubs gross receipts.

(c) If the recipient of the above-mentioned items of income are financial institutions, the same shall be
included as part of the tax base upon which the gross receipt tax is imposed. (Emphasis supplied)
Thus, the Tax Court, which decided Asian Bank on 30 January 1996, not only erroneously interpreted Section 4(e) of
Revenue Regulations No. 12-80, it also cited Section 4(e) when it was no longer the applicable revenue regulation. To
reiterate, the revenue regulations applicable at the time the tax court decided Asian Bank was Revenue Regulations
No. 17-84, not Revenue Regulations No. 12-80.
The argument that Section 7(c) of Revenue Regulations No. 17-84 does not apply to banks but only to finance
companies deserves scant consideration. This argument proceeds from the interpretation [58]that the term financial
institutions in Section 7(c) is the equivalent of the term finance companies. Section 7(c) states as follows:
If the recipient of the above-mentioned items of income are financial institutions, the same shall be included as
part of their tax base upon which the gross receipts tax is imposed. (Emphasis supplied)
However, the immediately succeeding section belies this interpretation. Section 8 of Revenue Regulations No. 17-84
states:
Section 8. Statement to be attached to the corporate tax return of financial institutions. - There shall be attached to
the final consolidated corporate return of the authorized agent bank or non-financial intermediaries for each
taxable year, a statement summarizing the pertinent information required by these regulations with respect to the
computation of the aggregate interest paid on savings, time deposits and deposit substitutes and taxes withheld
therefrom and paid to the Bureau, during the year (B.I.R. Form No. ___). (Emphasis supplied)
Section 8 expressly specifies banks and non-bank financial intermediaries as the financial institutions that should
attach to their corporate tax returns statements summarizing certain pertinent information on the computation of their
interest income subject to the final tax. Revenue Regulations No. 17-84 applies to banks, non-bank financial
intermediaries, finance companies, lending investors, investment houses, trust companies and similar institutions and
corporations.[59] Obviously, the term financial institutions is not the same as the term finance companies, but signifies
a broader meaning to embrace banks.
Of course, the term financial institutions also covers finance companies since Section 7(c) uses this term to refer to
institutions that are subject to the gross receipts tax. Section 7(c) states that interest income received by financial
institutions shall form part of their tax base upon which the gross receipts tax is based. Under Sections 121 and
122[60] of the Tax Code, the financial institutions that are subject to the gross receipts tax are banks, non-bank financial
intermediaries and finance companies. These financial institutions are taxable on the same class of interest income
and at the same tax rates. Evidently, the term financial institutions refers to banks, non-bank financial intermediaries,
and finance companies.
CBCs contention that it can deduct the final withholding tax from its interest income amounts to a claim of tax
exemption. The cardinal rule in taxation is exemptions are highly disfavored and whoever claims an exemption must
justify his right by the clearest grant of organic or statute law. [61] CBC must point to a specific provision of law granting
the tax exemption.[62] The tax exemption cannot arise by mere implication and any doubt about whether the
exemption exists is strictly construed against the taxpayer and in favor of the taxing authority. [63]
Section 121 of the Tax Code expressly subjects interest income to the gross receipts tax on banks. Such express
inclusion of interest income in taxable gross receipts creates a presumption that the entire amount of the interest
income, without any deduction, is subject to the gross receipts tax. As ruled by the Supreme Court of New Mexico
in Kewanee Industries, Inc. v. Reese,[64] x x x There is a presumption that receipts of a person engaging in business are subject to the gross receipts tax. For
Kewanee to prevail, it must clearly overcome this presumption. Additionally, where an exception is claimed, the
statute is construed strictly in favor of the taxing authority. The exemption must be clearly and unambiguously

Nevertheless, the tax court quoted with approval this particular statement in Manila Jockey Club, thus implying two
interpretations. One, the court should avoid an interpretation that will tax twice the same interest income, first to the
20% final tax and then to the gross receipts tax. Two, the court should avoid an interpretation that will impose a tax on
a tax, such as subjecting the final tax to the gross receipts tax.
The first interpretation raises the bogey of a constitutional prohibition on double taxation. The rule, however, is wellsettled that there is no constitutional prohibition against double taxation. As the Court aptly explained in City of
Baguio v. De Leon[65] To repeat, the challenged ordinance cannot be considered ultra vires as there is more than ample statutory authority
for the enactment thereof. Nonetheless, its validity on constitutional grounds is challenged because the allegation that
it imposed double taxation, which is repugnant to the due process clause, and that it violated the requirement of
uniformity. We do not view the matter thus.
As to why double taxation is not violative of due process, Justice Holmes made clear in this language: The objection to
the taxation as double may be laid down on one side . . . . The 14th Amendment [the due process clause] no more
forbids double taxation than it does doubling the amount of a tax, short of confiscation or proceedings unconstitutional
on other grounds. With that decision rendered at a time when American sovereignty in the Philippines was recognized,
it possesses more than just a persuasive effect. To some, it delivered the coup de grace to the bogey of double
taxation as a constitutional bar to the exercise of the taxing power. It would seem though that in the United States, as
with us, its ghost, as noted by an eminent critic, still stalks the juridical stage. In a 1947 decision, however, we quoted
with approval this excerpt from a leading American decision: Where, as here, Congress has clearly expressed its
intention, the statute must be sustained even though double taxation results.
Besides, there is no double taxation when Section 121 of the Tax Code imposes a gross receipts tax on interest income
that is already subjected to the 20% final withholding tax under Section 27 of the Tax Code. The gross receipts tax is a
business tax under Title V of the Tax Code, while the final withholding tax is an income tax under Title II of the
Code. There is no double taxation if the law imposes two different taxes on the same income, business or property.
The second interpretation, of a prohibition on a tax on a tax, is as illusory as the prohibition on double taxation. The
gross receipts tax falls not on the final withholding tax, but on the amount of the interest income withheld as the final
tax. What is being taxed is still the interest income. The law imposes the gross receipts tax on that portion of the
interest income that the depository bank withholds and remits to the government. Consequently, the entire amount of
the interest income is taxable and not only the net interest income.
Moreover, whenever the legislature excludes a certain tax from gross receipts, the legislature states so clearly and
unequivocally. Thus, for purposes of the value-added tax, Section 106 [66] of the Tax Code expressly excludes the valueadded tax from the gross selling price to avoid a tax on the tax. To clarify that only the value-added tax does not form
part of the gross selling price, Section 106 expressly states that the gross selling price shall include any excise tax,
effectively resulting in a tax on a tax. Of course, the tax on a tax is in reality a tax on the portion of the income or
receipt that is equivalent to the tax, usually withheld and remitted to the government.
There is no constitutional prohibition on subjecting the same income or receipt to an income tax and to some other tax
like the gross receipts tax. Similarly, the same income or receipt may be subject to the value-added tax and the excise
tax like the specific tax. If the tax law follows the constitutional rule on uniformity, making all income, business or
property of the same class taxable at the same rate, there can be no valid objection to taxing the same income,
business or property twice.

In summary, CBC has failed to point to any specific provision of law allowing the deduction, exemption or exclusion,
from its taxable gross receipts, of the amount withheld as final tax. Such amount should therefore form part of CBCs
gross receipts in computing the gross receipts tax. There being no legal basis for CBCs claim for a tax refund or credit,
the second issue raised in this petition is now moot.

"WHEREFORE, premises considered judgment is hereby rendered DISMISSING the petition for Certiorari with prayer for
Restraining Order and Injunction.
No pronouncements as to cost.
SO ORDERED."

WHEREFORE, the Petition for Review filed by China Banking Corporation in G.R. No. 146749 is DENIED for lack of
merit. The Petition for Review filed by the Commissioner of Internal Revenue in G.R. No. 147938 is GRANTED. The
assailed decisions and resolutions of the Court of Tax Appeals in CTA Case No. 5405 and those of the Court of Appeals
in CA-G.R. SP No. 50839 and CA-G.R. SP No. 50790 are SET ASIDE.
SO ORDERED.
28 FERDINAND R. MARCOS II, petitioner, vs. COURT OF APPEALS, THE COMMISSIONER OF THE BUREAU OF
INTERNAL REVENUE and HERMINIA D. DE GUZMAN, respondents.

DECISION
TORRES, JR., J.:

In this Petition for Review on Certiorari, Government action is once again assailed as precipitate and unfair, suffering
the basic and oftly implored requisites of due process of law. Specifically, the petition assails the Decision[1] of the
Court of Appeals dated November 29, 1994 in CA-G.R. SP No. 31363, where the said court held:
"In view of all the foregoing, we rule that the deficiency income tax assessments and estate tax assessment, are
already final and (u)nappealable -and- the subsequent levy of real properties is a tax remedy resorted to by the
government, sanctioned by Section 213 and 218 of the National Internal Revenue Code. This summary tax remedy is
distinct and separate from the other tax remedies (such as Judicial Civil actions and Criminal actions), and is not
affected or precluded by the pendency of any other tax remedies instituted by the government.
WHEREFORE, premises considered, judgment is hereby rendered DISMISSING the petition for certiorari with prayer for
Restraining Order and Injunction.
No pronouncements as to costs.
SO ORDERED."
More than seven years since the demise of the late Ferdinand E. Marcos, the former President of the Republic of the
Philippines, the matter of the settlement of his estate, and its dues to the government in estate taxes, are still
unresolved, the latter issue being now before this Court for resolution. Specifically, petitioner Ferdinand R. Marcos II,
the eldest son of the decedent, questions the actuations of the respondent Commissioner of Internal Revenue in
assessing, and collecting through the summary remedy of Levy on Real Properties, estate and income tax
delinquencies upon the estate and properties of his father, despite the pendency of the proceedings on probate of the
will of the late president, which is docketed as Sp. Proc. No. 10279 in the Regional Trial Court of Pasig, Branch 156.
Petitioner had filed with the respondent Court of Appeals a Petition for Certiorari and Prohibition with an application for
writ of preliminary injunction and/or temporary restraining order on June 28, 1993, seeking to I. Annul and set aside the Notices of Levy on real property dated February 22, 1993 and May 20, 1993, issued by
respondent Commissioner of Internal Revenue;
II. Annul and set aside the Notices of Sale dated May 26, 1993;
III. Enjoin the Head Revenue Executive Assistant Director II (Collection Service), from proceeding with the Auction of
the real properties covered byNotices of Sale.
After the parties had pleaded their case, the Court of Appeals rendered its Decision[2] on November 29, 1994, ruling
that the deficiency assessments for estate and income tax made upon the petitioner and the estate of the deceased
President Marcos have already become final and unappealable, and may thus be enforced by the summary remedy of
levying upon the properties of the late President, as was done by the respondent Commissioner of Internal Revenue.

Unperturbed, petitioner is now before us assailing the validity of the appellate court's decision, assigning the following
as errors:
A. RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT THE SUMMARY TAX REMEDIES RESORTED TO BY THE
GOVERNMENT ARE NOT AFFECTED AND PRECLUDED BY THE PENDENCY OF THE SPECIAL PROCEEDING FOR THE
ALLOWANCE OF THE LATE PRESIDENT'S ALLEGED WILL. TO THE CONTRARY, THIS PROBATE PROCEEDING PRECISELY
PLACED ALL PROPERTIES WHICH FORM PART OF THE LATE PRESIDENT'S ESTATE IN CUSTODIA LEGIS OF THE PROBATE
COURT TO THE EXCLUSION OF ALL OTHER COURTS AND ADMINISTRATIVE AGENCIES.
B. RESPONDENT COURT ARBITRARILY ERRED IN SWEEPINGLY DECIDING THAT SINCE THE TAX ASSESSMENTS OF
PETITIONER AND HIS PARENTS HAD ALREADY BECOME FINAL AND UNAPPEALABLE, THERE WAS NO NEED TO GO INTO
THE MERITS OF THE GROUNDS CITED IN THE PETITION. INDEPENDENT OF WHETHER THE TAX ASSESSMENTS HAD
ALREADY BECOME FINAL, HOWEVER, PETITIONER HAS THE RIGHT TO QUESTION THE UNLAWFUL MANNER AND
METHOD IN WHICH TAX COLLECTION IS SOUGHT TO BE ENFORCED BY RESPONDENTS COMMISSIONER AND DE
GUZMAN. THUS, RESPONDENT COURT SHOULD HAVE FAVORABLY CONSIDERED THE MERITS OF THE FOLLOWING
GROUNDS IN THE PETITION:
(1) The Notices of Levy on Real Property were issued beyond the period provided in the Revenue Memorandum
Circular No. 38-68.
(2) [a] The numerous pending court cases questioning the late President's ownership or interests in several properties
(both personal and real) make the total value of his estate, and the consequent estate tax due, incapable of exact
pecuniary determination at this time. Thus, respondents assessment of the estate tax and their issuance of the
Notices of Levy and Sale are premature, confiscatory and oppressive.
[b] Petitioner, as one of the late President's compulsory heirs, was never notified, much less served with copies of the
Notices of Levy, contrary to the mandate of Section 213 of the NIRC. As such, petitioner was never given an
opportunity to contest the Notices in violation of his right to due process of law.
C. ON ACCOUNT OF THE CLEAR MERIT OF THE PETITION, RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT IT
HAD NO POWER TO GRANT INJUNCTIVE RELIEF TO PETITIONER. SECTION 219 OF THE NIRC NOTWITHSTANDING,
COURTS POSSESS THE POWER TO ISSUE A WRIT OF PRELIMINARY INJUNCTION TO RESTRAIN RESPONDENTS
COMMISSIONER'S AND DE GUZMAN'S ARBITRARY METHOD OF COLLECTING THE ALLEGED DEFICIENCY ESTATE AND
INCOME TAXES BY MEANS OF LEVY.
The facts as found by the appellate court are undisputed, and are hereby adopted:
"On September 29, 1989, former President Ferdinand Marcos died in Honolulu, Hawaii, USA.
On June 27, 1990, a Special Tax Audit Team was created to conduct investigations and examinations of the tax
liabilities and obligations of the late president, as well as that of his family, associates and "cronies". Said audit team
concluded its investigation with a Memorandum dated July 26, 1991. The investigation disclosed that the Marcoses
failed to file a written notice of the death of the decedent, an estate tax returns [sic], as well as several income tax
returns covering the years 1982 to 1986, -all in violation of the National Internal Revenue Code (NIRC).
Subsequently, criminal charges were filed against Mrs. Imelda R. Marcos before the Regional Trial of Quezon City for
violations of Sections 82, 83 and 84 (has penalized under Sections 253 and 254 in relation to Section 252- a & b) of the
National Internal Revenue Code (NIRC).
The Commissioner of Internal Revenue thereby caused the preparation and filing of the Estate Tax Return for the
estate of the late president, the Income Tax Returns of the Spouses Marcos for the years 1985 to 1986, and the Income
Tax Returns of petitioner Ferdinand 'Bongbong' Marcos II for the years 1982 to 1985.
On July 26, 1991, the BIR issued the following: (1) Deficiency estate tax assessment no. FAC-2-89-91-002464 (against
the estate of the late president Ferdinand Marcos in the amount of P23,293,607,638.00 Pesos); (2) Deficiency income
tax assessment no. FAC-1-85-91-002452 and Deficiency income tax assessment no. FAC-1-86-91-002451 (against the
Spouses Ferdinand and Imelda Marcos in the amounts of P149,551.70 and P184,009,737.40 representing deficiency
income tax for the years 1985 and 1986); (3) Deficiency income tax assessment nos. FAC-1-82-91-002460 to FAC-1-8591-002463 (against petitioner Ferdinand 'Bongbong' Marcos II in the amounts of P258.70 pesos; P9,386.40
Pesos; P4,388.30 Pesos; and P6,376.60 Pesos representing his deficiency income taxes for the years 1982 to 1985).

The Commissioner of Internal Revenue avers that copies of the deficiency estate and income tax assessments were all
personally and constructively served on August 26, 1991 and September 12, 1991 upon Mrs. Imelda Marcos (through
her caretaker Mr. Martinez) at her last known address at No. 204Ortega St., San Juan, M.M. (Annexes 'D' and 'E' of the
Petition). Likewise, copies of the deficiency tax assessments issued against petitioner Ferdinand 'Bongbong' Marcos II
were also personally and constructively served upon him (through his caretaker) on September 12, 1991, at his last
known address at Don Mariano Marcos St. corner P. Guevarra St., San Juan, M.M. (Annexes 'J' and 'J-1' of the
Petition). Thereafter, Formal Assessment notices were served on October 20, 1992, upon Mrs. Marcos c/o petitioner, at
his office, House of Representatives, Batasan Pambansa, Quezon City. Moreover, a notice to Taxpayer inviting Mrs.
Marcos (or her duly authorized representative or counsel), to a conference, was furnished the counsel of Mrs. Marcos,
Dean Antonio Coronel - but to no avail.
The deficiency tax assessments were not protested administratively, by Mrs. Marcos and the other heirs of the late
president, within 30 days from service of said assessments.
On February 22, 1993, the BIR Commissioner issued twenty-two notices of levy on real property against certain parcels
of land owned by the Marcoses - to satisfy the alleged estate tax and deficiency income taxes of Spouses Marcos.
On May 20, 1993, four more Notices of Levy on real property were issued for the purpose of satisfying the deficiency
income taxes.
On May 26, 1993, additional four (4) notices of Levy on real property were again issued. The foregoing tax remedies
were resorted to pursuant to Sections 205 and 213 of the National Internal Revenue Code (NIRC).
In response to a letter dated March 12, 1993 sent by Atty. Loreto Ata (counsel of herein petitioner) calling the attention
of the BIR and requesting that they be duly notified of any action taken by the BIR affecting the interest of their client
Ferdinand 'Bongbong Marcos II, as well as the interest of the late president - copies of the aforesaid notices were
served on April 7, 1993 and on June 10, 1993, upon Mrs. Imelda Marcos, the petitioner, and their counsel of record, 'De
Borja, Medialdea, Ata, Bello, Guevarra and Serapio Law Office'.
Notices of sale at public auction were posted on May 26, 1993, at the lobby of the City Hall of Tacloban City. The public
auction for the sale of the eleven (11) parcels of land took place on July 5, 1993. There being no bidder, the lots were
declared forfeited in favor of the government.
On June 25, 1993, petitioner Ferdinand 'Bongbong' Marcos II filed the instant petition for certiorari and prohibition
under Rule 65 of the Rules of Court, with prayer for temporary restraining order and/or writ of preliminary injunction."
It has been repeatedly observed, and not without merit, that the enforcement of tax laws and the collection of taxes, is
of paramount importance for the sustenance of government. Taxes are the lifeblood of the government and should be
collected without unnecessary hindrance. However, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently
conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of
the common good, may be achieved."[3]
Whether or not the proper avenues of assessment and collection of the said tax obligations were taken by the
respondent Bureau is now the subject of the Court's inquiry.
Petitioner posits that notices of levy, notices of sale, and subsequent sale of properties of the late President Marcos
effected by the BIR are null and void for disregarding the established procedure for the enforcement of taxes due upon
the estate of the deceased. The case of Domingo vs. Garlitos[4] is specifically cited to bolster the argument that "the
ordinary procedure by which to settle claims of indebtedness against the estate of a deceased, person, as in an
inheritance (estate) tax, is for the claimant to present a claim before the probate court so that said court may order
the administrator to pay the amount therefor." This remedy is allegedly, exclusive, and cannot be effected through any
other means.
Petitioner goes further, submitting that the probate court is not precluded from denying a request by the government
for the immediate payment of taxes, and should order the payment of the same only within the period fixed by the
probate court for the payment of all the debts of the decedent. In this regard, petitioner cites the case of Collector of
Internal Revenue vs. The Administratrix of the Estate of Echarri (67 Phil 502), where it was held that:
"The case of Pineda vs. Court of First Instance of Tayabas and Collector of Internal Revenue (52 Phil 803), relied upon
by the petitioner-appellant is good authority on the proposition that the court having control over the administration
proceedings has jurisdiction to entertain the claim presented by the government for taxes due and to order the
administrator to pay the tax should it find that the assessment was proper, and that the tax was legal, due and
collectible. And the rule laid down in that case must be understood in relation to the case of Collector of Customs vs.
Haygood, supra., as to the procedure to be followed in a given case by the government to effectuate the collection of
the tax. Categorically stated, where during the pendency of judicial administration over the estate of a deceased
person a claim for taxes is presented by the government, the court has the authority to order payment by the

administrator; but, in the same way that it has authority to order payment or satisfaction, it also has the negative
authority to deny the same. While there are cases where courts are required to perform certain duties mandatory and
ministerial in character, the function of the court in a case of the present character is not one of them; and here, the
court cannot be an organism endowed with latitude of judgment in one direction, and converted into a mere
mechanical contrivance in another direction."
On the other hand, it is argued by the BIR, that the state's authority to collect internal revenue taxes is
paramount. Thus, the pendency of probate proceedings over the estate of the deceased does not preclude the
assessment and collection, through summary remedies, of estate taxes over the same. According to the respondent,
claims for payment of estate and income taxes due and assessed after the death of the decedent need not be
presented in the form of a claim against the estate. These can and should be paid immediately. The probate court is
not the government agency to decide whether an estate is liable for payment of estate of income taxes. Well-settled is
the rule that the probate court is a court with special and limited jurisdiction.
Concededly, the authority of the Regional Trial Court, sitting, albeit with limited jurisdiction, as a probate court over
estate of deceased individual, is not a trifling thing. The court's jurisdiction, once invoked, and made effective, cannot
be treated with indifference nor should it be ignored with impunity by the very parties invoking its authority.
In testament to this, it has been held that it is within the jurisdiction of the probate court to approve the sale of
properties of a deceased person by his prospective heirs before final adjudication;[5] to determine who are the heirs of
the decedent;[6] the recognition of a natural child;[7] the status of a woman claiming to be the legal wife of the
decedent;[8] the legality of disinheritance of an heir by the testator;[9] and to pass upon the validity of a waiver of
hereditary rights.[10]
The pivotal question the court is tasked to resolve refers to the authority of the Bureau of Internal Revenue to collect
by the summary remedy of levying upon, and sale of real properties of the decedent, estate tax deficiencies, without
the cognition and authority of the court sitting in probate over the supposed will of the deceased.
The nature of the process of estate tax collection has been described as follows:
"Strictly speaking, the assessment of an inheritance tax does not directly involve the administration of a decedent's
estate, although it may be viewed as an incident to the complete settlement of an estate, and, under some statutes, it
is made the duty of the probate court to make the amount of the inheritance tax a part of the final decree of
distribution of the estate. It is not against the property of decedent, nor is it a claim against the estate as such, but it is
against the interest or property right which the heir, legatee, devisee, etc., has in the property formerly held by
decedent. Further, under some statutes, it has been held that it is not a suit or controversy between the parties, nor is
it an adversary proceeding between the state and the person who owes the tax on the inheritance. However, under
other statutes it has been held that the hearing and determination of the cash value of the assets and the
determination of the tax are adversary proceedings. The proceeding has been held to be necessarily a proceeding in
rem.[11]
In the Philippine experience, the enforcement and collection of estate tax, is executive in character, as the legislature
has seen it fit to ascribe this task to the Bureau of Internal Revenue. Section 3 of the National Internal Revenue Code
attests to this:
"Sec. 3. Powers and duties of the Bureau.-The powers and duties of the Bureau of Internal Revenue shall comprehend
the assessment and collection of all national internal revenue taxes, fees, and charges, and the enforcement of all
forfeitures, penalties, and fines connected therewith, including the execution of judgments in all cases decided in its
favor by the Court of Tax Appeals and the ordinary courts. Said Bureau shall also give effect to and administer the
supervisory and police power conferred to it by this Code or other laws."
Thus, it was in Vera vs. Fernandez[12] that the court recognized the liberal treatment of claims for taxes charged
against the estate of the decedent. Such taxes, we said, were exempted from the application of the statute of nonclaims, and this is justified by the necessity of government funding, immortalized in the maxim that taxes are the
lifeblood of the government. Vectigalia nervi sunt rei publicae - taxes are the sinews of the state.
"Taxes assessed against the estate of a deceased person, after administration is opened, need not be submitted to the
committee on claims in the ordinary course of administration. In the exercise of its control over the administrator, the
court may direct the payment of such taxes upon motion showing that the taxes have been assessed against the
estate."
Such liberal treatment of internal revenue taxes in the probate proceedings extends so far, even to allowing the
enforcement of tax obligations against the heirs of the decedent, even after distribution of the estate's properties.

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

the sixth month) within which to issue these Notices of Levy. The Notices of Levy, having been issued beyond the
period allowed by law, are thus void and of no effect."[15]

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

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

From the foregoing, it is discernible that the approval of the court, sitting in probate, or as a settlement tribunal over
the deceased is not a mandatory requirement in the collection of estate taxes. It cannot therefore be argued that the
Tax Bureau erred in proceeding with the levying and sale of the properties allegedly owned by the late President, on
the ground that it was required to seek first the probate court's sanction. There is nothing in the Tax Code, and in the
pertinent remedial laws that implies the necessity of the probate or estate settlement court's approval of the state's
claim for estate taxes, before the same can be enforced and collected.
On the contrary, under Section 87 of the NIRC, it is the probate or settlement court which is bidden not to authorize
the executor or judicial administrator of the decedent's estate to deliver any distributive share to any party interested
in the estate, unless it is shown a Certification by the Commissioner of Internal Revenue that the estate taxes have
been paid. This provision disproves the petitioner's contention that it is the probate court which approves the
assessment and collection of the estate tax.
If there is any issue as to the validity of the BIR's decision to assess the estate taxes, this should have been pursued
through the proper administrative and judicial avenues provided for by law.
Section 229 of the NIRC tells us how:
"Sec. 229. Protesting of assessment.-When the Commissioner of Internal Revenue or his duly authorized representative
finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings. Within a period to be
prescribed by implementing regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails
to respond, the Commissioner shall issue an assessment based on his findings.
Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation in such
form and manner as may be prescribed by implementing regulations within (30) days from receipt of the assessment;
otherwise, the assessment shall become final and unappealable.
If the protest is denied in whole or in part, the individual, association or corporation adversely affected by the decision
on the protest may appeal to the Court of Tax Appeals within thirty (30) days from receipt of said decision; otherwise,
the decision shall become final, executory and demandable. (As inserted by P.D. 1773)"
Apart from failing to file the required estate tax return within the time required for the filing of the same, petitioner,
and the other heirs never questioned the assessments served upon them, allowing the same to lapse into finality, and
prompting the BIR to collect the said taxes by levying upon the properties left by President Marcos.
Petitioner submits, however, that "while the assessment of taxes may have been validly undertaken by the
Government, collection thereof may have been done in violation of the law. Thus, the manner and method in which the
latter is enforced may be questioned separately, and irrespective of the finality of the former, because the
Government does not have the unbridled discretion to enforce collection without regard to the clear provision of
law."[14]

The applicable provision in regard to the prescriptive period for the assessment and collection of tax deficiency in this
instance is Article 223 of the NIRC, which pertinently provides:
"Sec. 223. Exceptions as to a period of limitation of assessment and collection of taxes.- (a) In the case of a false or
fraudulent return with intent to evade tax or of a failure to file a return, the tax may be assessed, or a proceeding in
court for the collection of such tax may be begun without assessment, at any time within ten (10) years after the
discovery of the falsity, fraud, or omission: Provided, That, in a fraud assessment which has become final and
executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection
thereof.
xxx
(c) Any internal revenue tax which has been assessed within the period of limitation above prescribed, may be
collected by distraint or levy or by a proceeding in court within three years following the assessment of the tax.
xxx
The omission to file an estate tax return, and the subsequent failure to contest or appeal the assessment made by the
BIR is fatal to the petitioner's cause, as under the above-cited provision, in case of failure to file a return, the tax may
be assessed at any time within ten years after the omission, and any tax so assessed may be collected by levy upon
real property within three years following the assessment of the tax. Since the estate tax assessment had become
final and unappealable by the petitioner's default as regards protesting the validity of the said assessment, there is
now no reason why the BIR cannot continue with the collection of the said tax. Any objection against the assessment
should have been pursued following the avenue paved in Section 229 of the NIRC on protests on assessments of
internal revenue taxes.
Petitioner further argues that "the numerous pending court cases questioning the late president's ownership or
interests in several properties (both real and personal) make the total value of his estate, and the consequent estate
tax due, incapable of exact pecuniary determination at this time. Thus, respondents' assessment of the estate tax and
their issuance of the Notices of Levy and sale are premature and oppressive." He points out the pendency of
Sandiganbayan Civil Case Nos. 0001-0034 and 0141, which were filed by the government to question the ownership
and interests of the late President in real and personal properties located within and outside the Philippines. Petitioner,
however, omits to allege whether the properties levied upon by the BIR in the collection of estate taxes upon the
decedent's estate were among those involved in the said cases pending in the Sandiganbayan. Indeed, the court is at
a loss as to how these cases are relevant to the matter at issue. The mere fact that the decedent has pending cases
involving ill-gotten wealth does not affect the enforcement of tax assessments over the properties indubitably included
in his estate.
Petitioner also expresses his reservation as to the propriety of the BIR's total assessment of P23,292,607,638.00,
stating that this amount deviates from the findings of the Department of Justice's Panel of Prosecutors as per its
resolution of 20 September 1991.Allegedly, this is clear evidence of the uncertainty on the part of the Government as
to the total value of the estate of the late President.

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

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

"...the Notices of Levy on Real Property (Annexes 0 to NN of Annex C of this Petition) in satisfaction of said
assessments were still issued by respondents well beyond the period mandated in Revenue Memorandum Circular No.
38-68. These Notices of Levy were issued only on 22 February 1993 and 20 May 1993 when at least seventeen (17)
months had already lapsed from the last service of tax assessment on 12 September 1991. As no notices of distraint of
personal property were first issued by respondents, the latter should have complied with Revenue Memorandum
Circular No. 38-68 and issued these Notices of Levy not earlier than three (3) months nor later than six (6) months
from 12 September 1991. In accordance with the Circular, respondents only had until 12 March 1992 (the last day of

It is not the Department of Justice which is the government agency tasked to determine the amount of taxes due upon
the subject estate, but the Bureau of Internal Revenue[16] whose determinations and assessments are presumed
correct and made in good faith.[17] The taxpayer has the duty of proving otherwise. In the absence of proof of any
irregularities in the performance of official duties, an assessment will not be disturbed. Even an assessment based on
estimates is prima facie valid and lawful where it does not appear to have been arrived at arbitrarily or
capriciously. The burden of proof is upon the complaining party to show clearly that the assessment is
erroneous. Failure to present proof of error in the assessment will justify the judicial affirmance of said assessment.
[18] In this instance, petitioner has not pointed out one single provision in the Memorandum of the Special Audit Team

which gave rise to the questioned assessment, which bears a trace of falsity. Indeed, the petitioner's attack on the
assessment bears mainly on the alleged improbable and unconscionable amount of the taxes charged. But mere
rhetoric cannot supply the basis for the charge of impropriety of the assessments made.
Moreover, these objections to the assessments should have been raised, considering the ample remedies afforded the
taxpayer by the Tax Code, with the Bureau of Internal Revenue and the Court of Tax Appeals, as described earlier, and
cannot be raised now via Petition forCertiorari, under the pretext of grave abuse of discretion. The course of action
taken by the petitioner reflects his disregard or even repugnance of the established institutions for governance in the
scheme of a well-ordered society. The subject tax assessments having become final, executory and enforceable, the
same can no longer be contested by means of a disguised protest. In the main, Certiorari may not be used as a
substitute for a lost appeal or remedy.[19] This judicial policy becomes more pronounced in view of the absence of
sufficient attack against the actuations of government.

process. Where there was an opportunity to raise objections to government action, and such opportunity was
disregarded, for no justifiable reason, the party claiming oppression then becomes the oppressor of the orderly
functions of government. He who comes to court must come with clean hands. Otherwise, he not only taints his name,
but ridicules the very structure of established authority.
IN VIEW WHEREOF, the Court RESOLVED to DENY the present petition. The Decision of the Court of Appeals dated
November 29, 1994 is hereby AFFIRMED in all respects.
SO ORDERED.
29 COMMISSION OF INTERNAL REVENUE, petitioner, vs. HANTEX TRADING CO., INC., respondent.

On the matter of sufficiency of service of Notices of Assessment to the petitioner, we find the respondent appellate
court's pronouncements sound and resilient to petitioner's attacks.
"Anent grounds 3(b) and (B) - both alleging/claiming lack of notice - We find, after considering the facts and
circumstances, as well as evidences, that there was sufficient, constructive and/or actual notice of assessments, levy
and sale, sent to herein petitioner Ferdinand "Bongbong" Marcos as well as to his mother Mrs. Imelda Marcos.
Even if we are to rule out the notices of assessments personally given to the caretaker of Mrs. Marcos at the latter's
last known address, on August 26, 1991 and September 12, 1991, as well as the notices of assessment personally
given to the caretaker of petitioner also at his last known address on September 12, 1991 - the subsequent notices
given thereafter could no longer be ignored as they were sent at a time when petitioner was already here in the
Philippines, and at a place where said notices would surely be called to petitioner's attention, and received by
responsible persons of sufficient age and discretion.
Thus, on October 20, 1992, formal assessment notices were served upon Mrs. Marcos c/o the petitioner, at his office,
House of Representatives, Batasan Pambansa, Q.C. (Annexes "A", "A-1", "A-2", "A-3"; pp. 207-210,
Comment/Memorandum of OSG). Moreover, a notice to taxpayer dated October 8, 1992 inviting Mrs. Marcos to a
conference relative to her tax liabilities, was furnished the counsel of Mrs. Marcos - Dean Antonio Coronel (Annex "B",
p. 211, ibid). Thereafter, copies of Notices were also served upon Mrs. Imelda Marcos, the petitioner and their counsel
"De Borja, Medialdea, Ata, Bello, Guevarra and Serapio Law Office", on April 7, 1993 and June 10, 1993. Despite all of
these Notices, petitioner never lifted a finger to protest the assessments, (upon which the Levy and sale of properties
were based), nor appealed the same to the Court of Tax Appeals.
There being sufficient service of Notices to herein petitioner (and his mother) and it appearing that petitioner
continuously ignored said Notices despite several opportunities given him to file a protest and to thereafter appeal to
the Court of Tax Appeals, - the tax assessments subject of this case, upon which the levy and sale of properties were
based, could no longer be contested (directly or indirectly) via this instant petition for certiorari."[20]
Petitioner argues that all the questioned Notices of Levy, however, must be nullified for having been issued without
validly serving copies thereof to the petitioner. As a mandatory heir of the decedent, petitioner avers that he has an
interest in the subject estate, and notices of levy upon its properties should have been served upon him.
We do not agree. In the case of notices of levy issued to satisfy the delinquent estate tax, the delinquent taxpayer is
the Estate of the decedent, and not necessarily, and exclusively, the petitioner as heir of the deceased. In the same
vein, in the matter of income tax delinquency of the late president and his spouse, petitioner is not the taxpayer
liable. Thus, it follows that service of notices of levy in satisfaction of these tax delinquencies upon the petitioner is not
required by law, as under Section 213 of the NIRC, which pertinently states:
"xxx
...Levy shall be effected by writing upon said certificate a description of the property upon which levy is made. At the
same time, written notice of the levy shall be mailed to or served upon the Register of Deeds of the province or city
where the property is located and upon the delinquent taxpayer, or if he be absent from the Philippines, to his agent or
the manager of the business in respect to which the liability arose, or if there be none, to the occupant of the property
in question.
xxx"
The foregoing notwithstanding, the record shows that notices of warrants of distraint and levy of sale were furnished
the counsel of petitioner on April 7, 1993, and June 10, 1993, and the petitioner himself on April 12, 1993 at his office
at the Batasang Pambansa.[21] We cannot therefore, countenance petitioner's insistence that he was denied due

DECISION
CALLEJO, SR., J.:

Before us is a petition for review of the Decision[ 1 ] of the Court of Appeals (CA) which reversed the Decision[ 2 ] of the
Court of Tax Appeals (CTA) in CTA Case No. 5126, upholding the deficiency income and sales tax assessments against
respondent Hantex Trading Co., Inc.

The Antecedents

The respondent is a corporation duly organized and existing under the laws of the Philippines. Being engaged in the
sale of plastic products, it imports synthetic resin and other chemicals for the manufacture of its products. For this
purpose, it is required to file an Import Entry and Internal Revenue Declaration (Consumption Entry) with the Bureau of
Customs under Section 1301 of the Tariff and Customs Code.
Sometime in October 1989, Lt. Vicente Amoto, Acting Chief of Counter-Intelligence Division of the Economic
Intelligence and Investigation Bureau (EIIB), received confidential information that the respondent had imported
synthetic resin amounting toP115,599,018.00 but only declared P45,538,694.57.[ 3 ] According to the informer, based
on photocopies of 77 Consumption Entries furnished by another informer, the 1987 importations of the respondent
were understated in its accounting records.[ 4 ] Amoto submitted a report to the EIIB Commissioner recommending
that an inventory audit of the respondent be conducted by the Internal Inquiry and Prosecution Office (IIPO) of the EIIB.
[5]
Acting on the said report, Jose T. Almonte, then Commissioner of the EIIB, issued Mission Order No. 398-89[ 6 ] dated
November 14, 1989 for the audit and investigation of the importations of Hantex for 1987. The IIPO issued subpoena
duces tecum and ad testificandum for the president and general manager of the respondent to appear in a hearing
and bring the following:
1. Books of Accounts for the year 1987;
2. Record of Importations of Synthetic Resin and Calcium Carbonate for the year 1987;
3. Income tax returns & attachments for 1987; and
4. Record of tax payments.[ 7 ]
However, the respondents president and general manager refused to comply with the subpoena, contending that its
books of accounts and records of importation of synthetic resin and calcium bicarbonate had been investigated
repeatedly by the Bureau of Internal Revenue (BIR) on prior occasions.[ 8 ] The IIPO explained that despite such
previous investigations, the EIIB was still authorized to conduct an investigation pursuant to Section 26-A of Executive
Order No. 127. Still, the respondent refused to comply with the subpoena issued by the IIPO. The latter forthwith
secured certified copies of the Profit and Loss Statements for 1987 filed by the respondent with the Securities and

Exchange Commission (SEC).[ 9 ] However, the IIPO failed to secure certified copies of the respondents 1987
Consumption Entries from the Bureau of Customs since, according to the custodian thereof, the original copies had
been eaten by termites.[ 1 0 ]
In a Letter dated June 28, 1990, the IIPO requested the Chief of the Collection Division, Manila International Container
Port, and the Acting Chief of the Collection Division, Port of Manila, to authenticate the machine copies of the import
entries supplied by the informer. However, Chief of the Collection Division Merlita D. Tomas could not do so because
the Collection Division did not have the original copies of the entries. Instead, she wrote the IIPO that, as gleaned from
the records, the following entries had been duly processed and released after the payment of duties and taxes:
Bienvenido G. Flores, Chief of the Investigation Division, and Lt. Leo Dionela, Lt. Vicente Amoto and Lt. Rolando
Gatmaitan conducted an investigation. They relied on the certified copies of the respondents Profit and Loss Statement
for 1987 and 1988 on file with the SEC, the machine copies of the Consumption Entries, Series of 1987, submitted by
the informer, as well as excerpts from the entries certified by Tomas and Danganan.
Based on the documents/records on hand, inclusive of the machine copies of the Consumption Entries, the EIIB found
that for 1987, the respondent had importations totaling P105,716,527.00 (inclusive of advance sales tax). Compared
with the declared sales based on the Profit and Loss Statements filed with the SEC, the respondent had unreported
sales in the amount of P63,032,989.17, and its corresponding income tax liability was P41,916,937.78, inclusive of
penalty charge and interests.
EIIB Commissioner Almonte transmitted the entire docket of the case to the BIR and recommended the collection of
the total tax assessment from the respondent.[ 1 3 ]
On February 12, 1991, Deputy Commissioner Deoferio, Jr. issued a Memorandum to the BIR Assistant Commissioner for
Special Operations Service, directing the latter to prepare a conference letter advising the respondent of its deficiency
taxes.[ 1 4 ]
Meanwhile, as ordered by the Regional Director, Revenue Enforcement Officers Saturnino D. Torres and Wilson Filamor
conducted an investigation on the 1987 importations of the respondent, in the light of the records elevated by the EIIB
to the BIR, inclusive of the photocopies of the Consumption Entries. They were to ascertain the respondents liability for
deficiency sales and income taxes for 1987, if any. Per Torres and Filamors Report dated March 6, 1991 which was
based on the report of the EIIB and the documents/records appended thereto, there was a prima facie case of fraud
against the respondent in filing its 1987 Consumption Entry reports with the Bureau of Customs. They found that the
respondent had unrecorded importation in the total amount of P70,661,694.00, and that the amount was not declared
in its income tax return for 1987. The District Revenue Officer and the Regional Director of the BIR concurred with the
report.[ 1 5 ]

Invoking Section 235[ 1 9 ] of the 1977 National Internal Revenue Code (NIRC), as amended, Chua requested that the
inquiry be set aside.
The petitioner, the Commissioner of Internal Revenue, through Assistant Commissioner for Collection Jaime M. Maza,
sent a Letter dated April 15, 1991 to the respondent demanding payment of its deficiency income tax
of P13,414,226.40 and deficiency sales tax ofP14,752,903.25, inclusive of surcharge and interest.[ 2 0 ] Appended
thereto were the Assessment Notices of Tax Deficiency Nos. FAS-1-87-91-001654 and FAS-4-87-91-001655.[ 2 1 ]
On February 12, 1992, the Chief of the Accounts Receivables/Billing Division of the BIR sent a letter to the respondent
demanding payment of its tax liability due for 1987 within ten (10) days from notice, on pain of the collection tax due
via a warrant of distraint and levy and/or judicial action.[ 2 2 ] The Warrant of Distraint and/or Levy[ 2 3 ] was actually
served on the respondent on January 21, 1992. On September 7, 1992, it wrote the Commissioner of Internal Revenue
protesting the assessment on the following grounds:
I. THAT THE ASSESSMENT HAS NO FACTUAL AS WELL AS LEGAL BASIS, THE FACT THAT NO INVESTIGATION OF OUR
RECORDS WAS EVER MADE BY THE EIIB WHICH RECOMMENDED ITS ISSUANCE.[ 2 4 ]
II. THAT GRANTING BUT WITHOUT ADMITTING THAT OUR PURCHASES FOR 1987 AMOUNTED TO P105,716,527.00 AS
CLAIMED BY THE EIIB, THE ASSESSMENT OF A DEFICIENCY INCOME TAX IS STILL DEFECTIVE FOR IT FAILED TO
CONSIDER OUR REAL PURCHASES OF P45,538,694.57.[ 2 5 ]
III. THAT THE ASSESSMENT OF A DEFICIENCY SALES TAX IS ALSO BASELESS AND UNFOUNDED CONSIDERING THAT WE
HAVE DUTIFULLY PAID THE SALES TAX DUE FROM OUR BUSINESS.[ 2 6 ]
In view of the impasse, administrative hearings were conducted on the respondents protest to the assessment. During
the hearing of August 20, 1993, the IIPO representative presented the photocopies of the Consumption and Import
Entries and the Certifications issued by Tomas and Danganan of the Bureau of Customs. The IIPO representative
testified that the Bureau of Customs failed to furnish the EIIB with certified copies of the Consumption and Import
Entries; hence, the EIIB relied on the machine copies from their informer.[ 2 7 ]
The respondent wrote the BIR Commissioner on July 12, 1993 questioning the assessment on the ground that the EIIB
representative failed to present the original, or authenticated, or duly certified copies of the Consumption and Import
Entry Accounts, or excerpts thereof if the original copies were not readily available; or, if the originals were in the
official custody of a public officer, certified copies thereof as provided for in Section 12, Chapter 3, Book VII,
Administrative Procedure, Administrative Order of 1987. It stated that the only copies of the Consumption Entries
submitted to the Hearing Officer were mere machine copies furnished by an informer of the EIIB. It asserted that the
letters of Tomas and Danganan were unreliable because of the following:

Based on the said report, the Acting Chief of the Special Investigation Branch wrote the respondent and invited its
representative to a conference at 10:00 a.m. of March 14, 1991 to discuss its deficiency internal revenue taxes and to
present whatever documentary and other evidence to refute the same.[ 1 6 ] Appended to the letter was a
computation of the deficiency income and sales tax due from the respondent, inclusive of increments:

In the said letters, the two collection officers merely submitted a listing of alleged import entry numbers and dates
released of alleged importations by Hantex Trading Co., Inc. of merchandise in 1987, for which they certified that the
corresponding duties and taxes were paid after being processed in their offices. In said letters, no amounts of the
landed costs and advance sales tax and duties were stated, and no particulars of the duties and taxes paid per import
entry document was presented.

The invitation was reiterated in a Letter dated March 15, 1991. In his Reply dated March 15, 1991, Mariano O. Chua,
the President and General Manager of the respondent, requested that the report of Torres and Filamor be set aside on
the following claim:

The contents of the two letters failed to indicate the particulars of the importations per entry number, and the said
letters do not constitute as evidence of the amounts of importations of Hantex Trading Co., Inc. in 1987.[ 2 8 ]

[W]e had already been investigated by RDO No. 23 under Letters of Authority Nos. 0322988 RR dated Oct. 1, 1987,
0393561 RR dated Aug. 17, 1988 and 0347838 RR dated March 2, 1988, and re-investigated by the Special
Investigation Team on Aug. 17, 1988 under Letter of Authority No. 0357464 RR, and the Intelligence and Investigation
Office on Sept. 27, 1988 under Letter of Authority No. 0020188 NA, all for income and business tax liabilities for 1987.
The Economic Intelligence and Investigation Bureau on Nov. 20, 1989, likewise, confronted us on the same information
for the same year.

The respondent cited the following findings of the Hearing Officer:

In all of these investigations, save your request for an informal conference, we welcomed them and proved the
contrary of the allegation. Now, with your new inquiry, we think that there will be no end to the problem.

The respondent requested anew that the income tax deficiency assessment and the sales tax deficiency assessment
be set aside for lack of factual and legal basis.

Madam, we had been subjected to so many investigations and re-investigations for 1987 and nothing came out except
the payment of deficiency taxes as a result of oversight. Tax evasion through underdeclaration of income had never
been proven.[ 1 8 ]

[T]hat the import entry documents do not constitute evidence only indicate that the tax assessments in question have
no factual basis, and must, at this point in time, be withdrawn and cancelled. Any new findings by the IIPO
representative who attended the hearing could not be used as evidence in this hearing, because all the issues on the
tax assessments in question have already been raised by the herein taxpayer.[ 2 9 ]

The BIR Commissioner[ 3 0 ] wrote the respondent on December 10, 1993, denying its letter-request for the dismissal
of the assessments.[ 3 1 ] The BIR Commissioner admitted, in the said letter, the possibility that the figures appearing
in the photocopies of the Consumption Entries had been tampered with. She averred, however, that she was not
proscribed from relying on other admissible evidence, namely, the Letters of Torres and Filamor dated August 7 and

22, 1990 on their investigation of the respondents tax liability. The Commissioner emphasized that her decision was
final.[ 3 2 ]
The respondent forthwith filed a petition for review in the CTA of the Commissioners Final Assessment Letter dated
December 10, 1993 on the following grounds:
First. The alleged 1987 deficiency income tax assessment (including increments) and the alleged 1987 deficiency sales
tax assessment (including increments) are void ab initio, since under Sections 16(a) and 49(b) of the Tax Code, the
Commissioner shall examine a return after it is filed and, thereafter, assess the correct amount of tax. The following
facts obtaining in this case, however, are indicative of the incorrectness of the tax assessments in question: the
deficiency interests imposed in the income and percentage tax deficiency assessment notices were computed in
violation of the provisions of Section 249(b) of the NIRC of 1977, as amended; the percentage tax deficiency was
computed on an annual basis for the year 1987 in accordance with the provision of Section 193, which should have
been computed in accordance with Section 162 of the 1977 NIRC, as amended by Pres. Decree No. 1994 on a quarterly
basis; and the BIR official who signed the deficiency tax assessments was the Assistant Commissioner for Collection,
who had no authority to sign the same under the NIRC.
Second. Even granting arguendo that the deficiency taxes and increments for 1987 against the respondent were
correctly computed in accordance with the provisions of the Tax Code, the facts indicate that the above-stated
assessments were based on alleged documents which are inadmissible in either administrative or judicial proceedings.
Moreover, the alleged bases of the tax computations were anchored on mere presumptions and not on actual facts.
The alleged undeclared purchases for 1987 were based on mere photocopies of alleged import entry documents, not
the original ones, and which had never been duly certified by the public officer charged with the custody of such
records in the Bureau of Customs. According to the respondent, the alleged undeclared sales were computed based on
mere presumptions as to the alleged gross profit contained in its 1987 financial statement. Moreover, even the alleged
financial statement of the respondent was a mere machine copy and not an official copy of the 1987 income and
business tax returns. Finally, the respondent was following the accrual method of accounting in 1987, yet, the BIR
investigator who computed the 1987 income tax deficiency failed to allow as a deductible item the alleged sales tax
deficiency for 1987 as provided for under Section 30(c) of the NIRC of 1986.[ 3 3 ]
The Commissioner did not adduce in evidence the original or certified true copies of the 1987 Consumption Entries on
file with the Commission on Audit. Instead, she offered in evidence as proof of the contents thereof, the photocopies of
the Consumption Entries which the respondent objected to for being inadmissible in evidence.[ 3 4 ] She also failed to
present any witness to prove the correct amount of tax due from it. Nevertheless, the CTA provisionally admitted the
said documents in evidence, subject to its final evaluation of their relevancy and probative weight to the issues
involved.[ 3 5 ]
On December 11, 1997, the CTA rendered a decision, the dispositive portion of which reads:
IN THE LIGHT OF ALL THE FOREGOING, judgment is hereby rendered DENYING the herein petition. Petitioner is hereby
ORDERED TO PAY the respondent Commissioner of Internal Revenue its deficiency income and sales taxes for the year
1987 in the amounts of P11,182,350.26 andP12,660,382.46, respectively, plus 20% delinquency interest per annum on
both deficiency taxes from April 15, 1991 until fully paid pursuant to Section 283(c)(3) of the 1987 Tax Code, with costs
against the petitioner.
SO ORDERED.[ 3 6 ]
The CTA ruled that the respondent was burdened to prove not only that the assessment was erroneous, but also to
adduce the correct taxes to be paid by it. The CTA declared that the respondent failed to prove the correct amount of
taxes due to the BIR. It also ruled that the respondent was burdened to adduce in evidence a certification from the
Bureau of Customs that the Consumption Entries in question did not belong to it.
On appeal, the CA granted the petition and reversed the decision of the CTA. The dispositive portion of the decision
reads:
FOREGOING PREMISES CONSIDERED, the Petition for Review is GRANTED and the December 11, 1997 decision of the
CTA in CTA Case No. 5162 affirming the 1987 deficiency income and sales tax assessments and the increments
thereof, issued by the BIR is hereby REVERSED. No costs.[ 3 7 ]

The Ruling of the Court of Appeals

The CA held that the income and sales tax deficiency assessments issued by the petitioner were unlawful and baseless
since the copies of the import entries relied upon in computing the deficiency tax of the respondent were not duly
authenticated by the public officer charged with their custody, nor verified under oath by the EIIB and the BIR
investigators.[ 3 8 ] The CA also noted that the public officer charged with the custody of the import entries was never
presented in court to lend credence to the alleged loss of the originals.[ 3 9 ] The CA pointed out that an import entry is
a public document which falls within the provisions of Section 19, Rule 132 of the Rules of Court, and to be admissible
for any legal purpose, Section 24, Rule 132 of the Rules of Court should apply. [ 4 0 ] Citing the ruling of this Court
inCollector of Internal Revenue v. Benipayo,[ 4 1 ] the CA ruled that the assessments were unlawful because they were
based on hearsay evidence. The CA also ruled that the respondent was deprived of its right to due process of law.
The CA added that the CTA should not have just brushed aside the legal requisites provided for under the pertinent
provisions of the Rules of Court in the matter of the admissibility of public documents, considering that substantive
rules of evidence should not be disregarded. It also ruled that the certifications made by the two Customs Collection
Chiefs under the guise of supporting the respondents alleged tax deficiency assessments invoking the best evidence
obtainable rule under the Tax Code should not be permitted to supplant the best evidence rule under Section 7, Rule
130 of the Rules of Court.
Finally, the CA noted that the tax deficiency assessments were computed without the tax returns. The CA opined that
the use of the tax returns is indispensable in the computation of a tax deficiency; hence, this essential requirement
must be complied with in the preparation and issuance of valid tax deficiency assessments.[ 4 2 ]

The Present Petition

The Commissioner of Internal Revenue, the petitioner herein, filed the present petition for review under Rule 45 of the
Rules of Court for the reversal of the decision of the CA and for the reinstatement of the ruling of the CTA.
As gleaned from the pleadings of the parties, the threshold issues for resolution are the following: (a) whether the
petition at bench is proper and complies with Sections 4 and 5, Rule 7 of the Rules of Court; (b) whether the December
10, 1991 final assessment of the petitioner against the respondent for deficiency income tax and sales tax for the
latters 1987 importation of resins and calcium bicarbonate is based on competent evidence and the law; and (c) the
total amount of deficiency taxes due from the respondent for 1987, if any.
On the first issue, the respondent points out that the petition raises both questions of facts and law which cannot be
the subject of an appeal by certiorari under Rule 45 of the Rules of Court. The respondent notes that the petition is
defective because the verification and the certification against forum shopping were not signed by the petitioner
herself, but only by the Regional Director of the BIR. The respondent submits that the petitioner should have filed a
motion for reconsideration with the CA before filing the instant petition for review.[ 4 3 ]
We find and so rule that the petition is sufficient in form. A verification and certification against forum shopping signed
by the Regional Director constitutes sufficient compliance with the requirements of Sections 4 and 5, Rule 7 of the
Rules of Court. Under Section 10 of the NIRC of 1997,[ 4 4 ] the Regional Director has the power to administer and
enforce internal revenue laws, rules and regulations, including the assessment and collection of all internal revenue
taxes, charges and fees. Such power is broad enough to vest the Revenue Regional Director with the authority to sign
the verification and certification against forum shopping in behalf of the Commissioner of Internal Revenue. There is no
other person in a better position to know the collection cases filed under his jurisdiction than the Revenue Regional
Director.
Moreover, under Revenue Administrative Order No. 5-83,[ 4 5 ] the Regional Director is authorized to sign all pleadings
filed in connection with cases referred to the Revenue Regions by the National Office which, otherwise, require the
signature of the petitioner.
We do not agree with the contention of the respondent that a motion for reconsideration ought to have been filed
before the filing of the instant petition. A motion for reconsideration of the decision of the CA is not a condition sine
qua non for the filing of a petition for review under Rule 45. As we held in Almora v. Court of Appeals:[ 4 6 ]
Rule 45, Sec. 1 of the Rules of Court, however, distinctly provides that:

A party may appeal by certiorari from a judgment of the Court of Appeals, by filing with the Supreme Court a petition
for certiorari within fifteen (15) days from notice of judgment, or of the denial of his motion for reconsideration filed in
due time. (Emphasis supplied)

Central to the second issue is Section 16 of the NIRC of 1977, as amended,[ 6 4 ] which provides that the Commissioner
of Internal Revenue has the power to make assessments and prescribe additional requirements for tax administration
and enforcement. Among such powers are those provided in paragraph (b) thereof, which we quote:

The conjunctive or clearly indicates that the 15-day reglementary period for the filing of a petition for certiorari under
Rule 45 commences either from notice of the questioned judgment or from notice of denial of the appellants motion
for reconsideration. A prior motion for reconsideration is not indispensable for a petition for review on certiorari under
Rule 45 to prosper. [ 4 7 ]

(b) Failure to submit required returns, statements, reports and other documents. When a report required by law as a
basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by law or
regulation or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner
shall assess the proper tax on the best evidence obtainable.

While Rule 45 of the Rules of Court provides that only questions of law may be raised by the petitioner and resolved by
the Court, under exceptional circumstances, the Court may take cognizance thereof and resolve questions of fact. In
this case, the findings and conclusion of the CA are inconsistent with those of the CTA, not to mention those of the
Commissioner of Internal Revenue. The issues raised in this case relate to the propriety and the correctness of the tax
assessments made by the petitioner against the respondent, as well as the propriety of the application of Section 16,
paragraph (b) of the 1977 NIRC, as amended by Pres. Decree Nos. 1705, 1773, 1994 and Executive Order No. 273, in
relation to Section 3, Rule 132 of the Rules of Evidence. There is also an imperative need for the Court to resolve the
threshold factual issues to give justice to the parties, and to determine whether the CA capriciously ignored,
misunderstood or misinterpreted cogent facts and circumstances which, if considered, would change the outcome of
the case.
On the second issue, the petitioner asserts that since the respondent refused to cooperate and show its 1987 books of
account and other accounting records, it was proper for her to resort to the best evidence obtainable the photocopies
of the import entries in the Bureau of Customs and the respondents financial statement filed with the SEC.[ 4 8 ] The
petitioner maintains that these import entries were admissible as secondary evidence under the best evidence
obtainable rule, since they were duly authenticated by the Bureau of Customs officials who processed the documents
and released the cargoes after payment of the duties and taxes due.[ 4 9 ] Further, the petitioner points out that under
the best evidence obtainable rule, the tax return is not important in computing the tax deficiency.[ 5 0 ]
The petitioner avers that the best evidence obtainable rule under Section 16 of the 1977 NIRC, as amended, legally
cannot be equated to the best evidence rule under the Rules of Court; nor can the best evidence rule, being
procedural law, be made strictly operative in the interpretation of the best evidence obtainable rule which is
substantive in character.[ 5 1 ] The petitioner posits that the CTA is not strictly bound by technical rules of evidence,
the reason being that the quantum of evidence required in the said court is merely substantial evidence.[ 5 2 ]
Finally, the petitioner avers that the respondent has the burden of proof to show the correct assessments; otherwise,
the presumption in favor of the correctness of the assessments made by it stands.[ 5 3 ] Since the respondent was
allowed to explain its side, there was no violation of due process.[ 5 4 ]
The respondent, for its part, maintains that the resort to the best evidence obtainable method was illegal. In the first
place, the respondent argues, the EIIB agents are not duly authorized to undertake examination of the taxpayers
accounting records for internal revenue tax purposes. Hence, the respondents failure to accede to their demands to
show its books of accounts and other accounting records cannot justify resort to the use of the best evidence
obtainable method.[ 5 5 ] Secondly, when a taxpayer fails to submit its tax records upon demand by the BIR officer, the
remedy is not to assess him and resort to the best evidence obtainable rule, but to punish the taxpayer according to
the provisions of the Tax Code.[ 5 6 ]
In any case, the respondent argues that the photocopies of import entries cannot be used in making the assessment
because they were not properly authenticated, pursuant to the provisions of Sections 24[ 5 7 ] and 25[ 5 8 ] of Rule 132
of the Rules of Court. It avers that while the CTA is not bound by the technical rules of evidence, it is bound by
substantial rules.[ 5 9 ] The respondent points out that the petitioner did not even secure a certification of the fact of
loss of the original documents from the custodian of the import entries. It simply relied on the report of the EIIB agents
that the import entry documents were no longer available because they were eaten by termites. The respondent posits
that the two collectors of the Bureau of Customs never authenticated the xerox copies of the import entries; instead,
they only issued certifications stating therein the import entry numbers which were processed by their office and the
date the same were released.[ 6 0 ]
The respondent argues that it was not necessary for it to show the correct assessment, considering that it is
questioning the assessments not only because they are erroneous, but because they were issued without factual basis
and in patent violation of the assessment procedures laid down in the NIRC of 1977, as amended. [ 6 1 ] It is also
pointed out that the petitioner failed to use the tax returns filed by the respondent in computing the deficiency taxes
which is contrary to law;[ 6 2 ] as such, the deficiency assessments constituted deprivation of property without due
process of law.[ 6 3 ]

In case a person fails to file a required return or other document at the time prescribed by law, or willfully or otherwise
files a false or fraudulent return or other document, the Commissioner shall make or amend the return from his own
knowledge and from such information as he can obtain through testimony or otherwise, which shall be prima facie
correct and sufficient for all legal purposes.[ 6 5 ]
This provision applies when the Commissioner of Internal Revenue undertakes to perform her administrative duty of
assessing the proper tax against a taxpayer, to make a return in case of a taxpayers failure to file one, or to amend a
return already filed in the BIR.
The petitioner may avail herself of the best evidence or other information or testimony by exercising her power or
authority under paragraphs (1) to (4) of Section 7 of the NIRC:
(1) To examine any book, paper, record or other data which may be relevant or material to such inquiry;
(2) To obtain information from any office or officer of the national and local governments, government agencies or its
instrumentalities, including the Central Bank of the Philippines and government owned or controlled corporations;
(3) To summon the person liable for tax or required to file a return, or any officer or employee of such person, or any
person having possession, custody, or care of the books of accounts and other accounting records containing entries
relating to the business of the person liable for tax, or any other person, to appear before the Commissioner or his duly
authorized representative at a time and place specified in the summons and to produce such books, papers, records,
or other data, and to give testimony;
(4) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry; [ 6 6 ]
The best evidence envisaged in Section 16 of the 1977 NIRC, as amended, includes the corporate and accounting
records of the taxpayer who is the subject of the assessment process, the accounting records of other taxpayers
engaged in the same line of business, including their gross profit and net profit sales.[ 6 7 ] Such evidence also includes
data, record, paper, document or any evidence gathered by internal revenue officers from other taxpayers who had
personal transactions or from whom the subject taxpayer received any income; and record, data, document and
information secured from government offices or agencies, such as the SEC, the Central Bank of the Philippines, the
Bureau of Customs, and the Tariff and Customs Commission.
The law allows the BIR access to all relevant or material records and data in the person of the taxpayer. It places no
limit or condition on the type or form of the medium by which the record subject to the order of the BIR is kept. The
purpose of the law is to enable the BIR to get at the taxpayers records in whatever form they may be kept. Such
records include computer tapes of the said records prepared by the taxpayer in the course of business.[ 6 8 ] In this era
of developing information-storage technology, there is no valid reason to immunize companies with computer-based,
record-keeping capabilities from BIR scrutiny. The standard is not the form of the record but where it might shed light
on the accuracy of the taxpayers return.
In Campbell, Jr. v. Guetersloh,[ 6 9 ] the United States (U.S.) Court of Appeals (5th Circuit) declared that it is the duty of
the Commissioner of Internal Revenue to investigate any circumstance which led him to believe that the taxpayer had
taxable income larger than reported. Necessarily, this inquiry would have to be outside of the books because they
supported the return as filed. He may take the sworn testimony of the taxpayer; he may take the testimony of third
parties; he may examine and subpoena, if necessary, traders and brokers accounts and books and the taxpayers book
accounts. The Commissioner is not bound to follow any set of patterns. The existence of unreported income may be
shown by any practicable proof that is available in the circumstances of the particular situation. Citing its ruling
in Kenney v. Commissioner,[ 7 0 ] the U.S. appellate court declared that where the records of the taxpayer are
manifestly inaccurate and incomplete, the Commissioner may look to other sources of information to establish income
made by the taxpayer during the years in question.[ 7 1 ]
We agree with the contention of the petitioner that the best evidence obtainable may consist of hearsay evidence,
such as the testimony of third parties or accounts or other records of other taxpayers similarly circumstanced as the
taxpayer subject of the investigation, hence, inadmissible in a regular proceeding in the regular courts.[ 7 2 ] Moreover,
the general rule is that administrative agencies such as the BIR are not bound by the technical rules of evidence. It can

accept documents which cannot be admitted in a judicial proceeding where the Rules of Court are strictly observed. It
can choose to give weight or disregard such evidence, depending on its trustworthiness.
However, the best evidence obtainable under Section 16 of the 1977 NIRC, as amended, does not include mere
photocopies of records/documents. The petitioner, in making a preliminary and final tax deficiency assessment against
a taxpayer, cannot anchor the said assessment on mere machine copies of records/documents. Mere photocopies of
the Consumption Entries have no probative weight if offered as proof of the contents thereof. The reason for this is that
such copies are mere scraps of paper and are of no probative value as basis for any deficiency income or business
taxes against a taxpayer. Indeed, in United States v. Davey,[ 7 3 ] the U.S. Court of Appeals (2nd Circuit) ruled that
where the accuracy of a taxpayers return is being checked, the government is entitled to use the original records
rather than be forced to accept purported copies which present the risk of error or tampering.[ 7 4 ]
In Collector of Internal Revenue v. Benipayo,[ 7 5 ] the Court ruled that the assessment must be based on actual facts.
The rule assumes more importance in this case since the xerox copies of the Consumption Entries furnished by the
informer of the EIIB were furnished by yet another informer. While the EIIB tried to secure certified copies of the said
entries from the Bureau of Customs, it was unable to do so because the said entries were allegedly eaten by termites.
The Court can only surmise why the EIIB or the BIR, for that matter, failed to secure certified copies of the said entries
from the Tariff and Customs Commission or from the National Statistics Office which also had copies thereof. It bears
stressing that under Section 1306 of the Tariff and Customs Code, the Consumption Entries shall be the required
number of copies as prescribed by regulations.[ 7 6 ] The Consumption Entry is accomplished in sextuplicate copies
and quadruplicate copies in other places. In Manila, the six copies are distributed to the Bureau of Customs, the Tariff
and Customs Commission, the Declarant (Importer), the Terminal Operator, and the Bureau of Internal Revenue.
Inexplicably, the Commissioner and the BIR personnel ignored the copy of the Consumption Entries filed with the BIR
and relied on the photocopies supplied by the informer of the EIIB who secured the same from another informer. The
BIR, in preparing and issuing its preliminary and final assessments against the respondent, even ignored the records
on the investigation made by the District Revenue officers on the respondents importations for 1987.
The original copies of the Consumption Entries were of prime importance to the BIR. This is so because such entries
are under oath and are presumed to be true and correct under penalty of falsification or perjury. Admissions in the said
entries of the importers documents are admissions against interest and presumptively correct.[ 7 7 ]
In fine, then, the petitioner acted arbitrarily and capriciously in relying on and giving weight to the machine copies of
the Consumption Entries in fixing the tax deficiency assessments against the respondent.
The rule is that in the absence of the accounting records of a taxpayer, his tax liability may be determined by
estimation. The petitioner is not required to compute such tax liabilities with mathematical exactness. Approximation
in the calculation of the taxes due is justified. To hold otherwise would be tantamount to holding that skillful
concealment is an invincible barrier to proof.[ 7 8 ] However, the rule does not apply where the estimation is arrived at
arbitrarily and capriciously.[ 7 9 ]
We agree with the contention of the petitioner that, as a general rule, tax assessments by tax examiners are presumed
correct and made in good faith. All presumptions are in favor of the correctness of a tax assessment. It is to be
presumed, however, that such assessment was based on sufficient evidence. Upon the introduction of the assessment
in evidence, a prima facie case of liability on the part of the taxpayer is made.[ 8 0 ] If a taxpayer files a petition for
review in the CTA and assails the assessment, the prima facie presumption is that the assessment made by the BIR is
correct, and that in preparing the same, the BIR personnel regularly performed their duties. This rule for tax initiated
suits is premised on several factors other than the normal evidentiary rule imposing proof obligation on the petitionertaxpayer: the presumption of administrative regularity; the likelihood that the taxpayer will have access to the
relevant information; and the desirability of bolstering the record-keeping requirements of the NIRC.[ 8 1 ]
However, the prima facie correctness of a tax assessment does not apply upon proof that an assessment is utterly
without foundation, meaning it is arbitrary and capricious. Where the BIR has come out with a naked assessment, i.e.,
without any foundation character, the determination of the tax due is without rational basis. [ 8 2 ] In such a situation,
the U.S. Court of Appeals ruled[ 8 3 ] that the determination of the Commissioner contained in a deficiency notice
disappears. Hence, the determination by the CTA must rest on all the evidence introduced and its ultimate
determination must find support in credible evidence.
The issue that now comes to fore is whether the tax deficiency assessment against the respondent based on the
certified copies of the Profit and Loss Statement submitted by the respondent to the SEC in 1987 and 1988, as well as
certifications of Tomas and Danganan, is arbitrary, capricious and illegal. The CTA ruled that the respondent failed to
overcome the prima facie correctness of the tax deficiency assessment issued by the petitioner, to wit:

The issue should be ruled in the affirmative as petitioner has failed to rebut the validity or correctness of the
aforementioned tax assessments. It is incongruous for petitioner to prove its cause by simply drawing an inference
unfavorable to the respondent by attacking the source documents (Consumption Entries) which were the bases of the
assessment and which were certified by the Chiefs of the Collection Division, Manila International Container Port and
the Port of Manila, as having been processed and released in the name of the petitioner after payment of duties and
taxes and the duly certified copies of Financial Statements secured from the Securities and Exchange Commission. Any
such inference cannot operate to relieve petitioner from bearing its burden of proof and this Court has no warrant of
absolution. The Court should have been persuaded to grant the reliefs sought by the petitioner should it have
presented any evidence of relevance and competence required, like that of a certification from the Bureau of Customs
or from any other agencies, attesting to the fact that those consumption entries did not really belong to them.
The burden of proof is on the taxpayer contesting the validity or correctness of an assessment to prove not only that
the Commissioner of Internal Revenue is wrong but the taxpayer is right (Tan Guan v. CTA, 19 SCRA 903), otherwise,
the presumption in favor of the correctness of tax assessment stands (Sy Po v. CTA, 164 SCRA 524). The burden of
proving the illegality of the assessment lies upon the petitioner alleging it to be so. In the case at bar, petitioner
miserably failed to discharge this duty.[ 8 4 ]
We are not in full accord with the findings and ratiocination of the CTA. Based on the letter of the petitioner to the
respondent dated December 10, 1993, the tax deficiency assessment in question was based on (a) the findings of the
agents of the EIIB which was based, in turn, on the photocopies of the Consumption Entries; (b) the Profit and Loss
Statements of the respondent for 1987 and 1988; and (c) the certifications of Tomas and Danganan dated August 7,
1990 and August 22, 1990:
In reply, please be informed that after a thorough evaluation of the attending facts, as well as the laws and
jurisprudence involved, this Office holds that you are liable to the assessed deficiency taxes. The conclusion was
arrived at based on the findings of agents of the Economic Intelligence & Investigation Bureau (EIIB) and of our own
examiners who have painstakingly examined the records furnished by the Bureau of Customs and the Securities &
Exchange Commission (SEC). The examination conducted disclosed that while your actual sales for 1987 amounted
to P110,731,559.00, you declared for taxation purposes, as shown in the Profit and Loss Statements, the sum
of P47,698,569.83 only. The difference, therefore, of P63,032,989.17 constitutes as undeclared or unrecorded sales
which must be subjected to the income and sales taxes.
You also argued that our assessment has no basis since the alleged amount of underdeclared importations were lifted
from uncertified or unauthenticated xerox copies of consumption entries which are not admissible in evidence. On this
issue, it must be considered that in letters dated August 7 and 22, 1990, the Chief and Acting Chief of the Collection
Division of the Manila International Container Port and Port of Manila, respectively, certified that the enumerated
consumption entries were filed, processed and released from the port after payment of duties and taxes. It is noted
that the certification does not touch on the genuineness, authenticity and correctness of the consumption entries
which are all xerox copies, wherein the figures therein appearing may have been tampered which may render said
documents inadmissible in evidence, but for tax purposes, it has been held that the Commissioner is not required to
make his determination (assessment) on the basis of evidence legally admissible in a formal proceeding in Court
(Mertens, Vol. 9, p. 214, citing Cohen v. Commissioner). A statutory notice may be based in whole or in part upon
admissible evidence (Llorente v. Commissioner, 74 TC 260 (1980); Weimerskirch v. Commissioner, 67 TC 672 (1977);
and Rosano v. Commissioner, 46 TC 681 (1966). In the case also of Weimerskirch v. Commissioner (1977), the
assessment was given due course in the presence of admissible evidence as to how the Commissioner arrived at his
determination, although there was no admissible evidence with respect to the substantial issue of whether the
taxpayer had unreported or undeclared income from narcotics sale. [ 8 5 ]
Based on a Memorandum dated October 23, 1990 of the IIPO, the source documents for the actual cost of importation
of the respondent are the machine copies of the Consumption Entries from the informer which the IIPO claimed to
have been certified by Tomas and Danganan:
The source documents for the total actual cost of importations, abovementioned, were the different copies of
Consumption Entries, Series of 1987, filed by subject with the Bureau of Customs, marked Annexes F-1 to F-68. The
total cost of importations is the sum of the Landed Costs and the Advance Sales Tax as shown in the annexed entries.
These entries were duly authenticated as having been processed and released, after payment of the duties and taxes
due thereon, by the Chief, Collection Division, Manila International Container Port, dated August 7, 1990, Annex-G, and
the Port of Manila, dated August 22, 1990, Annex-H. So, it was established that subject-importations, mostly resins,
really belong to HANTEX TRADING CO., INC.[ 8 6 ]
It also appears on the worksheet of the IIPO, as culled from the photocopies of the Consumption Entries from its
informer, that the total cost of the respondents importation for 1987 was P105,761,527.00. Per the report of Torres and
Filamor, they also relied on the photocopies of the said Consumption Entries:
The importations made by taxpayer verified by us from the records of the Bureau of Customs and xerox copies of
which are hereto attached shows the big volume of importations made and not declared in the income tax return filed
by taxpayer.

Based on the above findings, it clearly shows that a prima facie case of fraud exists in the herein transaction of the
taxpayer, as a consequence of which, said transaction has not been possibly entered into the books of accounts of the
subject taxpayer.[ 8 7 ]
In fine, the petitioner based her finding that the 1987 importation of the respondent was underdeclared in the amount
ofP105,761,527.00 on the worthless machine copies of the Consumption Entries. Aside from such copies, the
petitioner has no other evidence to prove that the respondent imported goods costing P105,761,527.00. The petitioner
cannot find solace on the certifications of Tomas and Danganan because they did not authenticate the machine copies
of the Consumption Entries, and merely indicated therein the entry numbers of Consumption Entries and the dates
when the Bureau of Customs released the same. The certifications of Tomas and Danganan do not even contain the
landed costs and the advance sales taxes paid by the importer, if any. Comparing the certifications of Tomas and
Danganan and the machine copies of the Consumption Entries, only 36 of the entry numbers of such copies are
included in the said certifications; the entry numbers of the rest of the machine copies of the Consumption Entries are
not found therein.
Even if the Court would concede to the petitioners contention that the certification of Tomas and Danganan
authenticated the machine copies of the Consumption Entries referred to in the certification, it appears that the total
cost of importations inclusive of advance sales tax is only P64,324,953.00 far from the amount of P105,716,527.00
arrived at by the EIIB and the BIR,[ 8 8 ] or even the amount ofP110,079,491.61 arrived at by Deputy Commissioner
Deoferio, Jr.[ 8 9 ] As gleaned from the certifications of Tomas and Danganan, the goods covered by the Consumption
Entries were released by the Bureau of Customs, from which it can be presumed that the respondent must have paid
the taxes due on the said importation. The petitioner did not adduce any documentary evidence to prove otherwise.
Thus, the computations of the EIIB and the BIR on the quantity and costs of the importations of the respondent in the
amount ofP105,761,527.00 for 1987 have no factual basis, hence, arbitrary and capricious. The petitioner cannot rely
on the presumption that she and the other employees of the BIR had regularly performed their duties. As the Court
held in Collector of Internal Revenue v. Benipayo,[ 9 0 ] in order to stand judicial scrutiny, the assessment must be
based on facts. The presumption of the correctness of an assessment, being a mere presumption, cannot be made to
rest on another presumption.

ALHAMBRA INDUSTRIES, INC., respondents.

DECISION
BELLOSILLO, J.:

ALHAMBRA INDUSTRIES, INC., is a domestic corporation engaged in the manufacture and sale of cigar and cigarette
products. On 7 May 1991 private respondent received a letter dated 26 April 1991 from the Commissioner of Internal
Revenue assessing it deficiency Ad Valorem Tax (AVT) in the total amount of Four Hundred Eighty-Eight Thousand
Three Hundred Ninety-Six Pesos and Sixty-Two Centavos (P 488,396.62), inclusive of increments, on the removals of
cigarette products from their place of production during the period 2 November 1990 to 22 January 1991. [1] Petitioner
computes the deficiency thus Total AVT due per manufacturers declaration P4,279,042.33
Less: AVT paid under BIR Ruling No. 473-88 3,905,348.85
Deficiency AVT 373,693.48
Add: Penalties:
25% Surcharge (Sec. 248[c][3] NIRC) 93,423.37
20% Interest (P 467,116.85 x 82/360 days) 21,279.77
Total Amount Due P 488,396.62

Moreover, the uncontroverted fact is that the BIR District Revenue Office had repeatedly examined the 1987 books of
accounts of the respondent showing its importations, and found that the latter had minimal business tax liability. In
this case, the presumption that the District Revenue officers performed their duties in accordance with law shall apply.
There is no evidence on record that the said officers neglected to perform their duties as mandated by law; neither is
there evidence aliunde that the contents of the 1987 and 1988 Profit and Loss Statements submitted by the
respondent with the SEC are incorrect.

In a letter dated 22 May 1991 received by petitioner on even date, private respondent thru counsel filed a protest
against the proposed assessment with a request that the same be withdrawn and cancelled. On 31 May 1991 private
respondent received petitioner's reply dated 27 May 1991 denying its protest and request for cancellation stating that
the decision was final, and at the same time requesting payment of the revised amount of Five Hundred Twenty
Thousand Eight Hundred Thirty-Five Pesos and Twenty-Nine Centavos (P 520,835.29), with interest updated, within ten
(10) days from receipt thereof. In a letter dated 10 June 1991 which petitioner received on the same day, private
respondent requested for the reconsideration of petitioner's denial of its protest. Without waiting for petitioner's reply
to its request forreconsideration, private respondent filed on 19 June 1991 a petition for review with the Court of Tax
Appeals. On 25 June 1991 privaterespondent received from petitioner a letter dated 21 June 1991 denying its request
for reconsideration declaring again that its decision wasfinal. On 8 July 1991 private respondent paid under protest the
disputed ad valorem tax in the sum of P 520,835.29.[2]

Admittedly, the respondent did not adduce evidence to prove its correct tax liability. However, considering that it has
been established that the petitioners assessment is barren of factual basis, arbitrary and illegal, such failure on the
part of the respondent cannot serve as a basis for a finding by the Court that it is liable for the amount contained in
the said assessment; otherwise, the Court would thereby be committing a travesty.

In its Decision[3] of 1 December 1993 the Court of Tax Appeals ordered petitioner to refund to private respondent the
amount
of
Five
Hundred
Twenty
Thousand
Eight
Hundred
Thirty-Five
Pesos
and TwentyNine Centavos (P 520,835.29) representing erroneously paid ad valorem tax for the period 2 November 1990 to 22
January 1991.

On the disposition of the case, the Court has two options, namely, to deny the petition for lack of merit and affirm the
decision of the CA, without prejudice to the petitioners issuance of a new assessment against the respondent based on
credible evidence; or, to remand the case to the CTA for further proceedings, to enable the petitioner to adduce in
evidence certified true copies or duplicate original copies of the Consumption Entries for the respondents 1987
importations, if there be any, and the correct tax deficiency assessment thereon, without prejudice to the right of the
respondent to adduce controverting evidence, so that the matter may be resolved once and for all by the CTA. In the
higher interest of justice to both the parties, the Court has chosen the latter option. After all, as the Tax Court of the
United States emphasized in Harbin v. Commissioner of Internal Revenue,[ 9 1 ] taxation is not only practical; it is vital.
The obligation of good faith and fair dealing in carrying out its provision is reciprocal and, as the government should
never be over-reaching or tyrannical, neither should a taxpayer be permitted to escape payment by the concealment
of material facts.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision of the Court of Appeals is SET ASIDE. The
records are REMANDED to the Court of Tax Appeals for further proceedings, conformably with the decision of this
Court. No costs.
SO ORDERED.
30 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS, COURT OF APPEALS and

The Court of Tax Appeals explained that the subject deficiency excise tax assessment resulted from private
respondents use of the computation mandated by BIR Ruling 473-88 dated 4 October 1988 as basis for computing the
fifteen percent (15%) ad valorem tax due onits removals of cigarettes from 2 November 1990 to 22 January 1991. BIR
Circular 473-88 was issued by Deputy Commissioner Eufracio D. Santos to Insular-Yebana Tobacco Corporation allowing
the latter to exclude the value-added tax (VAT) in the determination of the gross selling price for purposes of
computing the ad valorem tax of its cigar and cigarette products in accordance with Sec. 127 of the Tax Code as
amended by Executive Order No. 273 which provides as follows:
Sec. 127. Payment of excise taxes on domestic products. - x x x x (b) Determination of gross selling price of goods
subject to ad valorem tax. - Unless otherwise provided, the price, excluding the value-added tax, at which the goods
are sold at wholesale in the place of production or through their salesagents to the public shall constitute the gross
selling price.
The computation, pursuant to the ruling, is illustrated by way of example thus P44.00 x 1/11 = P 4.00 VAT
P44.00 - P 4.00 = P40.00 price without VAT
P40.00 x 15% = P 6.00 Ad Valorem Tax
For the period 2 November 1990 to 22 January 1991 private respondent paid P3,905,348.85 ad valorem tax, applying
Sec. 127 (b) of the NIRC as interpreted by BIR Ruling 473-88 by excluding the VAT in the determination of the gross
selling price.

Thereafter, on 11 February 1991, petitioner issued BIR Ruling 017-91 to Insular-Yebana Tobacco Corporation revoking
BIR Ruling 473-88 for being violative of Sec. 142 of the Tax Code. It included back the VAT to the gross selling price in
determining the tax base for computing the ad valorem tax on cigarettes. Cited as basis by petitioner is Sec. 142 of
the Tax Code, as amended by E.O. No. 273 Sec. 142. Cigar and cigarettes - x x x x For purposes of this section, manufacturer's or importer's
registered wholesale price shall include the ad valoremtax imposed in paragraphs (a), (b), (c) or (d) hereof and
the amount intended to cover the value added tax imposed under Title IV of this Code.
Petitioner sought to apply the revocation retroactively to private respondent's removals of cigarettes for the period
starting 2 November 1990 to 22 January 1991 on the ground that private respondent allegedly acted in bad faith which
is an exception to the rule on non-retroactivity of BIR Rulings.[4]
On appeal, the Court of Appeals affirmed the Court of Tax Appeals holding that the retroactive application of BIR Ruling
017-91 cannot be allowed since private respondent did not act in bad faith; private respondents computation under
BIR Ruling 473-88 was not shown to be motivated by ill will or dishonesty partaking the nature of fraud; hence, this
petition.
Petitioner imputes error to the Court of Appeals: (1) in failing to consider that private respondents reliance on BIR
Ruling 473-88 being contrary to Sec. 142 of the Tax Code does not confer vested rights to private respondent in the
computation of its ad valorem tax; (2) in failing to consider that good faith and prejudice to the taxpayer in cases of
reliance on a void BIR Ruling is immaterial and irrelevant and does not place the government in estoppel in
collecting taxes legally due; (3) in holding that private respondent acted in good faith in applying BIR Ruling 473-88;
and, (4) in failing to consider that the assessment of petitioner is presumed to be regular and the claim for tax refund
must be strictly construed against private respondent for being in derogation of sovereign authority.
Petitioner claims that the main issue before us is whether private respondent's reliance on a void BIR ruling conferred
upon the latter a vested right to apply the same in the computation of its ad valorem tax and claim for tax refund. Sec.
142 (d) of the Tax Code, which provides for the inclusion of the VAT in the tax base for purposes of computing the 15%
ad valorem tax, is the applicable law in the instant case as it specifically applies to the manufacturer's wholesale price
of cigar and cigarette products and not Sec. 127 (b) of the Tax Code which applies in general to the wholesale of goods
or domestic products. Sec. 142 being a specific provision applicable to cigar and cigarettes must perforce prevail over
Sec. 127 (b), a general provision of law insofar as the imposition of the ad valorem tax on cigar and cigarettes is
concerned.[5] Consequently, the application of Sec. 127 (b) to the wholesaleprice of cigar and cigarette products for
purposes of computing the ad valorem tax is patently erroneous. Accordingly, BIR Ruling 473-88 is void ab initioas it
contravenes the express provisions of Sec. 142 (d) of the Tax Code.[6]
Petitioner contends that BIR Ruling 473-88 being an erroneous interpretation of Sec. 142 (b) of the Tax Code does not
confer any vested right to private respondent as to exempt it from the retroactive application of BIR Ruling 01791. Thus Art. 2254 of the New Civil Code is explicit that "(n)o vested oracquired right can arise from acts or omissions
which are against the law x x x x "[7] It is argued that the Court of Appeals erred in ruling that retroactive application
cannot be made since private respondent acted in good faith. The following circumstances would show that private
respondents reliance on BIR Ruling 473-88 was induced by ill will: first, private respondent despite knowledge that Sec.
142 of the Tax Code was the specific provision applicable still shifted its accounting method pursuant to Sec. 127 (b) of
the Tax Code; and, second, the shift in accounting method was made without anyprior consultation with the BIR.[8]
It is further contended by petitioner that claims for tax refund must be construed against private respondent. A tax
refund being in the nature of a taxexemption is regarded as in derogation of the sovereign authority and is strictly
construed against private respondent as the same partakes the nature of a tax exemption. Tax exemptions cannot
merely be implied but must be categorically and unmistakably expressed.[9]
We cannot sustain petitioner. The deficiency tax assessment issued by petitioner against private respondent is without
legal basis because of the prohibition against the retroactive application of the revocation of BIR rulings in the absence
of bad faith on the part of private respondent.
The present dispute arose from the discrepancy in the taxable base on which the excise tax is to apply on account of
two incongruous BIR Rulings: (1) BIR Ruling 473-88 dated 4 October 1988 which excluded the VAT from the tax base in
computing the fifteen percent (15%) excise tax due; and, (2) BIR Ruling 017-91 dated 11 February 1991
which included back the VAT in computing the tax base for purposes of the fifteen percent (15%) ad valorem tax.
The question as to the correct computation of the excise tax on cigarettes in the case at bar has been sufficiently
addressed by BIR Ruling 017-91 dated 11 February 1991 which revoked BIR Ruling 473-88 dated 4 October 1988 It is to be noted that Section 127 (b) of the Tax Code as amended applies in general to domestic products and excludes
the value-added tax in the determination of the gross selling price, which is the tax base for purposes of the imposition
of ad valorem tax. On the other hand, the last paragraph of Section 142 of the same Code which includes the valueadded tax in the computation of the ad valorem tax, refers specifically to cigar and cigarettes only.It does not
include/apply to any other articles or goods subject to the ad valorem tax. Accordingly,
Section 142 must perforce prevail over Section 127 (b) which is a general provision of law insofar as the imposition of
the ad valorem tax on cigar and cigarettes is concerned.

Moreover, the phrase unless otherwise provided in Section 127 (b) purports of exceptions to the general rule contained
therein, such as that of Section 142, last paragraph thereof which explicitly provides that in the case of cigarettes, the
tax base for purposes of the ad valorem tax shall include, among others, the value-added tax.
Private respondent did not question the correctness of the above BIR ruling. In fact, upon knowledge of the effectivity
of BIR Ruling No. 017-91, private respondent immediately implemented the method of computation mandated therein
by restoring the VAT in computing the tax base for purposes of the 15% ad valorem tax.
However, well-entrenched is the rule that rulings and circulars, rules and regulations promulgated by the
Commissioner of Internal Revenue would have no retroactive application if to so apply them would be prejudicial to
the taxpayers.[10]
The applicable law is Sec. 246 of the Tax Code which provides Sec. 246. Non-retroactivity of rulings.- Any revocation, modification, or reversal of any rules and regulations
promulgated in accordance with thepreceding section or any of the rulings or circulars promulgated by the
Commissioner of Internal Revenue shall not be given retroactive application if the revocation, modification, or reversal
will be prejudicial to the taxpayers except in the following cases: a) where the taxpayer deliberately misstates or omits
material facts from his return or in any document required of him by the Bureau of Internal Revenue; b) where the
facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the
ruling is based; or c) where the taxpayer acted in bad faith.
Without doubt, private respondent would be prejudiced by the retroactive application of the revocation as it would be
assessed deficiency excise tax.
What is left to be resolved is petitioners claim that private respondent falls under the third exception in Sec. 246, i.e.,
that the taxpayer has acted in bad faith.
Bad faith imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It partakes of the nature
of fraud; a breach of a known duty through some motive of interest or ill will.[11] We find no convincing evidence that
private respondents implementation of the computation mandated by BIR Ruling 473-88 was ill-motivated or attended
with a dishonest purpose. To the contrary, as a sign of good faith, private respondent immediately reverted to the
computation mandated by BIR Ruling 017-91 upon knowledge of its issuance on 11 February 1991.
As regards petitioner's argument that private respondent should have made consultations with it before private
respondent used the computation mandated by BIR Ruling 473-88, suffice it to state that the aforesaid BIR Ruling was
clear and categorical thus leaving no room for interpretation. The failure of private respondent to consult petitioner
does not imply bad faith on the part of the former.
Admittedly the government is not estopped from collecting taxes legally due because of mistakes or errors of its
agents. But like other principles of law, this admits of exceptions in the interest of justice and fair play, as where
injustice will result to the taxpayer.[12]
WHEREFORE, there being no reversible error committed by respondent Court of Appeals, the petition is DENIED and
petitioner COMMISSIONER OF INTERNAL REVENUE is ordered to refund private respondent ALHAMBRA INDUSTRIES,
INC., the amount ofP520,835.29 upon finality of this Decision.
SO ORDERED.
31 G.R. No. 85749 May 15, 1989
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ANTONIO TUASON, INC. and THE COURT OF TAX APPEALS, respondents.
The Office of the Solicitor General for petitioner.
Mendoza & Papa and Roman M. Umali for private respondent.

GRIO-AQUINO, J.:
Elevated to this Court for review is the decision dated October 14, 1988 of the Court of Tax Appeals in CTA Case No. 3865, entitled " Antonio
Tuason, Inc. vs. Commissioner of Internal Revenue," which set aside the petitioner Revenue Commissioner's assessment of P1,151,146.98 as the 25%
surtax on the private respondent's unreasonable accumulation of surplus for the years 1975-1978.
Under date of February 27, 1981, the petitioner, Commissioner of Internal Revenue, assessed Antonio Tuason, Inc.

a. Deficiency income tax for the years 1975,1976 and 1978 . . . . . . . .. P37,491.83.
(b) Deficiency corporate quarterly income tax for the first quarter of 1975 . . . . . . . . . . . . . . . . . . . . . 161.49.
(c) 25% surtax on unreasonable accumulation of surplus for the years 1975-1978 . . . . . . . . . . . . 1,151,146.98.
The private respondent did not object to the first and second items and, therefore, paid the amounts demanded. However, it protested the assessment
on a 25% surtax on the third item on the ground that the accumulation of surplus profits during the years in question was solely for the purpose of
expanding its business operations as real estate broker. The request for reinvestigation was granted on condition that a waiver of the statute of
limitations should be filed by the private respondent. The latter replied that there was no need of a waiver of the statute of limitaitons because the
right of the Government to assess said tax does not prescribe.
No investigation was conducted nor a decision rendered on Antonio Tuazon Inc.'s protest. meantime, the Revenue Commissioner issued warrants of
distraint and levy to enforce collection of the total amount originally assessed including the amounts already paid.
The private respondent filed a petition for review in the Court of Tax Appeals with a request that pending determination of the case on the merits, an
order be issued restraining the Commissioner and/or his representatives from enforcing the warrants of distraint and levy. Since the right asserted by
the Commissioner to collect the taxes involved herein by the summary methods of distraint and levy was not clear, and it was shown that portions of
the tax liabilities involved in the assessment had already been paid, a writ of injunction was issued by the Tax Court on November 26, 1984, ordering
the Commissioner to refrain fron enforcing said warrants of distraint and levy. It did not require the petitioner to file a bond (Annex A, pp. 28-30,
Rollo).

enormous discrepancy between the alleged investment cost and the declared market value of these pieces of real estate was not denied nor explained
by the private respondent.
Since the company as of the time of the assessment in 1981, had invested in its business operations only P 773,720 out of its accumulated surplus
profits of P3,263,305.88 for 1975-1978, its remaining accumulated surplus profits of P2,489,858.88 are subject to the 25% surtax.
All presumptions are in favor of the correctness of petitioner's assessment against the private respondent. It is incumbent upon the taxpayer to prove
the contrary (Mindanao Bus Company vs. Commissioner of Internal Revenue, 1 SCRA 538). Unfortunately, the private respondent failed to
overcome the presumption of correctness of the Commissioner's assessment.
The touchstone of liability is the purpose behind the accumulation of the income and not the consequences of the accumulation. Thus, if the failure to
pay dividends were for the purpose of using the undistributed earnings and profits for the reasonable needs of the business, that purpose would not
fall within the interdiction of the statute" (Mertens Law of Federal Income Taxation, Vol. 7, Chapter 39, p. 45 cited in Manila Wine Merchants, Inc.
vs. Commissioner of Internal Revenue, 127 SCRA 483, 493).
It is plain to see that the company's failure to distribute dividends to its stockholders in 1975-1978 was for reasons other than the reasonable needs of
the business, thereby falling within the interdiction of Section 25 of the Tax Code of 1977.
WHEREFORE, the appealed decision of the Court of Tax Appeals is hereby set aside. The petitioner's assessment of a 25% surtax against the
Antonio Tuason, Inc. is reinstated but only on the latter's unspent accumulated surplus profits of P2,489,585.88. No costs.
SO ORDERED.

In view of the reversal of the Commissioner's decision by the Court of Tax Appeals, the petitioner appealed to this Court, raising the following issues:
1. Whether or not private respondent Antonio Tuason, Inc. is a holding company and/or investment company;
2. Whether or not privaaate respondent Antonio Tuason, Inc. accumulated surplus for the years 1975 to 1978; and

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

3. Whether or not Antonio Tuason, Inc. is liable for the 25% surtax on undue accumulation of surplus for the years 1975 to
1978.

DECISION

Section 25 of the Tax Code at the time the surtax was assessed, provided:
Sec. 25. Additional tax on corporation improperly accumulating profits or surplus.
(a) Imposition of tax. If any corporation, except banks, insurance companies, or personal holding companies, whether
domestic or foreign, is formed or availed of for the purpose of preventing the imposition of the tax upon its shareholders or
members or the shareholders or members of another corporation, through the medium of permitting its gains and profits to
accumulate instead of being divided or distributed, there is levied and assessed against such corporation, for each taxable
year, a tax equal to twenty-five per centum of the undistributed portion of its accumulated profits or surplus which shall be
in addition to the tax imposed by section twenty-four, and shall be computed, collected and paid in the same manner and
subject to the same provisions of law, including penalties, as that tax.
(b) Prima facie evidence. The fact that any corporation is a mere holding company shall be prima facie evidence of a
purpose to avoid the tax upon its shareholders or members. Similar presumption will lie in the case of an investment
company where at any time during the taxable year more than fifty per centum in value of its outstanding stock is owned,
directly or indirectly, by one person.
(c) Evidence determinative of purpose. The fact that the earnings or profits of a corporation are permitted to accumulate
beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or
members unless the corporation, by clear preponderance of evidence, shall prove the contrary.
The petition for review is meritorious.
The Court of Tax Appeals conceded that the Revenue Commissioner's determination that Antonio Tuason, Inc. was a mere holding or investment
company, was "presumptively correct" (p. 7, Annex A), for the corporation did not involve itself in the development of subdivisions but merely
subdivided its own lots and sold them for bigger profits. It derived its income mostly from interest, dividends and rental realized from the sale of
realty.
Another circumstance supporting that presumption is that 99.99% in value of the outstanding stock of Antonio Tuason, Inc., is owned by Antonio
Tuason himself. The Commissioner "conclusively presumed" that when the corporation accumulated (instead of distributing to the shareholders) a
surplus of over P3 million fron its earnings in 1975 up to 1978, the purpose was to avoid the imposition of the progressive income tax on its
shareholders.
That Antonio Tuason, Inc. accumulated surplus profits amounting to P3,263,305.88 for 1975 up to 1978 is not disputed. However, the private
respondent vehemently denies that its purpose was to evade payment of the progressive income tax on such dividends by its stockholders. According
to the private respondent, surplus profits were set aside by the company to build up sufficient capital for its expansion program which included the
construction in 1979-1981 of an apartment building, and the purchase in 1980 of a condominium unit which was intended for resale or lease.
However, while these investments were actually made, the Commissioner points out that the corporation did not use up its surplus profits. It
allegation that P1,525,672.74 was spent for the construction of an apartment building in 1979 and P1,752,332.87 for the purchase of a condominium
unit in Urdaneta Village in 1980 was refuted by the Declaration of Real Property on the apartment building (Exh. C) which shows that its market
value is only P429,890.00, and the Tax Declaration on the condominium unit which reflects a market value of P293,830.00 only (Exh. D-1). The

MENDOZA, J.:

This is a petition for review of the decision[1] of the Regional Trial Court, Branch 44, San Fernando, Pampanga,
dismissing the suit filed by the Bureau of Internal Revenue for collection of tax.
The facts are as follows:
On July 18, 1986, the BIR issued to respondent Salud V. Hizon a deficiency income tax assessment of P1,113,359.68
covering the fiscal year 1981-1982. Respondent not having contested the assessment, petitioner, on January 12, 1989,
served warrants of distraint and levy to collect the tax deficiency.However, for reasons not known, it did not proceed to
dispose of the attached properties.
More than three years later, or on November 3, 1992, respondent wrote the BIR requesting a reconsideration of her tax
deficiency assessment. The BIR, in a letter dated August 11, 1994, denied the request. On January 1, 1997, it filed a
case with the Regional Trial Court, Branch 44, San Fernando, Pampanga to collect the tax deficiency. The complaint
was signed by Norberto Salud, Chief of the Legal Division, BIR Region 4, and verified by Amancio Saga, the Bureaus
Regional Director in Pampanga.
Respondent moved to dismiss the case on two grounds: (1) that the complaint was not filed upon authority of the BIR
Commissioner as required by 221[2] of the National Internal Revenue Code, and (2) that the action had already
prescribed. Over petitioners objection, the trial court, on August 28, 1997, granted the motion and dismissed the
complaint. Hence, this petition. Petitioner raises the following issues:[3]
I. WHETHER OR NOT THE INSTITUTION OF THE CIVIL CASE FOR COLLECTION OF TAXES WAS WITHOUT THE APPROVAL
OF THE COMMISSIONER IN VIOLATION OF SECTION 221 OF THE NATIONAL INTERNAL REVENUE CODE.
II. WHETHER OR NOT THE ACTION FOR COLLECTION OF TAXES FILED AGAINST RESPONDENT HAD ALREADY BEEN
BARRED BY THE STATUTE OF LIMITATIONS.
First. In sustaining respondents contention that petitioners complaint was filed without the authority of the BIR
Commissioner, the trial court stated:[4]
There is no question that the National Internal Revenue Code explicitly provides that in the matter of filing cases in
Court, civil or criminal, for the collection of taxes, etc., the approval of the commissioner must first be

secured. . . . [A]n action will not prosper in the absence of the commissioners approval. Thus, in the instant case, the
absence of the approval of the commissioner in the institution of the action is fatal to the cause of the plaintiff . . . .
The trial court arrived at this conclusion because the complaint filed by the BIR was not signed by then Commissioner
Liwayway Chato.
Sec. 221 of the NIRC provides:
Form and mode of proceeding in actions arising under this Code. Civil and criminal actions and proceedings instituted
in behalf of the Government under the authority of this Code or other law enforced by the Bureau of Internal Revenue
shall be brought in the name of the Government of the Philippines and shall be conducted by the provincial or city
fiscal, or the Solicitor General, or by the legal officers of the Bureau of Internal Revenue deputized by the Secretary of
Justice, but no civil and criminal actions for the recovery of taxes or the enforcement of any fine, penalty or forfeiture
under this Code shall be begun without the approval of the Commissioner. (Emphasis supplied)
To implement this provision Revenue Administrative Order No. 5-83 of the BIR provides in pertinent portions:
The following civil and criminal cases are to be handled by Special Attorneys and Special Counsels assigned in the
Legal Branches of Revenue Regions:
....
II. Civil Cases
1. Complaints for collection on cases falling within the jurisdiction of the Region . . . .
In all the abovementioned cases, the Regional Director is authorized to sign all pleadings filed in connection therewith
which, otherwise, requires the signature of the Commissioner.
....
Revenue Administrative Order No. 10-95 specifically authorizes the Litigation and Prosecution Section of the Legal
Division of regional district offices to institute the necessary civil and criminal actions for tax collection. As the
complaint filed in this case was signed by the BIRs Chief of Legal Division for Region 4 and verified by the Regional
Director, there was, therefore, compliance with the law.
However, the lower court refused to recognize RAO No. 10-95 and, by implication, RAO No. 5-83. It held:
[M]emorand[a], circulars and orders emanating from bureaus and agencies whether in the purely public or quasi-public
corporations are mere guidelines for the internal functioning of the said offices. They are not laws which courts can
take judicial notice of. As such, they have no binding effect upon the courts for such memorand[a] and circulars are
not the official acts of the legislative, executive and judicial departments of the Philippines . . . .[5]
This is erroneous. The rule is that as long as administrative issuances relate solely to carrying into effect the provisions
of the law, they are valid and have the force of law.[6] The governing statutory provision in this case is 4(d) of the NIRC
which provides:
Specific provisions to be contained in regulations. - The regulations of the Bureau of Internal Revenue shall, among
other things, contain provisions specifying, prescribing, or defining:
....
(d) The conditions to be observed by revenue officers, provincial fiscals and other officials respecting the institution
and conduct of legal actions and proceedings.
RAO Nos. 5-83 and 10-95 are in harmony with this statutory mandate.
As amended by R.A. No. 8424, the NIRC is now even more categorical. Sec. 7 of the present Code authorizes the BIR
Commissioner to delegate the powers vested in him under the pertinent provisions of the Code to any subordinate
official with the rank equivalent to a division chief or higher, except the following:
(a) The power to recommend the promulgation of rules and regulations by the Secretary of Finance;
(b) The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau;

(c) The power to compromise or abate under 204(A) and (B) of this Code, any tax deficiency: Provided, however, that
assessments issued by the Regional Offices involving basic deficiency taxes of five hundred thousand pesos
(P500,000.00) or less, and minor criminal violations as may be determined by rules and regulations to be promulgated
by the Secretary of Finance, upon the recommendation of the Commissioner, discovered by regional and district
officials, may be compromised by a regional evaluation board which shall be composed of the Regional Director as
Chairman, the Assistant Regional Director, heads of the Legal, Assessment and Collection Divisions and the Revenue
District Officer having jurisdiction over the taxpayer, as members; and
(d) The power to assign or reassign internal revenue officers to establishments where articles subject to excise tax are
produced or kept.
None of the exceptions relates to the Commissioners power to approve the filing of tax collection cases.
Second. With regard to the issue that the case filed by petitioner for the collection of respondents tax deficiency is
barred by prescription, 223(c) of the NIRC provides:
Any internal revenue tax which has been assessed within the period of limitation above-prescribed may be collected
by distraint or levy or by a proceeding in court within three years[7]following the assessment of the tax.
The running of the three-year prescriptive period is suspended[8]for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or levy
or a proceeding in court and for sixty days thereafter; when the taxpayer requests for a reinvestigation which is
granted by the Commissioner; when the taxpayer cannot be located in the address given by him in the return filed
upon which the tax is being assessed or collected; provided, that, if the taxpayer informs the Commissioner of any
change in address, the running of the statute of limitations will not be suspended; when the warrant of distraint or levy
is duly served upon the taxpayer, his authorized representative or a member of his household with sufficient
discretion, and no property could be located; and when the taxpayer is out of the Philippines.
Petitioner argues that, in accordance with this provision, respondents request for reinvestigation of her tax deficiency
assessment on November 3, 1992 effectively suspended the running of the period of prescription such that the
government could still file a case for tax collection.[9]
The contention has no merit. Sec. 229[10] of the Code mandates that a request for reconsideration must be made
within 30 days from the taxpayers receipt of the tax deficiency assessment, otherwise the assessment becomes final,
unappealable and, therefore, demandable.[11] The notice of assessment for respondents tax deficiency was issued by
petitioner on July 18, 1986. On the other hand, respondent made her request for reconsideration thereof only on
November 3, 1992, without stating when she received the notice of tax assessment. She explained that she was
constrained to ask for a reconsideration in order to avoid the harassment of BIR collectors. [12] In all likelihood, she
must have been referring to the distraint and levy of her properties by petitioners agents which took place on January
12, 1989. Even assuming that she first learned of the deficiency assessment on this date, her request for
reconsideration was nonetheless filed late since she made it more than 30 days thereafter. Hence, her request for
reconsideration did not suspend the running of the prescriptive period provided under 223(c). Although the
Commissioner acted on her request by eventually denying it on August 11, 1994, this is of no moment and does not
detract from the fact that the assessment had long become demandable.
Nonetheless, it is contended that the running of the prescriptive period under 223(c) was suspended when the BIR
timely served the warrants of distraint and levy on respondent on January 12, 1989. [13] Petitioner cites for this
purpose our ruling in Advertising Associates Inc. v. Court of Appeals.[14]Because of the suspension, it is argued that
the BIR could still avail of the other remedy under 223(c) of filing a case in court for collection of the tax deficiency, as
the BIR in fact did on January 1, 1997.
Petitioners reliance on the Courts ruling in Advertising Associates Inc. v. Court of Appeals is misplaced. What the Court
stated in that case and, indeed, in the earlier case of Palanca v. Commissioner of Internal Revenue,[15] is that the
timely service of a warrant of distraint or levy suspends the running of the period to collect the tax deficiency in the
sense that the disposition of the attached properties might well take time to accomplish, extending even after the
lapse of the statutory period for collection. In those cases, the BIR did not file any collection case but merely relied on
the summary remedy of distraint and levy to collect the tax deficiency. The importance of this fact was not lost on the
Court. Thus, in Advertising Associates, it was held:[16] It should be noted that the Commissioner did not institute any
judicial proceeding to collect the tax. He relied on the warrants of distraint and levy to interrupt the running of the
statute of limitations.

Moreover, if, as petitioner in effect says, the prescriptive period was suspended twice, i.e., when the warrants of
distraint and levy were served on respondent on January 12, 1989 and then when respondent made her request for
reinvestigation of the tax deficiency assessment on November 3, 1992, the three-year prescriptive period must have
commenced running again sometime after the service of the warrants of distraint and levy. Petitioner, however, does
not state when or why this took place and, indeed, there appears to be no reason for such. It is noteworthy that
petitioner raised this point before the lower court apparently as an alternative theory, which, however, is untenable.
For the foregoing reasons, we hold that petitioners contention that the action in this case had not prescribed when
filed has no merit. Our holding, however, is without prejudice to the disposition of the properties covered by the
warrants of distraint and levy which petitioner served on respondent, as such would be a mere continuation of the
summary remedy it had timely begun. Although considerable time has passed since then, as held in Advertising
Associates Inc. v. Court of Appeals[17] and Palanca v. Commissioner of Internal Revenue,[18] the enforcement of tax
collection through summary proceedings may be carried out beyond the statutory period considering that such
remedy was seasonably availed of.

4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT Registration Certification No. 97-083000600-V issued on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent];
6. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with supporting documents
(inclusive of theP12,267,981.04 VAT input taxes subject of this Petition for Review), was filed on 4 October 1999 with
Revenue District Office No. 83, Talisay Cebu;
7. No final action has been received by [respondent] from [petitioner] on [respondents] claim for VAT refund.

WHEREFORE, the petition is DENIED.

33
COMMISSIONER
OF
(PHILIPPINES), respondent.

3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has been issued PEZA Certificate
No. 97-044 pursuant to Presidential Decree No. 66, as amended, to engage in the manufacture of recording
components primarily used in computers for export. Such registration was made on 6 June 1997;

INTERNAL

REVENUE, petitioner,

vs.

SEAGATE

TECHNOLOGY

The administrative claim for refund by the [respondent] on October 4, 1999 was not acted upon by the [petitioner]
prompting the [respondent] to elevate the case to [the CTA] on July 21, 2000 by way of Petition for Review in order to
toll the running of the two-year prescriptive period.
For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to wit:

DECISION
PANGANIBAN, J.:

1. [Respondents] alleged claim for tax refund/credit is subject to administrative routinary investigation/examination by
[petitioners] Bureau;
2. Since taxes are presumed to have been collected in accordance with laws and regulations, the [respondent] has the
burden of proof that the taxes sought to be refunded were erroneously or illegally collected x x x;

Business companies registered in and operating from the Special Economic Zone in Naga, Cebu -- like herein
respondent -- are entitiesexempt from all internal revenue taxes and the implementing rules relevant thereto,
including the value-added taxes or VAT. Although export sales are not deemed exempt transactions, they are
nonetheless
zero-rated. Hence,
in
the
present
case, the distinction
between
exemptentities and
exempt transactions has little significance, because the net result is that the taxpayer is not liable for the VAT.
Respondent, a VAT-registered enterprise, has complied with all requisites for claiming a tax refund of or credit for the
input VAT it paid on capital goods it purchased. Thus, the Court of Tax Appeals and the Court of Appeals did not err in
ruling that it is entitled to such refund or credit.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to set aside the May 27, 2002
Decision[2] of the Court of Appeals (CA) in CA-GR SP No. 66093. The decretal portion of the Decision reads as follows:
WHEREFORE, foregoing premises considered, the petition for review is DENIED for lack of merit.[3]

3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruled that:
A claimant has the burden of proof to establish the factual basis of his or her claim for tax credit/refund.
4. Claims for tax refund/tax credit are construed in strictissimi juris against the taxpayer. This is due to the fact that
claims for refund/credit [partake of] the nature of an exemption from tax. Thus, it is incumbent upon the [respondent]
to prove that it is indeed entitled to the refund/credit sought. Failure on the part of the [respondent] to prove the same
is fatal to its claim for tax credit. He who claims exemption must be able to justify his claim by the clearest grant of
organic or statutory law. An exemption from the common burden cannot be permitted to exist upon vague
implications;
5. Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority (PEZA) registered Ecozone
Enterprise, then its business is not subject to VAT pursuant to Section 24 of Republic Act No. ([RA]) 7916 in relation to
Section 103 of the Tax Code, as amended. As [respondents] business is not subject to VAT, the capital goods and
services it alleged to have purchased are considered not used in VAT taxable business. As such, [respondent] is not
entitled to refund of input taxes on such capital goods pursuant to Section 4.106.1 of Revenue Regulations No. ([RR])795, and of input taxes on services pursuant to Section 4.103 of said regulations.

The Facts
6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229 of the 1997 Tax Code on filing of
a written claim for refund within two (2) years from the date of payment of tax.
The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as follows:

On July 19, 2001, the Tax Court rendered a decision granting the claim for refund.[4]

As jointly stipulated by the parties, the pertinent facts x x x involved in this case are as follows:
1. [Respondent] is a resident foreign corporation duly registered with the Securities and Exchange Commission to do
business in the Philippines, with principal office address at the new Cebu Township One, Special Economic Zone,
Barangay Cantao-an, Naga, Cebu;
2. [Petitioner] is sued in his official capacity, having been duly appointed and empowered to perform the duties of his
office, including, among others, the duty to act and approve claims for refund or tax credit;

Ruling of the Court of Appeals

The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a tax credit certificate (TCC) in
favor of respondent in the reduced amount of P12,122,922.66. This sum represented the unutilized but substantiated
input VAT paid on capital goods purchased for the period covering April 1, 1998 to June 30, 1999.

The appellate court reasoned that respondent had availed itself only of the fiscal incentives under Executive Order No.
(EO) 226 (otherwise known as the Omnibus Investment Code of 1987), not of those under both Presidential Decree No.
(PD) 66, as amended, and Section 24 of RA 7916. Respondent was, therefore, considered exempt only from the
payment of income tax when it opted for the income tax holiday in lieu of the 5 percent preferential tax on gross
income earned. As a VAT-registered entity, though, it was still subject to the payment of other national internal
revenue taxes, like the VAT.
Moreover, the CA held that neither Section 109 of the Tax Code nor Sections 4.106-1 and 4.103-1 of RR 7-95 were
applicable. Having paid the input VAT on the capital goods it purchased, respondent correctly filed the administrative
and judicial claims for its refund within the two-year prescriptive period. Such payments were -- to the extent of the
refundable value -- duly supported by VAT invoices or official receipts, and were not yet offset against any output VAT
liability.
Hence this Petition.[5]

Sole Issue

imported capital equipment and spare parts, export taxes, duties, imposts and fees,[16] local taxes and licenses, and
real property taxes.[17]
A privilege available to respondent under the provision in RA 7227 on tax and duty-free importation of raw materials,
capital and equipment[18] -- is, ipso facto, also accorded to the zone[19] under RA 7916. Furthermore, the latter law -notwithstanding other existing laws, rules and regulations to the contrary -- extends [20] to that zone the provision
stating that no local or national taxes shall be imposed therein.[21] No exchange control policy shall be applied; and
free markets for foreign exchange, gold, securities and future shall be allowed and maintained.[22] Banking and
finance shall also be liberalized under minimum Bangko Sentral regulation with the establishment of foreign currency
depository units of local commercial banks and offshore banking units of foreign banks.[23]
In the same vein, respondent benefits under RA 7844 from negotiable tax credits[24] for locally-produced materials
used as inputs. Aside from the other incentives possibly already granted to it by the Board of Investments, it also
enjoys preferential credit facilities[25] and exemption from PD 1853.[26]
From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax treatment.[27] It is not subject
to internal revenue laws and regulations and is even entitled to tax credits. The VAT on capital goods is an internal
revenue tax from which petitioner as an entity is exempt. Although the transactions involving such tax are not exempt,
petitioner as a VAT-registered person,[28] however, is entitled to their credits.

Petitioner submits this sole issue for our consideration:

Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in the amount
of P12,122,922.66 representing alleged unutilized input VAT paid on capital goods purchased for the period April 1,
1998 to June 30, 1999.[6]

The Courts Ruling

The Petition is unmeritorious.

Nature of the VAT and

the Tax Credit Method

Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent levied on every importation
of goods, whether or not in the course of trade or business, or imposed on each sale, barter, exchange or lease of
goods or properties or on each rendition of services in the course of trade or business [29] as they pass along the
production and distribution chain, the tax being limited only to the value added[30] to such goods, properties or
services by the seller, transferor or lessor.[31] It is an indirect tax that may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services.[32] As such, it should be understood not in the context of the
person or entity that is primarily, directly and legally liable for its payment, but in terms of its nature as a tax on
consumption.[33] In either case, though, the same conclusion is arrived at.

Sole Issue:
Entitlement of a VAT-Registered PEZA Enterprise to
a Refund of or Credit for Input VAT

The law[34] that originally imposed the VAT in the country, as well as the subsequent amendments of that law, has
been drawn from thetax credit method.[35] Such method adopted the mechanics and self-enforcement features of the
VAT as first implemented and practiced in Europe and subsequently adopted in New Zealand and Canada.[36] Under
the present method that relies on invoices, an entity can credit against or subtract from the VAT charged on its sales or
outputs the VAT paid on its purchases, inputs and imports.[37]

No doubt, as a PEZA-registered enterprise within a special economic zone,[7] respondent is entitled to the fiscal
incentives and benefits[8] provided for in either PD 66[9] or EO 226.[10] It shall, moreover, enjoy all privileges,
benefits, advantages or exemptions under both Republic Act Nos. (RA) 7227[11] and 7844.[12]

If at the end of a taxable quarter the output taxes [38] charged by a seller[39] are equal to the input taxes[40] passed
on by the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess has to
be paid.[41] If, however, the input taxes exceed the output taxes, the excess shall be carried over to the succeeding
quarter or quarters.[42] Should the input taxes result from zero-rated or effectively zero-rated transactions or from the
acquisition of capital goods,[43] any excess over the output taxes shall instead be refunded[44] to the taxpayer or
credited[45] against other internal revenue taxes.[46]

Preferential Tax Treatment

Under Special Laws

If it avails itself of PD 66, notwithstanding the provisions of other laws to the contrary, respondent shall not be subject
to internal revenue laws and regulations for raw materials, supplies, articles, equipment, machineries, spare parts and
wares, except those prohibited by law, brought into the zone to be stored, broken up, repacked, assembled, installed,
sorted, cleaned, graded or otherwise processed, manipulated, manufactured, mixed or used directly or indirectly in
such activities.[13] Even so, respondent would enjoy a net-operating loss carry over; accelerated depreciation; foreign
exchange and financial assistance; and exemption from export taxes, local taxes and licenses.[14]
Comparatively, the same exemption from internal revenue laws and regulations applies if EO 226 [15] is chosen. Under
this law, respondent shall further be entitled to an income tax holiday; additional deduction for labor expense;
simplification of customs procedure; unrestricted use of consigned equipment; access to a bonded manufacturing
warehouse system; privileges for foreign nationals employed; tax credits on domestic capital equipment, as well as for
taxes and duties on raw materials; and exemption from contractors taxes, wharfage dues, taxes and duties on

Zero-Rated and Effectively

Zero-Rated Transactions

Although both are taxable and similar in effect, zero-rated transactions differ from effectively zero-rated transactions
as to their source.
Zero-rated transactions generally refer to the export sale of goods and supply of services. [47] The tax rate is set at
zero.[48] When applied to the tax base, such rate obviously results in no tax chargeable against the purchaser. The
seller of such transactions charges no output tax,[49] but can claim a refund of or a tax credit certificate for the VAT
previously charged by suppliers.

Effectively zero-rated transactions, however, refer to the sale of goods[50] or supply of services[51] to persons or
entities whose exemption under special laws or international agreements to which the Philippines is a signatory
effectively subjects such transactions to a zero rate.[52] Again, as applied to the tax base, such rate does not yield
any tax chargeable against the purchaser. The seller who charges zero output tax on such transactions can also claim
a refund of or a tax credit certificate for the VAT previously charged by suppliers.

Zero Rating and

Exemption

In terms of the VAT computation, zero rating and exemption are the same, but the extent of relief that results from
either one of them is not.

consumption in the Philippines, then these shall be subject to 10 percent,[67] unless the purchaser is exempt from the
indirect burden of the VAT, in which case it shall also be zero-rated.
Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its exemption under
both PD 66 and RA 7916 effectively subjects such transactions to a zero rate,[68] because the ecozone within which it
is registered is managed and operated by the PEZA as a separate customs territory.[69] This means that in such zone
is created the legal fiction of foreign territory.[70] Under thecross-border principle[71] of the VAT system being
enforced by the Bureau of Internal Revenue (BIR),[72] no VAT shall be imposed to form part of the cost of goods
destined for consumption outside of the territorial border of the taxing authority. If exports of goods and services from
the Philippines to a foreign country are free of the VAT,[73] then the same rule holds for such exports from the national
territory -- except specifically declared areas -- to an ecozone.

Applying the destination principle[53] to the exportation of goods, automatic zero rating[54] is primarily intended to
be enjoyed by the seller who is directly and legally liable for the VAT, making such seller internationally competitive by
allowing the refund or credit of input taxes that are attributable to export sales.[55] Effective zero rating, on the
contrary, is intended to benefit the purchaser who, not being directly and legally liable for the payment of the VAT, will
ultimately bear the burden of the tax shifted by the suppliers.

Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are considered exports to a
foreign country; conversely, sales by a PEZA-registered entity to a VAT-registered person in the customs territory are
deemed imports from a foreign country.[74] An ecozone -- indubitably a geographical territory of the Philippines -- is,
however, regarded in law as foreign soil.[75] This legal fiction is necessary to give meaningful effect to the policies of
the special law creating the zone.[76] If respondent is located in an export processing zone[77] within that ecozone,
sales to the export processing zone, even without being actually exported, shall in fact be viewed as constructively
exported under EO 226.[78] Considered as export sales,[79] such purchase transactions by respondent would indeed
be subject to a zero rate.[80]

In both instances of zero rating, there is total relief for the purchaser from the burden of the tax.[56] But in an
exemption there is onlypartial relief,[57] because the purchaser is not allowed any tax refund of or credit for input
taxes paid.[58]

Tax Exemptions
Broad and Express

Exempt Transaction
and Exempt Party

Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal revenue laws and
regulations.

The object of exemption from the VAT may either be the transaction itself or any of the parties to the transaction.[59]
An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically listed in
and expressly exempted from the VAT under the Tax Code, without regard to the tax status -- VAT-exempt or not -- of
the party to the transaction.[60]Indeed, such transaction is not subject to the VAT, but the seller is not allowed any tax
refund of or credit for any input taxes paid.

This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a tax on
consumption, for which the direct liability is imposed on one person but the indirect burden is passed on to another.
Respondent, as an exempt entity, can neither be directly charged for the VAT on its sales nor indirectly made to bear,
as added cost to such sales, the equivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere debemus.
Where the law does not distinguish, we ought not to distinguish.
Moreover, the exemption is both express and pervasive for the following reasons:

An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a special law or
an international agreement to which the Philippines is a signatory, and by virtue of which its taxable transactions
become exempt from the VAT.[61] Suchparty is also not subject to the VAT, but may be allowed a tax refund of or
credit for input taxes paid, depending on its registration as a VAT or non-VAT taxpayer.

First, RA 7916 states that no taxes, local and national, shall be imposed on business establishments operating within
the ecozone.[81]Since this law does not exclude the VAT from the prohibition, it is deemed included. Exceptio firmat
regulam in casibus non exceptis. An exception confirms the rule in cases not excepted; that is, a thing not being
excepted must be regarded as coming within the purview of the general rule.

As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or passed on by the seller
to the purchaser of the goods, properties or services.[62] While the liability is imposed on one person, the burden may
be passed on to another. Therefore, if a special law merely exempts a party as a seller from its direct liability for
payment of the VAT, but does not relieve the same party as a purchaser from its indirect burden of the VAT shifted to it
by its VAT-registered suppliers, the purchase transaction is not exempt. Applying this principle to the case at bar, the
purchase transactions entered into by respondent are not VAT-exempt.

Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be passed on and,
therefore, indirectly imposed on the same entity -- a patent circumvention of the law. That no VAT shall be imposed
directly upon business establishments operating within the ecozone under RA 7916 also means that no VAT may be
passed on and imposed indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum. When anything is
prohibited directly, it is also prohibited indirectly.

Special laws may certainly exempt transactions from the VAT.[63] However, the Tax Code provides that those falling
under PD 66 are not. PD 66 is the precursor of RA 7916 -- the special law under which respondent was registered. The
purchase transactions it entered into are, therefore, not VAT-exempt. These are subject to the VAT; respondent is
required to register.
Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10 percent, [64] depending
again on the application of the destination principle.[65]
If respondent enters into such sales transactions with a purchaser -- usually in a foreign country -- for use or
consumption outside the Philippines, these shall be subject to 0 percent.[66] If entered into with a purchaser for use or

Second, when RA 8748 was enacted to amend RA 7916, the same prohibition applied, except for real property taxes
that presently are imposed on land owned by developers.[82] This similar and repeated prohibition is an unambiguous
ratification of the laws intent in not imposing local or national taxes on business enterprises within the ecozone.
Third, foreign and domestic merchandise, raw materials, equipment and the like shall not be subject to x x x internal
revenue laws and regulations under PD 66[83] -- the original charter of PEZA (then EPZA) that was later amended by
RA 7916.[84] No provisions in the latter law modify such exemption.
Although this exemption puts the government at an initial disadvantage, the reduced tax collection ultimately
redounds to the benefit of the national economy by enticing more business investments and creating more
employment opportunities.[85]

Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise -- except those prohibited by law
-- shall not be subject to x x x internal revenue laws and regulations x x x[86] if brought to the ecozones restricted
area[87] for manufacturing by registered export enterprises,[88] of which respondent is one. These rules also apply to
all enterprises registered with the EPZA prior to the effectivity of such rules.[89]
Fifth, export processing zone enterprises registered[90] with the Board of Investments (BOI) under EO 226 patently
enjoy exemption from national internal revenue taxes on imported capital equipment reasonably needed and
exclusively used for the manufacture of their products;[91] on required supplies and spare part for consigned
equipment;[92] and on foreign and domestic merchandise, raw materials, equipment and the like -- except those
prohibited by law -- brought into the zone for manufacturing.[93] In addition, they are given credits for the value of the
national internal revenue taxes imposed on domestic capital equipment also reasonably needed and exclusively used
for the manufacture of their products,[94] as well as for the value of such taxes imposed on domestic raw materials
and supplies that are used in the manufacture of their export products and that form part thereof.[95]
Sixth, the exemption from local and national taxes granted under RA 7227[96] are ipso facto accorded to ecozones.
[97] In case of doubt, conflicts with respect to such tax exemption privilege shall be resolved in favor of the ecozone.
[98]
And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily used in the production of
export goods,[99] and for locally produced raw materials, capital equipment and spare parts used by exporters of nontraditional products[100] -- shall also be continuously enjoyed by similar exporters within the ecozone.[101] Indeed,
the latter exporters are likewise entitled to such tax exemptions and credits.

Tax Refund as
Tax Exemption

To be sure, statutes that grant tax exemptions are construed strictissimi juris[102] against the taxpayer[103] and
liberally in favor of the taxing authority.[104]
Tax refunds are in the nature of such exemptions.[105] Accordingly, the claimants of those refunds bear the burden of
proving the factual basis of their claims;[106] and of showing, by words too plain to be mistaken, that the legislature
intended to exempt them.[107] In the present case, all the cited legal provisions are teeming with life with respect to
the grant of tax exemptions too vivid to pass unnoticed. In addition, respondent easily meets the challenge.
Respondent, which as an entity is exempt, is different from its transactions which are not exempt. The end result,
however, is that it is not subject to the VAT. The non-taxability of transactions that are otherwise taxable is merely a
necessary incident to the tax exemption conferred by law upon it as an entity, not upon the transactions themselves.
[108] Nonetheless, its exemption as an entity and the non-exemption of its transactions lead to the same result for the
following considerations:
First, the contemporaneous construction of our tax laws by BIR authorities who are called upon to execute or
administer such laws[109]will have to be adopted. Their prior tax issuances have held inconsistent positions brought
about by their probable failure to comprehend and fully appreciate the nature of the VAT as a tax on consumption and
the application of the destination principle.[110] Revenue Memorandum Circular No. (RMC) 74-99, however, now
clearly and correctly provides that any VAT-registered suppliers sale of goods, property or services from the customs
territory to any registered enterprise operating in the ecozone -- regardless of the class or type of the latters PEZA
registration -- is legally entitled to a zero rate.[111]
Second, the policies of the law should prevail. Ratio legis est anima. The reason for the law is its very soul.
In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the establishment of export processing
zones, seeks to encourage and promote foreign commerce as a means of x x x strengthening our export trade and
foreign exchange position, of hastening industrialization, of reducing domestic unemployment, and of accelerating the
development of the country.[112]
RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating the special economic zones, the
government shall actively encourage, promote, induce and accelerate a sound and balanced industrial, economic and

social development of the country x x x through the establishment, among others, of special economic zones x x x
that shall effectively attract legitimate and productive foreign investments.[113]
Under EO 226, the State shall encourage x x x foreign investments in industry x x x which shall x x x meet the tests of
international competitiveness[,] accelerate development of less developed regions of the country[,] and result in
increased volume and value of exports for the economy.[114] Fiscal incentives that are cost-efficient and simple to
administer shall be devised and extended to significant projects to compensate for market imperfections, to reward
performance contributing to economic development,[115] and to stimulate the establishment and assist initial
operations of the enterprise.[116]
Wisely accorded to ecozones created under RA 7916[117] was the governments policy -- spelled out earlier in RA 7227
-- of converting into alternative productive uses[118] the former military reservations and their extensions,[119] as
well as of providing them incentives[120]to enhance the benefits that would be derived from them[121] in promoting
economic and social development.[122]
Finally, under RA 7844, the State declares the need to evolve export development into a national effort[123] in order
to win international markets. By providing many export and tax incentives,[124] the State is able to drive home the
point that exporting is indeed the key to national survival and the means through which the economic goals of
increased employment and enhanced incomes can most expeditiously be achieved.[125]
The Tax Code itself seeks to promote sustainable economic growth x x x; x x x increase economic activity; and x x x
create a robust environment for business to enable firms to compete better in the regional as well as the global
market.[126] After all, international competitiveness requires economic and tax incentives to lower the cost of goods
produced for export. State actions that affect global competition need to be specific and selective in the pricing of
particular goods or services.[127]
All these statutory policies are congruent to the constitutional mandates of providing incentives to needed
investments,[128] as well as of promoting the preferential use of domestic materials and locally produced goods and
adopting measures to help make these competitive.[129] Tax credits for domestic inputs strengthen backward
linkages. Rightly so, the rule of law and the existence of credible and efficient public institutions are essential
prerequisites for sustainable economic development.[130]

VAT Registration, Not Application

for Effective Zero Rating,
Indispensable to VAT Refund

Registration is an indispensable requirement under our VAT law.[131] Petitioner alleges that respondent did register for
VAT purposes with the appropriate Revenue District Office. However, it is now too late in the day for petitioner to
challenge the VAT-registered status of respondent, given the latters prior representation before the lower courts and
the mode of appeal taken by petitioner before this Court.
The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting from internal revenue laws and
regulations the equipment -- including capital goods -- that registered enterprises will use, directly or indirectly, in
manufacturing.[132] EO 226 even reiterates this privilege among the incentives it gives to such enterprises.
[133] Petitioner merely asserts that by virtue of the PEZA registration alone of respondent, the latter is not subject to
the VAT. Consequently, the capital goods and services respondent has purchased are not considered used in the VAT
business, and no VAT refund or credit is due.[134] This is a non sequitur. By the VATs very nature as a tax on
consumption, the capital goods and services respondent has purchased are subject to the VAT, although at zero rate.
Registration does not determine taxability under the VAT law.
Moreover, the facts have already been determined by the lower courts. Having failed to present evidence to support
its contentions against the income tax holiday privilege of respondent,[135] petitioner is deemed to have conceded. It
is a cardinal rule that issues and arguments not adequately and seriously brought below cannot be raised for the first
time on appeal.[136] This is a matter of procedure[137]and a question of fairness.[138] Failure to assert within a
reasonable time warrants a presumption that the party entitled to assert it either has abandoned or declined to assert
it.[139]

The BIR regulations additionally requiring an approved prior application for effective zero rating [140] cannot prevail
over the clear VAT nature of respondents transactions. The scope of such regulations is not within the statutory
authority x x x granted by the legislature.[141]

Compliance with All Requisites

for VAT Refund or Credit

First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot purport to do any
more than interpret the latter.[142] The courts will not countenance one that overrides the statute it seeks to apply
and implement.[143]

As further enunciated by the Tax Court, respondent complied with all the requisites for claiming a VAT refund or credit.
[150]

Other than the general registration of a taxpayer the VAT status of which is aptly determined, no provision under our
VAT law requires an additional application to be made for such taxpayers transactions to be considered effectively
zero-rated. An effectively zero-rated transaction does not and cannot become exempt simply because an application
therefor was not made or, if made, was denied. To allow the additional requirement is to give unfettered discretion to
those officials or agents who, without fluid consideration, are bent on denying a valid application. Moreover, the State
can never be estopped by the omissions, mistakes or errors of its officials or agents.[144]
Second, grantia argumenti that such an application is required by law, there is still the presumption of regularity in the
performance of official duty.[145] Respondents registration carries with it the presumption that, in the absence of
contradictory evidence, an application for effective zero rating was also filed and approval thereof given. Besides, it is
also presumed that the law has been obeyed[146] by both the administrative officials and the applicant.
Third, even though such an application was not made, all the special laws we have tackled exempt respondent not
only from internal revenue laws but also from the regulations issued pursuant thereto. Leniency in the implementation
of the VAT in ecozones is an imperative, precisely to spur economic growth in the country and attain global
competitiveness as envisioned in those laws.

First, respondent is a VAT-registered entity. This fact alone distinguishes the present case from Contex, in which this
Court held that the petitioner therein was registered as a non-VAT taxpayer.[151] Hence, for being merely VAT-exempt,
the petitioner in that case cannot claim any VAT refund or credit.
Second, the input taxes paid on the capital goods of respondent are duly supported by VAT invoices and have not been
offset against any output taxes. Although enterprises registered with the BOI after December 31, 1994 would no longer
enjoy the tax credit incentives on domestic capital equipment -- as provided for under Article 39(d), Title III, Book I of
EO 226[152] -- starting January 1, 1996, respondent would still have the same benefit under a general and express
exemption contained in both Article 77(1), Book VI of EO 226; and Section 12, paragraph 2 (c) of RA 7227, extended to
the ecozones by RA 7916.
There was a very clear intent on the part of our legislators, not only to exempt investors in ecozones from national and
local taxes, but also to grant them tax credits. This fact was revealed by the sponsorship speeches in Congress during
the second reading of House Bill No. 14295, which later became RA 7916, as shown below:
MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national and local taxes; x x x tax
credit for locally-sourced inputs x x x.
xxxxxxxxx

A VAT-registered status, as well as compliance with the invoicing requirements,[147] is sufficient for the effective zero
rating of the transactions of a taxpayer. The nature of its business and transactions can easily be perused from, as
already clearly indicated in, its VAT registration papers and photocopied documents attached thereto. Hence, its
transactions cannot be exempted by its mere failure to apply for their effective zero rating. Otherwise, their VAT
exemption would be determined, not by their nature, but by the taxpayers negligence -- a result not at all
contemplated. Administrative convenience cannot thwart legislative mandate.

MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an environment conducive for
investors, the bill offers incentives such as the exemption from local and national taxes, x x x tax credits for locally
sourced inputs x x x.[153]
And third, no question as to either the filing of such claims within the prescriptive period or the validity of the VAT
returns has been raised. Even if such a question were raised, the tax exemption under all the special laws cited above
is broad enough to cover even the enforcement of internal revenue laws, including prescription.[154]

Tax Refund or
Credit in Order
Summary
Having determined that respondents purchase transactions are subject to a zero VAT rate, the tax refund or credit is in
order.
As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal incentives in EO 226 over those
in RA 7916 and PD 66. It opted for the income tax holiday regime instead of the 5 percent preferential tax regime.
The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA law,[148] for EO
226[149] also has provisions to contend with. These two regimes are in fact incompatible and cannot be availed of
simultaneously by the same entity. While EO 226 merely exempts it from income taxes, the PEZA law exempts it from
all taxes.

To summarize, special laws expressly grant preferential tax treatment to business establishments registered and
operating within an ecozone, which by law is considered as a separate customs territory. As such, respondent is
exempt from all internal revenue taxes, including the VAT, and regulations pertaining thereto. It has opted for the
income tax holiday regime, instead of the 5 percent preferential tax regime. As a matter of law and procedure, its
registration status entitling it to such tax holiday can no longer be questioned. Its sales transactions intended for
export may not be exempt, but like its purchase transactions, they are zero-rated. No prior application for the effective
zero rating of its transactions is necessary. Being VAT-registered and having satisfactorily complied with all the
requisites for claiming a tax refund of or credit for the input VAT paid on capital goods purchased, respondent is
entitled to such VAT refund or credit.
WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No pronouncement as to costs.

Therefore, respondent can be considered exempt, not from the VAT, but only from the payment of income tax for a
certain number of years, depending on its registration as a pioneer or a non-pioneer enterprise. Besides, the
remittance of the aforesaid 5 percent of gross income earned in lieu of local and national taxes imposable upon
business establishments within the ecozone cannot outrightly determine a VAT exemption. Being subject to VAT,
payments erroneously collected thereon may then be refunded or credited.
Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA 7916, Section 24 thereof
does not preclude the VAT. One can, therefore, counterargue that such provision merely exempts respondent from
taxes imposed on business. To repeat, the VAT is a tax imposed on consumption, not on business. Although respondent
as an entity is exempt, the transactions it enters into are not necessarily so. The VAT payments made in excess of the
zero rate that is imposable may certainly be refunded or credited.

SO ORDERED.
34 CIR VS CENTRAL LUZON DRUG CORPORATION
he 20 percent discount required by the law to be given to senior citizens is a tax credit, not merely a tax
deduction from the gross income or gross sale of the establishment concerned. A tax credit is used by a private
establishment only after the tax has been computed; a tax deduction, before the tax is computed. RA 7432
unconditionally grants a tax credit to all covered entities. Thus, the provisions of the revenue regulation that withdraw
or modify such grant are void. Basic is the rule that administrative regulations cannot amend or revoke the law.

WHEREFORE, premises considered, the Resolution appealed from is AFFIRMED in toto. No costs.[4]

The CA affirmed in toto the Resolution of the Court of Tax Appeals (CTA) ordering petitioner to issue a tax credit
certificate in favor of respondent in the reduced amount of P903,038.39. It reasoned that Republic Act No. (RA) 7432
required neither a tax liability nor a payment of taxes by private establishments prior to the availment of a tax credit.
Moreover, such credit is not tantamount to an unintended benefit from the law, but rather a just compensation for the
taking of private property for public use.
Hence this Petition.[8]
The Issues
Petitioner raises the following issues for our consideration:

The assailed Resolution denied petitioners Motion for Reconsideration.

Whether the Court of Appeals erred in holding that respondent may claim the 20% sales discount as a tax credit
instead of as a deduction from gross income or gross sales.

The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to set aside the August 29, 2002
Decision[2] and the August 11, 2003 Resolution[3] of the Court of Appeals (CA) in CA-GR SP No. 67439. The assailed
Decision reads as follows:

The Facts
The CA narrated the antecedent facts as follows:
Respondent is a domestic corporation primarily engaged in retailing of medicines and other pharmaceutical products.
In 1996, it operated six (6) drugstores under the business name and style Mercury Drug.
From January to December 1996, respondent granted twenty (20%) percent sales discount to qualified senior citizens
on their purchases of medicines pursuant to Republic Act No. [R.A.] 7432 and its Implementing Rules and Regulations.
For the said period, the amount allegedly representing the 20% sales discount granted by respondent to qualified
senior citizens totaled P904,769.00.
On April 15, 1997, respondent filed its Annual Income Tax Return for taxable year 1996 declaring therein that it
incurred net losses from its operations.
On January 16, 1998, respondent filed with petitioner a claim for tax refund/credit in the amount of P904,769.00
allegedly arising from the 20% sales discount granted by respondent to qualified senior citizens in compliance with
[R.A.] 7432. Unable to obtain affirmative response from petitioner, respondent elevated its claim to the Court of Tax
Appeals [(CTA or Tax Court)] via a Petition for Review.
On February 12, 2001, the Tax Court rendered a Decision[5] dismissing respondents Petition for lack of merit. In said
decision, the [CTA] justified its ruling with the following ratiocination:
x x x, if no tax has been paid to the government, erroneously or illegally, or if no amount is due and collectible from
the taxpayer, tax refund or tax credit is unavailing. Moreover, whether the recovery of the tax is made by means of a
claim for refund or tax credit, before recovery is allowed[,] it must be first established that there was an actual
collection and receipt by the government of the tax sought to be recovered. x x x.
xxxxxxxxx
Prescinding from the above, it could logically be deduced that tax credit is premised on the existence of tax liability on
the part of taxpayer. In other words, if there is no tax liability, tax credit is not available.
Respondent lodged a Motion for Reconsideration. The [CTA], in its assailed resolution, [6] granted respondents motion
for reconsideration and ordered herein petitioner to issue a Tax Credit Certificate in favor of respondent citing the
decision of the then Special Fourth Division of [the CA] in CA G.R. SP No. 60057 entitled Central [Luzon] Drug
Corporation vs. Commissioner of Internal Revenue promulgated on May 31, 2001, to wit:
However, Sec. 229 clearly does not apply in the instant case because the tax sought to be refunded or credited by
petitioner was not erroneously paid or illegally collected. We take exception to the CTAs sweeping but unfounded
statement that both tax refund and tax credit are modes of recovering taxes which are either erroneously or illegally
paid to the government. Tax refunds or credits do not exclusively pertain to illegally collected or erroneously paid taxes
as they may be other circumstances where a refund is warranted. The tax refund provided under Section 229 deals
exclusively with illegally collected or erroneously paid taxes but there are other possible situations, such as the refund
of excess estimated corporate quarterly income tax paid, or that of excess input tax paid by a VAT-registered person,
or that of excise tax paid on goods locally produced or manufactured but actually exported. The standards and
mechanics for the grant of a refund or credit under these situations are different from that under Sec. 229. Sec. 4[.a)]
of R.A. 7432, is yet another instance of a tax credit and it does not in any way refer to illegally collected or erroneously
paid taxes, x x x.[7]

Ruling of the Court of Appeals

Whether the Court of Appeals erred in holding that respondent is entitled to a refund.[9]
These two issues may be summed up in only one: whether respondent, despite incurring a net loss, may still claim the
20 percent sales discount as a tax credit
The Courts Ruling
The Petition is not meritorious.
Sole Issue:
Claim of 20 Percent Sales Discount
as Tax Credit Despite Net LossSection 4a) of RA 7432[10] grants to senior citizens the privilege of obtaining a 20
percent discount on their purchase of medicine from any private establishment in the country.[11] The latter may then
claim the cost of the discount as a tax credit.[12] But can such credit be claimed, even though an establishment
operates at a loss?
We answer in the affirmative.
Tax Credit versus
Tax Deduction
Although the term is not specifically defined in our Tax Code,[13] tax credit generally refers to an amount that is
subtracted directly from ones total tax liability.[14] It is an allowance against the tax itself[15] or a deduction from
what is owed[16] by a taxpayer to the government. Examples of tax credits are withheld taxes, payments of estimated
tax, and investment tax credits.[17]
Tax credit should be understood in relation to other tax concepts. One of these is tax deduction -- defined as a
subtraction from income for tax purposes,[18] or an amount that is allowed by law to reduce income prior to [the]
application of the tax rate to compute the amount of tax which is due. [19] An example of a tax deduction is any of the
allowable deductions enumerated in Section 34[20] of the Tax Code.
A tax credit differs from a tax deduction. On the one hand, a tax credit reduces the tax due, including -- whenever
applicable -- the income tax that is determined after applying the corresponding tax rates to taxable income.[21] Atax
deduction, on the other, reduces the income that is subject to tax[22] in order to arrive at taxable income.[23] To think
of the former as the latter is to avoid, if not entirely confuse, the issue. A tax credit is used only after the tax has been
computed; a tax deduction, before.
Tax Liability Required
for Tax Credit
Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax liability before the tax
creditcan be applied. Without that liability, any tax credit application will be useless. There will be no reason for
deducting the latter when there is, to begin with, no existing obligation to the government. However, as will be
presented shortly, the existence of a tax credit or its grant by law is not the same as the availment or use of such
credit. While the grant is mandatory, the availment or use is not.
If a net loss is reported by, and no other taxes are currently due from, a business establishment, there will obviously
be no tax liability against which any tax credit can be applied.[24] For the establishment to choose the immediate
availment of a tax credit will be premature and impracticable. Nevertheless, the irrefutable fact remains that, under RA
7432, Congress has granted without conditions a tax credit benefit to all covered establishments.
Although this tax credit benefit is available, it need not be used by losing ventures, since there is no tax liability that
calls for its application. Neither can it be reduced to nil by the quick yet callow stroke of an administrative pen, simply
because no reduction of taxes can instantly be effected. By its nature, the tax credit may still be deducted from
a future, not a present, tax liability, without which it does not have any use. In the meantime, it need not move. But it
breathes.
Prior Tax Payments Not
Required for Tax Credit
While a tax liability is essential to the availment or use of any tax credit, prior tax payments are not. On the contrary,
for the existence or grant solely of such credit, neither a tax liability nor a prior tax payment is needed. The Tax Code
is in fact replete with provisions granting or allowing tax credits, even though no taxes have been previously paid.
For example, in computing the estate tax due, Section 86(E) allows a tax credit -- subject to certain limitations -- for
estate taxes paid to a foreign country. Also found in Section 101(C) is a similar provision for donors taxes -- again when

paid to a foreign country -- in computing for the donors tax due. The tax credits in both instances allude to the prior
payment of taxes, even if not made to our government.
Under Section 110, a VAT (Value-Added Tax)- registered person engaging in transactions -- whether or not subject to
the VAT -- is also allowed a tax credit that includes a ratable portion of any input tax not directly attributable to either
activity. This input tax may either be the VAT on the purchase or importation of goods or services that is merely due
from -- not necessarily paid by -- such VAT-registered person in the course of trade or business; or the transitional input
tax determined in accordance with Section 111(A). The latter type may in fact be an amount equivalent to only eight
percent of the value of a VAT-registered persons beginning inventory of goods, materials and supplies, when such
amount -- as computed -- is higher than the actual VAT paid on the said items.[25] Clearly from this provision, the tax
credit refers to an input tax that is either due only or given a value by mere comparison with the VAT actually paid -then later prorated. No tax is actually paid prior to the availment of such credit.
In Section 111(B), a one and a half percent input tax credit that is merely presumptive is allowed. For the purchase of
primary agricultural products used as inputs -- either in the processing of sardines, mackerel and milk, or in the
manufacture of refined sugar and cooking oil -- and for the contract price of public work contracts entered into with the
government, again, no prior tax payments are needed for the use of the tax credit.
More important, a VAT-registered person whose sales are zero-rated or effectively zero-rated may, under Section
112(A), apply for the issuance of a tax credit certificate for the amount of creditable input taxes merely due -- again
not necessarily paid to -- the government and attributable to such sales, to the extent that the input taxes have not
been
applied
against
output
taxes.[26] Where
a
taxpayer
is engaged in zero-rated or effectively zero-rated sales and also in taxable or exempt sales, the amount of creditable
input taxes due that are not directly and entirely attributable to any one of these transactions shall be proportionately
allocated on the basis of the volume of sales. Indeed, in availing of such tax credit for VAT purposes, this provision -- as
well as the one earlier mentioned -- shows that the prior payment of taxes is not a requisite.
It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of a tax credit allowed, even though
no prior tax payments are not required. Specifically, in this provision, the imposition of a final withholding tax rate on
cash and/or property dividends received by a nonresident foreign corporation from a domestic corporation is subjected
to the condition that a foreign tax credit will be given by the domiciliary country in an amount equivalent to taxes that
are merely deemed paid.[27] Although true, this provision actually refers to the tax credit as a condition only for the
imposition of a lower tax rate, not as a deduction from the corresponding tax liability. Besides, it is not our government
but the domiciliary country that credits against the income tax payable to the latter by the foreign corporation, the tax
to be foregone or spared.[28]
In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows as credits, against the income tax
imposable under Title II, the amount of income taxes merely incurred -- not necessarily paid -- by a domestic
corporation during a taxable year in any foreign country. Moreover, Section 34(C)(5) provides that for such taxes
incurred but not paid, a tax credit may be allowed, subject to the condition precedent that the taxpayer shall simply
give a bond with sureties satisfactory to and approved by petitioner, in such su as may be required; and further
conditioned upon payment by the taxpayer of any tax found due, upon petitioners redetermination of it.
In addition to the above-cited provisions in the Tax Code, there are also tax treaties and special laws that grant or
allow tax credits, even though no prior tax payments have been made.
Under the treaties in which the tax credit method is used as a relief to avoid double taxation, income that is taxed in
the state of source is also taxable in the state of residence, but the tax paid in the former is merely allowed as a credit
against the tax levied in the latter.[29] Apparently, payment is made to the state of source, not the state of residence.
No tax, therefore, has been previously paid to the latter.
Under special laws that particularly affect businesses, there can also be tax credit incentives. To illustrate, the
incentives provided for in Article 48 of Presidential Decree No. (PD) 1789, as amended by Batas Pambansa Blg. (BP)
391, include tax credits equivalent to either five percent of the net value earned, or five or ten percent of the net local
content of exports.[30] In order to avail of such credits under the said law and still achieve its objectives, no prior tax
payments are necessary.
From all the foregoing instances, it is evident that prior tax payments are not indispensable to the availment of a tax
credit. Thus, the CA correctly held that the availment under RA 7432 did not require prior tax payments by private
establishments concerned.[31] However, we do not agree with its finding[32] that the carry-over of tax creditsunder
the said special law to succeeding taxable periods, and even their application against internal revenue taxes, did not
necessitate the existence of a tax liability
The examples above show that a tax liability is certainly important in the availment or use, not the existence or grant,
of a tax credit. Regarding this matter, a private establishment reporting a net loss in its financial statements is no
different from another that presents a net income. Both are entitled to the tax credit provided for under RA 7432, since
the law itself accords that unconditional benefit. However, for the losing establishment to immediately apply such
credit, where no tax is due, will be an improvident usance.
Sections 2.i and 4 of Revenue
Regulations No. 2-94 Erroneous
RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts they grant.[33] In
turn, the Implementing Rules and Regulations, issued pursuant thereto, provide the procedures for its availment.
[34] To deny such credit, despite the plain mandate of the law and the regulations carrying out that mandate, is
indefensible.
First, the definition given by petitioner is erroneous. It refers to tax credit as the amount representing the 20 percent
discount that shall be deducted by the said establishments from their gross income for income tax purposes and from

their gross sales for value-added tax or other percentage tax purposes.[35] In ordinary business language, thetax
credit represents the amount of such discount. However, the manner by which the discount shall be credited against
taxes has not been clarified by the revenue regulations.
By ordinary acceptation, a discount is an abatement or reduction made from the gross amount or value of anything.
[36] To be more precise, it is in business parlance a deduction or lowering of an amount of money; [37] or a reduction
from the full amount or value of something, especially a price.[38] In business there are many kinds of discount, the
most common of which is that affecting the income statement[39] or financial report upon which theincome tax is
based.
Business Discounts
Deducted from Gross Sales
A cash discount, for example, is one granted by business establishments to credit customers for their prompt
payment.[40] It is a reduction in price offered to the purchaser if payment is made within a shorter period of time than
the maximum time specified.[41] Also referred to as a sales discount on the part of the seller and a purchase
discount on the part of the buyer, it may be expressed in such terms as 5/10, n/30.[42]
A quantity discount, however, is a reduction in price allowed for purchases made in large quantities, justified by
savings in packaging, shipping, and handling.[43] It is also called a volume or bulk discount.[44]
A percentage reduction from the list price x x x allowed by manufacturers to wholesalers and by wholesalers to
retailers[45] is known as a trade discount. No entry for it need be made in the manual or computerized books of
accounts, since the purchase or sale is already valued at the net price actually charged the buyer.[46] The purpose for
the discount is to encourage trading or increase sales, and the prices at which the purchased goods may be resold are
also suggested.[47] Even a chain discount -- a series of discounts from one list price -- is recorded at net.[48]
Finally, akin to a trade discount is a functional discount. It is a suppliers price discount given to a purchaser based on
the [latters] role in the [formers] distribution system.[49] This role usually involves warehousing or advertising.
Based on this discussion, we find that the nature of a sales discount is peculiar. Applying generally accepted
accounting principles (GAAP) in the country, this type of discount is reflected in the income statement[50] as a line
item deducted -- along with returns, allowances, rebates and other similar expenses -- from gross sales to arrive atnet
sales.[51] This type of presentation is resorted to, because the accounts receivable and sales figures that arise
from sales discounts, -- as well as from quantity, volume or bulk discounts -- are recorded in the manual and
computerized books of accounts and reflected in the financial statements at the gross amounts of the invoices.
[52]This manner of recording credit sales -- known as the gross method -- is most widely used, because it is simple,
more convenient to apply than the net method, and produces no material errors over time.[53]
However, under the net method used in recording trade, chain or functional discounts, only the net amounts of the
invoices -- after the discounts have been deducted -- are recorded in the books of accounts[54] and reflected in the
financial statements. A separate line item cannot be shown,[55] because the transactions themselves involving
bothaccounts receivable and sales have already been entered into, net of the said discounts.
The term sales discounts is not expressly defined in the Tax Code, but one provision adverts to amounts whose sum -along with sales returns, allowances and cost of goods sold[56] -- is deducted from gross sales to come up with
the gross income, profit or margin[57] derived from business.[58] In another provision therein, sales discounts that are
granted and indicated in the invoices at the time of sale -- and that do not depend upon the happening of any future
event -- may be excluded from the gross sales within the same quarter they were given.[59] While determinative only
of the VAT, the latter provision also appears as a suitable reference point for income tax purposes already embraced in
the former. After all, these two provisions affirm that sales discounts are amounts that are always deductible
from gross sales.
Reason for the Senior Citizen Discount:
The Law, Not Prompt Payment
A distinguishing feature of the implementing rules of RA 7432 is the private establishments outright deduction of the
discount from the invoice price of the medicine sold to the senior citizen.[60] It is, therefore, expected that for each
retail sale made under this law, the discount period lasts no more than a day, because such discount is given -- and
the net amount thereof collected -- immediately upon perfection of the sale. [61] Although prompt payment is made for
an arms-length transaction by the senior citizen, the real and compelling reason for the private establishment giving
the discount is that the law itself makes it mandatory.
What RA 7432 grants the senior citizen is a mere discount privilege, not a sales discount or any of the above discounts
in particular. Prompt payment is not the reason for (although a necessary consequence of) such grant. To be sure, the
privilege enjoyed by the senior citizen must be equivalent to the tax credit benefit enjoyed by the private
establishment granting the discount. Yet, under the revenue regulations promulgated by our tax authorities, this
benefit has been erroneously likened and confined to a sales discount.
To a senior citizen, the monetary effect of the privilege may be the same as that resulting from a sales discount.
However, to a private establishment, the effect is different from a simple reduction in price that results from such
discount. In other words, the tax credit benefit is not the same as a sales discount. To repeat from our earlier
discourse, this benefit cannot and should not be treated as a tax deduction.
To stress, the effect of a sales discount on the income statement and income tax return of an establishment covered
by RA 7432 is different from that resulting from the availment or use of its tax credit benefit. While the former is a
deduction before, the latter is a deduction after, the income tax is computed. As mentioned earlier, a discount is not
necessarily a sales discount, and a tax credit for a simple discount privilege should not be automatically treated like
a sales discount. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not distinguish, we ought
not to distinguish.

Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent discount deductible
from gross income for income tax purposes, or from gross sales for VAT or other percentage tax purposes. In effect,
the tax credit benefit under RA 7432 is related to a sales discount. This contrived definition is improper, considering
that the latter has to be deducted from gross sales in order to compute the gross income in the income statement and
cannot be deducted again, even for purposes of computing the income tax.
When the law says that the cost of the discount may be claimed as a tax credit, it means that the amount -- when
claimed -- shall be treated as a reduction from any tax liability, plain and simple. The option to avail of the tax
credit benefit depends upon the existence of a tax liability, but to limit the benefit to a sales discount -- which is not
even identical to the discount privilege that is granted by law -- does not define it at all and serves no useful purpose.
The definition must, therefore, be stricken down.
Laws Not Amended
by Regulations
Second, the law cannot be amended by a mere regulatin. In fact, a regulation that operates to create a rule out of
harmony
with
the statute is a mere nullity;[62] it cannot prevail.
It is a cardinal rule that courts will and should respect the contemporaneous construction placed upon a statute by the
executive officers whose duty it is to enforce it x x x.[63] In the scheme of judicial tax administration, the need for
certainty and predictability in the implementation of tax laws is crucial.[64] Our tax authorities fill in the details that
Congress may not have the opportunity or competence to provide.[65] The regulations these authorities issue are
relied upon by taxpayers, who are certain that these will be followed by the courts.[66] Courts, however, will not
uphold these authorities interpretations when clearly absurd, erroneous or improper.
In the present case, the tax authorities have given the term tax credit in Sections 2.i and 4 of RR 2-94 a meaning
utterly in contrast to what RA 7432 provides. Their interpretation has muddled up the intent of Congress in granting a
mere discount privilege, not a sales discount. The administrative agency issuing these regulations may not enlarge,
alter or restrict the provisions of the law it administers; it cannot engraft additional requirements not contemplated by
the legislature.[67]
In case of conflict, the law must prevail.[68] A regulation adopted pursuant to law is law.[69] Conversely, a regulation
or any portion thereof not adopted pursuant to law is no law and has neither the force nor the effect of law.[70]
Availment of Tax
Credit Voluntary
Third,
the
word may in
the
text
of
the
statute[71] implies
that
the
availability of the tax credit benefit is neither unrestricted nor mandatory.[72] There is no absolute right conferred
upon respondent, or any similar taxpayer, to avail itself of the tax credit remedy whenever it chooses; neither does it
impose a duty on the part of the government to sit back and allow an important facet of tax collection to be at the sole
control and discretion of the taxpayer.[73] For the tax authorities to compel respondent to deduct the 20 percent
discount from either its gross income or its gross sales[74] is, therefore, not only to make an imposition without basis
in law, but also to blatantly contravene the law itself.
What Section 4.a of RA 7432 means is that the tax credit benefit is merely permissive, not imperative. Respondent is
given two options -- either to claim or not to claim the cost of the discounts as a tax credit. In fact, it may even ignore
the credit and simply consider the gesture as an act of beneficence, an expression of its social conscience.
Granting that there is a tax liability and respondent claims such cost as a tax credit, then the tax credit can easily be
applied. If there is none, the credit cannot be used and will just have to be carried over and revalidated [75]accordingly.
If, however, the business continues to operate at a loss and no other taxes are due, thus compelling it to close shop,
the credit can never be applied and will be lost altogether.
In other words, it is the existence or the lack of a tax liability that determines whether the cost of the discounts can be
used as a tax credit. RA 7432 does not give respondent the unfettered right to avail itself of the credit whenever it
pleases. Neither does it allow our tax administrators to expand or contract the legislative mandate. The plain meaning
rule or verba legis in statutory construction is thus applicable x x x. Where the words of a statute are clear, plain and
free from ambiguity, it must be given its literal meaning and applied without attempted interpretation.[76]
Tax Credit Benefit
Deemed Just Compensation
Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State of its power of eminent domain. Be it stressed that
the privilege enjoyed by senior citizens does not come directly from the State, but rather from the private
establishments concerned. Accordingly, the tax credit benefit granted to these establishments can be deemed as
their just compensation for private property taken by the State for public use.[77]
The concept of public use is no longer confined to the traditional notion of use by the public, but held synonymous
with public interest, public benefit, public welfare, and public convenience.[78] The discount privilege to which our
senior citizens are entitled is actually a benefit enjoyed by the general public to which these citizens belong. The
discounts given would have entered the coffers and formed part of the gross sales of the private establishments
concerned, were it not for RA 7432. The permanent reduction in their total revenues is a forced subsidy corresponding
to the taking of private property for public use or benefit.

As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just compensation. This
term refers not only to the issuance of a tax credit certificate indicating the correct amount of the discounts given, but
also to the promptness in its release. Equivalent to the payment of property taken by the State, such issuance -- when
not done within a reasonable time from the grant of the discounts -- cannot be considered as just compensation. In
effect, respondent is made to suffer the consequences of being immediately deprived of its revenues while awaiting
actual receipt, through the certificate, of the equivalent amount it needs to cope with the reduction in its revenues.
[79]
Besides, the taxation power can also be used as an implement for the exercise of the power of eminent domain.
[80]Tax measures are but enforced contributions exacted on pain of penal sanctions[81] and clearly imposed for
apublic purpose.[82] In recent years, the power to tax has indeed become a most effective tool to realize social
justice, public welfare, and the equitable distribution of wealth.[83]
While it is a declared commitment under Section 1 of RA 7432, social justice cannot be invoked to trample on the
rights of property owners who under our Constitution and laws are also entitled to protection. The social justice
consecrated in our [C]onstitution [is] not intended to take away rights from a person and give them to another who is
not entitled thereto.[84] For this reason, a just compensation for income that is taken away from respondent becomes
necessary. It is in the tax credit that our legislators find support to realize social justice, and no administrative body
can alter that fact.
To put it differently, a private establishment that merely breaks even[85] -- without the discounts yet -- will surely start
to incur losses because of such discounts. The same effect is expected if its mark-up is less than 20 percent, and if all
its sales come from retail purchases by senior citizens. Aside from the observation we have already raised earlier, it
will also be grossly unfair to an establishment if the discounts will be treated merely as deductions from either
its gross income or its gross sales. Operating at a loss through no fault of its own, it will realize that the tax
credit limitation under RR 2-94 is inutile, if not improper. Worse, profit-generating businesses will be put in a better
position if they avail themselves of tax credits denied those that are losing, because no taxes are due from the latter.
Grant of Tax Credit
Intended by the Legislature
Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens are assisted by the community as a whole and to
establish a program beneficial to them.[86] These objectives are consonant with the constitutional policy of making
health x x x services available to all the people at affordable cost[87] and of giving priority for the needs of the x x x
elderly.[88] Sections 2.i and 4 of RR 2-94, however, contradict these constitutional policies and statutory objectives.
Furthermore, Congress has allowed all private establishments a simple tax credit, not a deduction. In fact, no cash
outlay is required from the government for the availment or use of such credit. The deliberations on February 5, 1992
of the Bicameral Conference Committee Meeting on Social Justice, which finalized RA 7432, disclose the true intent of
our legislators to treat the sales discounts as a tax credit, rather than as a deduction from gross income. We quote
from those deliberations as follows:
"THE CHAIRMAN (Rep. Unico). By the way, before that ano, about deductions from taxable income. I think we
incorporated there a provision na - on the responsibility of the private hospitals and drugstores, hindi ba?
SEN. ANGARA. Oo.
THE CHAIRMAN. (Rep. Unico), So, I think we have to put in also a provision here about the deductions from taxable
income of that private hospitals, di ba ganon 'yan?
MS. ADVENTO. Kaya lang po sir, and mga discounts po nila affecting government and public institutions, so, puwede
na po nating hindi isama yung mga less deductions ng taxable income.
THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private hospitals. Yung isiningit natin?
MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did not use the microphone).
SEN. ANGARA. Hindi pa, hindi pa.
THE CHAIRMAN. (Rep. Unico) Ah, 'di pa ba naisama natin?
SEN. ANGARA. Oo. You want to insert that?
THE CHAIRMAN (Rep. Unico). Yung ang proposal ni Senator Shahani, e.
SEN. ANGARA. In the case of private hospitals they got the grant of 15% discount, provided that, the private hospitals
can claim the expense as a tax credit.
REP. AQUINO. Yah could be allowed as deductions in the perpetrations of (inaudible) income.
SEN. ANGARA. I-tax credit na lang natin para walang cash-out ano?

REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng establishments na covered.
THE CHAIRMAN. (Rep. Unico). Sa kuwan lang yon, as private hospitals lang.
REP. AQUINO. Ano ba yung establishments na covered?
SEN. ANGARA. Restaurant lodging houses, recreation centers.
REP. AQUINO. All establishments covered siguro?

The petitioner seeks the reversal of the Decision[1] of the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799
affirming the 3 January 2000 Decision[2] of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5328,[3] which held that
the respondent Estate of Benigno P. Toda, Jr. is not liable for the deficiency income tax of Cibeles Insurance Corporation
(CIC) in the amount of P79,099,999.22 for the year 1989, and ordered the cancellation and setting aside of the
assessment issued by Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January 1995.
The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal Revenue for
deficiency income tax arising from an alleged simulated sale of a 16-storey commercial building known as Cibeles
Building, situated on two parcels of land on Ayala Avenue, Makati City.

SEN. ANGARA. From all establishments. Alisin na natin 'Yung kuwan kung ganon. Can we go back to Section 4 ha?
REP. AQUINO. Oho.
SEN. ANGARA. Letter A. To capture that thought, we'll say the grant of 20% discount from all establishments et cetera,
et cetera, provided that said establishments - provided that private establishments may claim the cost as a tax credit.
Ganon ba 'yon?
REP. AQUINO. Yah.

On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and outstanding
capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands for an amount of not
less than P90 million.[4]
On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A. Altonaga, who, in turn, sold the
same property on the same day to Royal Match Inc. (RMI) for P200 million. These two transactions were evidenced by
Deeds of Absolute Sale notarized on the same day by the same notary public.[5]

SEN. ANGARA. Dahil kung government, they don't need to claim it.
For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million.[6]

THE CHAIRMAN. (Rep. Unico). Tax credit.

SEN. ANGARA. As a tax credit [rather] than a kuwan - deduction, Okay.
REP. AQUINO Okay.
SEN. ANGARA. Sige Okay. Di subject to style na lang sa Letter A".[89]

Special Law
Over General Law
Sixth and last, RA 7432 is a special law that should prevail over the Tax Code -- a general law. x x x [T]he rule is that
on
a
specific
matter
the
special
law
shall
prevail
over
the
general
law,
which
shall
be resorted to only to supply deficiencies in the former.[90] In addition, [w]here there are two statutes, the earlier
special and the later general -- the terms of the general broad enough to include the matter provided for in the special
-- the fact that one is special and the other is general creates a presumption that the special is to be considered as
remaining an exception to the general,[91] one as a general law of the land, the other as the law of a particular case.
[92] It is a canon of statutory construction that a later statute, general in its terms and not expressly repealing a prior
special statute, will ordinarily not affect the special provisions of such earlier statute.[93]
RA 7432 is an earlier law not expressly repealed by, and therefore remains an exception to, the Tax Code -- a later law.
When the former states that a tax credit may be claimed, then the requirement of prior tax payments under certain
provisions of the latter, as discussed above, cannot be made to apply. Neither can the instances of or references to
a tax deduction under the Tax Code[94] be made to restrict RA 7432. No provision of any revenue regulation can
supplant or modify the acts of Congress.
WHEREFORE, the Petition is hereby DENIED. The assailed Decision and Resolution of the Court of AppealsAFFIRMED. No pronouncement as
to costs.
SO ORDERED.
35 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE ESTATE OF BENIGNO P. TODA, JR.,
Represented by Special Co-administrators Lorna Kapunan and Mario Luza Bautista, respondents.

On 16 April 1990, CIC filed its corporate annual income tax return[7] for the year 1989, declaring, among other things,
its gain from the sale of real property in the amount of P75,728.021. After crediting withholding taxes of P254,497.00,
it paid P26,341,207[8] for its net taxable income of P75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 million, as evidenced by a
Deed of Sale of Shares of Stocks.[9] Three and a half years later, or on 16 January 1994, Toda died.
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice[10] and demand letter to the CIC
for deficiency income tax for the year 1989 in the amount of P79,099,999.22.
The new CIC asked for a reconsideration, asserting that the assessment should be directed against the old CIC, and
not against the new CIC, which is owned by an entirely different set of stockholders; moreover, Toda had undertaken to
hold the buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal years 1987-1989.[11]
On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators Lorna Kapunan and
Mario Luza Bautista, received a Notice of Assessment[12] dated 9 January 1995 from the Commissioner of Internal
Revenue for deficiency income tax for the year 1989 in the amount of P79,099,999.22, computed as follows:
The Estate thereafter filed a letter of protest.[13]
In the letter dated 19 October 1995,[14] the Commissioner dismissed the protest, stating that a fraudulent scheme
was deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the additional gain
of P100 million, which resulted in the change in the income structure of the proceeds of the sale of the two parcels of
land and the building thereon to an individual capital gains, thus evading the higher corporate income tax rate of 35%.
On 15 February 1996, the Estate filed a petition for review[15] with the CTA alleging that the Commissioner erred in
holding the Estate liable for income tax deficiency; that the inference of fraud of the sale of the properties is
unreasonable and unsupported; and that the right of the Commissioner to assess CIC had already prescribed.

DECISION
DAVIDE, JR., C.J.:

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

In his Answer[16] and Amended Answer,[17] the Commissioner argued that the two transactions actually constituted a
single sale of the property by CIC to RMI, and that Altonaga was neither the buyer of the property from CIC nor the
seller of the same property to RMI. The additional gain of P100 million (the difference between the second simulated
sale for P200 million and the first simulated sale for P100 million) realized by CIC was taxed at the rate of only 5%
purportedly as capital gains tax of Altonaga, instead of at the rate of 35% as corporate income tax of CIC. The income
tax return filed by CIC for 1989 with intent to evade payment of the tax was thus false or fraudulent. Since such falsity
or fraud was discovered by the BIR only on 8 March 1991, the assessment issued on 9 January 1995 was well within
the prescriptive period prescribed by Section 223 (a) of the National Internal Revenue Code of 1986, which provides
that tax may be assessed within ten years from the discovery of the falsity or fraud. With the sale being tainted with

fraud, the separate corporate personality of CIC should be disregarded. Toda, being the registered owner of the
99.991% shares of stock of CIC and the beneficial owner of the remaining 0.009% shares registered in the name of the
individual directors of CIC, should be held liable for the deficiency income tax, especially because the gains realized
from the sale were withdrawn by him as cash advances or paid to him as cash dividends. Since he is already dead, his
estate shall answer for his liability.
In its decision[18] of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC committed fraud to
deprive the government of the taxes due it. It ruled that even assuming that a pre-conceived scheme was adopted by
CIC, the same constituted mere tax avoidance, and not tax evasion. There being no proof of fraudulent transaction,
the applicable period for the BIR to assess CIC is that prescribed in Section 203 of the NIRC of 1986, which is three
years after the last day prescribed by law for the filing of the return. Thus, the governments right to assess CIC
prescribed on 15 April 1993. The assessment issued on 9 January 1995 was, therefore, no longer valid. The CTA also
ruled that the mere ownership by Toda of 99.991% of the capital stock of CIC was not in itself sufficient ground for
piercing the separate corporate personality of CIC. Hence, the CTA declared that the Estate is not liable for deficiency
income tax of P79,099,999.22 and, accordingly, cancelled and set aside the assessment issued by the Commissioner
on 9 January 1995.
In its motion for reconsideration,[19] the Commissioner insisted that the sale of the property owned by CIC was the
result of the connivance between Toda and Altonaga. She further alleged that the latter was a representative, dummy,
and a close business associate of the former, having held his office in a property owned by CIC and derived his salary
from a foreign corporation (Aerobin, Inc.) duly owned by Toda for representation services rendered. The CTA
denied[20] the motion for reconsideration, prompting the Commissioner to file a petition for review [21] with the Court
of Appeals.
In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the CTA, reasoning that the
CTA, being more advantageously situated and having the necessary expertise in matters of taxation, is better situated
to determine the correctness, propriety, and legality of the income tax assessments assailed by the Toda Estate.[22]
Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition invoking the
following grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO FRAUD WITH INTENT TO EVADE THE
TAX ON THE SALE OF THE PROPERTIES OF CIBELES INSURANCE CORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE PERSONALITY OF CIBELES
INSURANCE CORPORATION.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER TO ASSESS RESPONDENT FOR
DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD PRESCRIBED.
The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by CIC of the Cibeles
property was in connivance with its dummy Rafael Altonaga, who was financially incapable of purchasing it. She
further points out that the documents themselves prove the fact of fraud in that (1) the two sales were done
simultaneously on the same date, 30 August 1989; (2) the Deed of Absolute Sale between Altonaga and RMI was
notarized ahead of the alleged sale between CIC and Altonaga, with the former registered in the Notarial Register of
Jocelyn H. Arreza Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc. No. 92, Page 20, Book I,
Series of 1989, of the same Notary Public; (3) as early as 4 May 1989, CIC received P40 million from RMI, and not from
Altonaga. The said amount was debited by RMI in its trial balance as of 30 June 1989 as investment in Cibeles Building.
The substantial portion ofP40 million was withdrawn by Toda through the declaration of cash dividends to all its
stockholders.
For its part, respondent Estate asserts that the Commissioner failed to present the income tax return of Altonaga to
prove that the latter is financially incapable of purchasing the Cibeles property.
To resolve the grounds raised by the Commissioner, the following questions are pertinent:

We shall discuss these questions in seriatim.

Is this a case of tax evasion

or tax avoidance?

Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax
avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in
good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and
when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.[23]
Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that
known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an
accompanying state of mind which is described as being evil, in bad faith, willfull,or deliberate and not accidental; and
(3) a course of action or failure of action which is unlawful.[24]
All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior to the
purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC received P40 million from RMI,
[25] and not from Altonaga. That P40 million was debited by RMI and reflected in its trial balance[26] as other inv.
Cibeles Bldg. Also, as of 31 July 1989, another P40 million was debited and reflected in RMIs trial balance as other inv.
Cibeles Bldg. This would show that the real buyer of the properties was RMI, and not the intermediary Altonaga.
The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one of the many
trusted corporate executives of Toda. This information was revealed by Mr. Boy Prieto, the assistant accountant of CIC
and an old timer in the company. [27]But Mr. Prieto did not testify on this matter, hence, that information remains to
be hearsay and is thus inadmissible in evidence. It was not verified either, since the letter-request for investigation of
Altonaga was unserved,[28] Altonaga having left for the United States of America in January 1990. Nevertheless, that
Altonaga was a mere conduit finds support in the admission of respondent Estate that the sale to him was part of the
tax planning scheme of CIC. That admission is borne by the records. In its Memorandum, respondent Estate declared:
Petitioner, however, claims there was a change of structure of the proceeds of sale. Admitted one hundred percent.
But isnt this precisely the definition of tax planning? Change the structure of the funds and pay a lower tax. Precisely,
Sec. 40 (2) of the Tax Code exists, allowing tax free transfers of property for stock, changing the structure of the
property and the tax to be paid. As long as it is done legally, changing the structure of a transaction to achieve a lower
tax is not against the law. It is absolutely allowed.
Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic] cannot be faulted
for wanting to reduce the tax from 35% to 5%.[29] [Underscoring supplied].
The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from CIC to
Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted with
fraud.
Fraud in its general sense, is deemed to comprise anything calculated to deceive, including all acts, omissions, and
concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage
to another, or by which an undue and unconscionable advantage is taken of another.[30]
Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that
the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and not the 35%
corporate income tax. Altonagas sole purpose of acquiring and transferring title of the subject properties on the same
day was to create a tax shelter. Altonaga never controlled the property and did not enjoy the normal benefits and
burdens of ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and economic
substance. Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view of
reducing the consequent income tax liability.

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

2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and
3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if any?

In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the mitigation of
tax liabilities than for legitimate business purposes constitutes one of tax evasion.[31]

Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated. [32] The
incidence of taxation depends upon the substance of a transaction. The tax consequences arising from gains from a
sale of property are not finally to be determined solely by the means employed to transfer legal title. Rather, the
transaction must be viewed as a whole, and each step from the commencement of negotiations to the consummation
of the sale is relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by using
the latter as a conduit through which to pass title. To permit the true nature of the transaction to be disguised by mere
formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax
policies of Congress.[33]
To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct entity
when it is proved that the latter was merely a conduit is to sanction a circumvention of our tax laws. Hence, the sale to
Altonaga should be disregarded for income tax purposes.[34] The two sale transactions should be treated as a single
direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now 27 (A) of the
Tax Reform Act of 1997), which stated as follows:
Sec. 24. Rates of tax on corporations. (a) Tax on domestic corporations.- A tax is hereby imposed upon the
taxable net income received during each taxable year from all sources by every corporation organized in, or existing
under the laws of the Philippines, and partnerships, no matter how created or organized but not including general
professional partnerships, in accordance with the following:
Twenty-five percent upon the amount by which the taxable net income does not exceed one hundred thousand pesos;
and

Is respondent Estate liable

for the 1989 deficiency
income tax of Cibeles
Insurance Corporation?

A corporation has a juridical personality distinct and separate from the persons owning or composing it. Thus, the
owners or stockholders of a corporation may not generally be made to answer for the liabilities of a corporation and
vice versa. There are, however, certain instances in which personal liability may arise. It has been held in a number of
cases that personal liability of a corporate director, trustee, or officer along, albeit not necessarily, with the corporation
may validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in directing its
affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders, or other persons;
2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate action.[38]

Thirty-five percent upon the amount by which the taxable net income exceeds one hundred thousand pesos.
CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual capital gains
tax provided for in Section 34 (h) of the NIRC of 1986[35] (now 6% under Section 24 (D) (1) of the Tax Reform Act of
1997) is inapplicable. Hence, the assessment for the deficiency income tax issued by the BIR must be upheld.
Has the period of
assessment prescribed?

No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:
Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case of a
false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a
proceeding in court after the collection of such tax may be begun without assessment, at any time within ten years
after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and
executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for collection thereof .
Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file a
return, the period within which to assess tax is ten years from discovery of the fraud, falsification or omission, as the
case may be.

It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and voluntarily held
himself personally liable for all the tax liabilities of CIC and the buyer for the years 1987, 1988, and 1989. Paragraph g
of the Deed of Sale of Shares of Stocks specifically provides:
g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or obligations,
contingent or otherwise, for taxes, sums of money or insurance claims other than those reported in its audited
financial statement as of December 31, 1989, attached hereto as Annex B and made a part hereof. The business of
Cibeles has at all times been conducted in full compliance with all applicable laws, rules and regulations. SELLER
undertakes and agrees to hold the BUYER and Cibeles free from any and all income tax liabilities of
Cibeles for the fiscal years 1987, 1988 and 1989.[39] [Underscoring Supplied].
When the late Toda undertook and agreed to hold the BUYER and Cibeles free from any all income tax liabilities of
Cibeles for the fiscal years 1987, 1988, and 1989, he thereby voluntarily held himself personally liable therefor.
Respondent estate cannot, therefore, deny liability for CICs deficiency income tax for the year 1989 by invoking the
separate corporate personality of CIC, since its obligation arose from Todas contractual undertaking, as contained in
the Deed of Sale of Shares of Stock.
WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the Court of Appeals of 31
January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and another one is hereby rendered ordering
respondent Estate of Benigno P. Toda Jr. to pay P79,099,999.22 as deficiency income tax of Cibeles Insurance
Corporation for the year 1989, plus legal interest from 1 May 1994 until the amount is fully paid.
Costs against respondent.

It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of the BIR on the tax
consequence of the two sale transactions.[36] Thus, the BIR was amply informed of the transactions even prior to the
execution of the necessary documents to effect the transfer. Subsequently, the two sales were openly made with the
execution of public documents and the declaration of taxes for 1989. However, these circumstances do not negate the
existence of fraud. As earlier discussed those two transactions were tainted with fraud. And even
assuming arguendo that there was no fraud, we find that the income tax return filed by CIC for the year 1989 was
false. It did not reflect the true or actual amount gained from the sale of the Cibeles property. Obviously, such was
done with intent to evade or reduce tax liability.
As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years from the
discovery of the falsity. The false return was filed on 15 April 1990, and the falsity thereof was claimed to have been
discovered only on 8 March 1991.[37] The assessment for the 1989 deficiency income tax of CIC was issued on 9
January 1995. Clearly, the issuance of the correct assessment for deficiency income tax was well within the
prescriptive period.

SO ORDERED.