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TAX REMEDIES: CASES

Taxation II; Atty. Honoriza M. Lavista


WMSU LLB 3A S.Y. 2016-17

Table of Contents
1. PHILIPPINE NATIONAL OIL COMPANY vs CA
G.R. No. 109976; G.R. No. 112800 April 26, 2005 ........................................................................ 2
2. CIR vs ALBERTO D. BENIPAYO
G.R. No. L-13656; January 31, 1962 ............................................................................................. 78
3. CIR vs ENRON SUBIC POWER CORPORATION
G.R. No. 166387; January 19, 2009 .............................................................................................. 81
4. LUCAS G. ADAMSON, et al. vs COURT OF APPEALS
G.R. No. 120935; May 21, 2009 ................................................................................................... 87
5. BARCELON, ROXAS SECURITIES, INC. vs CIR
G. R. No. 157064; August 7, 2006 .............................................................................................. 107
6. QUIRICO P. UNGAB vs HON. VICENTE N. CUSI, JR.
G.R. No. L-41919-24; May 30, 1980 ........................................................................................... 116
7. CIR vs COURT OF APPEALS
G.R. No. 119322; June 4, 1996 ................................................................................................... 122
8. CIR vs PHIL. GLOBAL COMMUNICATION, INC.
G.R. No. 167146; October 31, 2006 ........................................................................................... 188
9. ANGELES CITY vs ANGELES CITY ELECTRIC CORPORATION
G.R. No. 166134; June 29, 2010 ................................................................................................. 201
10. SECURITY BANK CORPORATION vs CIR
G.R. No. 130838; August 22, 2006 ............................................................................................. 212
11. CIR vs FIRST EXPRESS PAWNSHOP COMPANY, INC.
G.R. Nos. 172045-46; June 16, 2009 .......................................................................................... 222
12. MICHEL J. LHUILLER Pawnshop, Inc. vs CIR
G.R. No. 166786; May 3, 2006 ................................................................................................... 241
13. CIR vs SONY PHILIPPINES, INC.
G.R. No. 178697; November 17, 2010 ....................................................................................... 250

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1. PHILIPPINE NATIONAL OIL COMPANY vs CA
G.R. No. 109976; G.R. No. 112800
April 26, 2005

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. 109976 April 26, 2005

PHILIPPINE NATIONAL OIL COMPANY, Petitioner,


vs.
THE HON. COURT OF APPEALS, THE COMMISSIONER OF INTERNAL REVENUE and TIRSO
SAVELLANO, Respondents.

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

G.R. No. 112800 April 26, 2005

PHILIPPINE NATIONAL BANK, Petitioner,


vs.
THE HON. COURT OF APPEALS, COURT OF TAX APPEALS, TIRSO B. SAVELLANO and
COMMISSIONER OF INTERNAL REVENUE, Respondents.

DECISION

CHICO-NAZARIO, J.:

This is a consolidation of two Petitions for Review on Certiorari filed by the Philippine National
Oil Company (PNOC)1 and the Philippine National Bank (PNB),<2 assailing the decisions of the
Court of Appeals in CA-G.R. SP No. 295833 and CA-G.R. SP No. 29526,4 respectively, which both
affirmed the decision of the Court of Tax Appeals (CTA) in CTA Case No. 4249.5

The Petitions before this Court originated from a sworn statement submitted by private
respondent Tirso B. Savellano (Savellano) to the Bureau of Internal Revenue (BIR) on 24 June
1986. Through his sworn statement, private respondent Savellano informed the BIR that PNB
had failed to withhold the 15% final tax on interest earnings and/or yields from the money
placements of PNOC with the said bank, in violation of Presidential Decree (P.D.) No. 1931. P.D.

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No. 1931, which took effect on 11 June 1984, withdrew all tax exemptions of government-owned
and controlled corporations.

In a letter, dated 08 August 1986, the BIR requested PNOC to settle its liability for taxes on the
interests earned by its money placements with PNB and which PNB did not withhold. 6 PNOC
wrote the BIR on 25 September 1986, and made an offer to compromise its tax liability, which it
estimated to be in the sum of P304,419,396.83, excluding interest and surcharges, as of 31 July
1986. PNOC proposed to set-off its tax liability against a claim for tax refund/credit of the
National Power Corporation (NAPOCOR), then pending with the BIR, in the amount
of P335,259,450.21. The amount of the claim for tax refund/credit was supposedly a receivable
account of PNOC from NAPOCOR.7

On 08 October 1986, the BIR sent a demand letter to PNB, as withholding agent, for the payment
of the final tax on the interest earnings and/or yields from PNOC's money placements with the
bank, from 15 October 1984 to 15 October 1986, in the total amount of P376,301,133.33.8 On
the same date, the BIR also mailed a letter to PNOC informing it of the demand letter sent to
PNB.9

PNOC, in another letter, dated 14 October 1986, reiterated its proposal to settle its tax liability
through the set-off of the said tax liability against NAPOCOR'S pending claim for tax
refund/credit.10 The BIR replied on 11 November 1986 that the proposal for set-off was
premature since NAPOCOR's claim was still under process. Once more, BIR requested PNOC to
settle its tax liability in the total amount of P385,961,580.82, consisting of P303,343,765.32 final
tax, plus P82,617,815.50 interest computed until 15 November 1986.11

On 09 June 1987, PNOC made another offer to the BIR to settle its tax liability. This time,
however, PNOC proposed a compromise by paying P91,003,129.89, representing 30% of
the P303,343,766.29 basic tax, in accordance with the provisions of Executive Order (E.O.) No.
44.12

Then BIR Commissioner Bienvenido A. Tan, in a letter, dated 22 June 1987, accepted the
compromise. The BIR received a total tax payment on the interest earnings and/or yields from
PNOC's money placements with PNB in the amount of P93,955,479.12, broken down as follows:

Previous payment made by PNB P 2,952,349.23


Add: Payment made by PNOC pursuant to the P 91,003,129.89
compromise agreement of June 22, 1987
Total tax payment P 93,955,479.1213

Private respondent Savellano, through four installments, was paid the informer's reward in the
total amount of P14,093,321.89, representing 15% of the P93,955,479.12 tax collected by the BIR
from PNOC and PNB. He received the last installment on 01 December 1987.14

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On 07 January 1988, private respondent Savellano, through his legal counsel, wrote the BIR to
demand payment of the balance of his informer's reward, computed as follows:

BIR tax assessment P 385,961,580.82


Final tax rate 0.15
Informer's reward due (BIR deficiency tax P 57,894,237.12
assessment x Final tax rate)
Less: Payment received by private respondent P 14,093,321.89
Savellano
Outstanding balance P 43,800,915.2515

BIR Commissioner Tan replied through a letter, dated 08 March 1988, that private respondent
Savellano was already fully paid the informer's reward equivalent to 15% of the amount of tax
actually collected by the BIR pursuant to its compromise agreement with PNOC. BIR
Commissioner Tan further explained that the compromise was in accordance with the provisions
of E.O. No. 44, Revenue Memorandum Order (RMO) No. 39-86, and RMO No. 4-87.16

Private respondent Savellano submitted another letter, dated 24 March 1988, to BIR
Commissioner Tan, seeking reconsideration of his decision to compromise the tax liability of
PNOC. In the same letter, private respondent Savellano questioned the legality of the
compromise agreement entered into by the BIR and PNOC and claimed that the tax liability
should have been collected in full.17

On 08 April 1988, while the aforesaid Motion for Reconsideration was still pending with the BIR,
private respondent Savellano filed a Petition for Review ad cautelam with the CTA, docketed as
CTA Case No. 4249. He claimed therein that BIR Commissioner Tan acted "with grave abuse of
discretion and/or whimsical exercise of jurisdiction" in entering into a compromise agreement
that resulted in "a gross and unconscionable diminution" of his reward. Private respondent
Savellano prayed for the enforcement and collection of the total tax assessment against taxpayer
PNOC and/or withholding agent PNB; and the payment to him by the BIR Commissioner of the
15% informer's reward on the total tax collected.18 He would later amend his Petition to implead
PNOC and PNB as necessary and indispensable parties since they were parties to the compromise
agreement.19

In his Answer filed with the CTA, BIR Commissioner Tan asserted that the Petition stated no cause
of action against him, and that private respondent Savellano was already paid the informer's
reward due him. Alleging that the Petition was baseless and malicious, BIR Commissioner Tan
filed a counterclaim for exemplary damages against private respondent Savellano. 20

PNOC and PNB filed separate Motions to Dismiss, both arguing that the CTA lacked jurisdiction
to decide the case.21 In its Resolution, dated 28 November 1988, the CTA denied the Motions to
Dismiss since the question of lack of jurisdiction and/or cause of action do not appear to be
indubitable.22

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After their Motions to Dismiss were denied by the CTA, PNOC and PNB filed their respective
Answers to the amended Petition. PNOC averred, among other things, that (1) it had no privity
with private respondent Savellano; (2) the BIR Commissioner's discretionary act in entering into
the compromise agreement had legal basis under E.O. No. 44 and RMO No. 39-86 and RMO No.
4-87; and (3) the CTA had no jurisdiction to resolve the case against it.23 On the other hand, PNB
asserted that (1) the CTA lacked jurisdiction over the case; and (2) the BIR Commissioner's
decision to accept the compromise was discretionary on his part and, therefore, cannot be
reviewed or interfered with by the courts.24 PNOC and PNB later filed their amended Answer
invoking an opinion of the Commission on Audit (COA) disallowing the payment by the BIR of
informer's reward to private respondent Savellano.25

The CTA, thereafter, ordered the parties to submit their evidence,26 to be followed by their
respective Memoranda.27

On 23 November 1990, private respondent Savellano, filed a Manifestation with Motion for
Suspension of Proceedings, claiming that his pending Motion for Reconsideration with the BIR
Commissioner may soon be resolved.28 Both PNOC and PNB opposed the said Motion.29

Subsequently, the new BIR Commissioner, Jose U. Ong, in a letter to PNB, dated 16 January 1991,
demanded that PNB pay deficiency withholding tax on the interest earnings and/or yields from
PNOC's money placements, in the amount of P294,958,450.73, computed as follows:

Withholding tax, plus interest under the letter P 385,961,580.82


of demand dated November 11, 1986
Less: Amount paid under E.O. No. 44 P 91,003,129.89
Amount still due and collectible P 294,958,450.7330

This BIR letter was received by PNB on 06 February 1991,31 and was protested by it through a
letter, dated 11 April 1991.32 The BIR denied PNB's protest on the ground that it was filed out of
time and, thus, the assessment had already become final.33

Private respondent Savellano, on 22 February 1991, filed an Omnibus Motion moving to


withdraw his previous Motion for Suspension of Proceeding since BIR Commissioner Ong had
finally resolved his Motion for Reconsideration, and submitting by way of supplemental offer of
evidence (1) the letter of BIR Commissioner Ong, dated 13 February 1991, informing private
respondent Savellano of the action on his Motion for Reconsideration; and (2) the demand-letter
of BIR Commissioner Ong to PNB, dated 16 January 1991.34

Despite the oppositions of PNOC and PNB, the CTA, in a Resolution, dated 02 May 1991, resolved
to allow private respondent Savellano to withdraw his previous Motion for Suspension of
Proceeding and to admit the supplementary evidence being offered by the same party. 35

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In its Order, dated 03 June 1991, the CTA considered the case submitted for decision as of the
following day, 04 June 1991.36

On 11 June 1991, PNB appealed to the Department of Justice (DOJ) the BIR assessment, dated 16
January 1991, for deficiency withholding tax in the sum of P294,958,450.73. PNB alleged that its
appeal to the DOJ was sanctioned under P.D. No. 242, which provided for the administrative
settlement of disputes between government offices, agencies, and instrumentalities, including
government-owned and controlled corporations.37

Three days later, on 14 June 1991, PNB filed a Motion to Suspend Proceedings before the CTA
since it had a pending appeal before the DOJ.38 On 04 July 1991, PNB filed with the CTA a Motion
for Reconsideration of its Order, dated 03 June 1991, submitting the case for decision as of 04
June 1991, and prayed that the CTA hold its resolution of the case in view of PNB's appeal pending
before the DOJ.39

On 17 July 1991, PNB filed a Motion to Suspend the Collection of Tax by the BIR. It alleged that
despite its request for reconsideration of the deficiency withholding tax assessment, dated 16
January 1991, BIR Commissioner Ong sent another letter, dated 23 April 1991, demanding
payment of the P294,958,450.73 deficiency withholding tax on the interest earnings and/or
yields from PNOC's money placements. The same letter informed PNB that this was the BIR
Commissioner's final decision on the matter and that the BIR Commissioner was set to issue a
warrant of distraint and/or levy against PNB's deposits with the Central Bank of the
Philippines. PNB further alleged that the levy and distraint of PNB's deposits, unless restrained
by the CTA, would cause great and irreparable prejudice not only to PNB, a government-owned
and controlled corporation, but also to the Government itself.40

Pursuant to the Order of the CTA, during the hearing on 19 July 1991,41 the parties submitted
their respective Memoranda on PNB's Motion to Suspend Proceedings.42

On 20 September 1991, private respondent Savellano filed another Omnibus Motion calling the
attention of the CTA to the fact that the BIR already issued, on 12 August 1991, a warrant of
garnishment addressed to the Central Bank Governor and against PNB. In compliance with the
said warrant, the Central Bank issued, on 23 August 1991, a debit advice against the demand
deposit account of PNB with the Central Bank for the amount of P294,958,450.73, with a
corresponding transfer of the same amount to the demand deposit-in-trust of BIR with the
Central Bank. Since the assessment had already been enforced, PNB's Motion to Suspend
Proceedings became moot and academic. Private respondent Savellano, thus, moved for the
denial of PNB's Motion to Suspend Proceedings and for an order requiring BIR to deposit with
the CTA the amount of P44,243,767.00 as his informer's reward, representing 15% of the
deficiency withholding tax collected.43

Both PNOC and PNB opposed private respondent Savellano's Omnibus Motion, dated 20
September 1991, arguing that the DOJ already ordered the suspension of the collection of the
tax deficiency. There was therefore no basis for private respondent Savellano's Motion as the

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same was premised on the erroneous assumption that the tax deficiency had been collected.
When the DOJ denied the BIR Commissioner's Motion to Dismiss and required him to file his
answer, the DOJ assumed jurisdiction over PNB's appeal, and the CTA should first suspend its
proceedings to give the DOJ the opportunity to decide the validity and propriety of the tax
assessment against PNB.44

The CTA, on 28 May 1992, rendered its decision, wherein it upheld its jurisdiction and disposed
of the case as follows:

WHEREFORE, judgment is rendered declaring the COMPROMISE AGREEMENT between


the Bureau of Internal Revenue, on the one hand, and the Philippine National Oil
Company and Philippine National Bank, on the other, as WITHOUT FORCE AND EFFECT;

The Commissioner of Internal Revenue is hereby ordered to ENFORCE the ASSESSMENT


of January 16, 1991 against Philippine National Bank which has become final and
unappealable by collecting from Philippine National Bank the deficiency withholding tax,
plus interest totalling (sic) P294,958,450.73;

Petitioner may be paid, upon collection of the deficiency withholding tax, the balance of
his entitlement to informer's reward based on fifteen percent (15%) of the deficiency
withholding total tax collected in this case or P44,243.767.00 subject to existing rules and
regulations governing payment of reward to informers.45

In a Resolution, dated 16 November 1992, the CTA denied the Motions for Reconsideration filed
by PNOC and PNB since they substantially raised the same issues in their previous pleadings and
which had already been passed upon and resolved adversely against them.46

PNOC and PNB filed separate appeals with the Court of Appeals seeking the reversal of the CTA
decision in CTA Case No. 4249, dated 28 May 1992, and the CTA Resolution in the same case,
dated 16 November 1992. PNOC's appeal was docketed as CA-G.R. SP No. 29583, while PNB's
appeal was CA-G.R. SP No. 29526. In both cases, the Court of Appeals affirmed the decision of
the CTA.

In the meantime, the Central Bank again issued on 02 September 1992 a debit advice against the
demand deposit account of PNB with the Central Bank for the amount of P294,958,450.73,47 and
on 15 September 1992, credited the same amount to the demand deposit account of the
Treasurer of the Republic of the Philippines.48 On 04 November 1992, the Treasurer of the
Republic issued a journal voucher transferring P294,958,450.73 to the account of the BIR.49 PNB,
in turn, debited P294,958,450.73 from the deposit account of PNOC with PNB.50

PNOC and PNB then filed separate Petitions for Review on Certiorari with this Court, praying that
the decisions of the Court of Appeals in CA-G.R. SP No. 29583 and CA-G.R. SP No. 29526,
respectively, both affirming the decision of the CTA in CTA Case No. 4249, be reversed and set

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aside. These two Petitions were consolidated since they involved identical parties and factual
background, and the resolution of related, if not exactly, the same issues.

In its Petition for Review, PNOC alleged the following errors committed by the Court of Appeals
in CA-G.R. SP No. 29583:

1. The Court of Appeals erred in holding that the deficiency taxes of PNOC could not be
the subject of a compromise under Executive Order No. 44; and

2. The Court of Appeals erred in holding that Savellano is entitled to additional informer's
reward.51

PNB, in its own Petition for Review, assailed the decision of the Court of Appeals in CA-G.R. SP
No. 29526, assigning the following errors:

1. Respondent Court erred in not finding that the Court of Tax Appeals lacks jurisdiction
on the controversy involving BIR and PNB (both government instrumentalities) regarding
the new assessment of BIR against PNB;

2. The respondent Court erred in not finding that the Court of Tax Appeals has no
jurisdiction to question the compromise agreement entered into by the Commissioner of
Internal Revenue; and

3. The respondent Court erred in not ruling that the Commissioner of Internal Revenue
cannot unilaterally annul tax compromises validly entered into by his predecessor.52

The decisions of the Court of Appeals in CA-GR SP No. 29583 and CA-G.R. SP No. 29526, affirmed
the decision of the CTA in CTA Case No. 4249. The resolution, therefore, of the assigned errors
in the Court of Appeals' decisions essentially requires a review of the CTA decision itself.

In consolidating the present Petitions, this Court finds that PNOC and PNB are basically
questioning the (1) Jurisdiction of the CTA in CTA Case No. 4249; (2) Declaration by the CTA that
the compromise agreement was without force and effect; (3) Finding of the CTA that the
deficiency withholding tax assessment against PNB had already become final and unappealable
and, thus, enforceable; and (4) Order of the CTA directing payment of additional informer's
reward to private respondent Savellano.

Jurisdiction of the CTA

A. The demand letter, dated 16 January 1991 did not constitute a new assessment
against PNB.

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The main argument of PNB in assailing the jurisdiction of the CTA in CTA Case No. 4249 is that
the BIR demand letter, dated 16 January 1991,53 should be considered as a new assessment
against PNB. As a new assessment, it gave rise to a new dispute and controversy solely between
the BIR and PNB that should be administratively settled or adjudicated, as provided in P.D. No.
242.

This argument is without merit. The issuance by the BIR of the demand letter, dated 16 January
1991, was merely a development in the continuing effort of the BIR to collect the tax assessed
against PNOC and PNB way back in 1986.

BIR's first letter, dated 08 August 1986, was addressed to PNOC, requesting it to settle its tax
liability. The BIR subsequently sent another letter, dated 08 October 1986, to PNB, as
withholding agent, demanding payment of the tax it had failed to withhold on the interest
earnings and/or yields from PNOC's money placements. PNOC wrote the BIR three succeeding
letters offering to compromise its tax liability; PNB, on the other hand, did not act on the demand
letter it received, dated 08 October 1986. The BIR and PNOC eventually reached a compromise
agreement on 22 June 1987. Private respondent Savellano questioned the validity of the
compromise agreement because the reduced amount of tax collected from PNOC, by virtue of
the compromise agreement, also proportionately reduced his informer's reward. Private
respondent Savellano then requested the BIR Commissioner to review and reconsider the
compromise agreement. Acting on the request of private respondent Savellano, the new BIR
Commissioner declared the compromise agreement to be without basis and issued the demand
letter, dated 16 January 1991, against PNB, as the withholding agent for PNOC.

It is clear from the foregoing that the BIR demand letter, dated 16 January 1991, could not stand
alone as a new assessment. It should always be considered in the factual context summarized
above.

In fact, the demand letter, dated 16 January 1991, actually referred to the withholding tax
assessment first issued in 1986 and its eventual settlement through a compromise agreement. In
addition, the computation of the deficiency withholding tax was based on the figures from the
1986 assessments against PNOC and PNB, and BIR no longer conducted a new audit or
investigation of either PNOC and PNB before it issued the demand letter on 16 January 1991.

These constant references to past events and circumstances demonstrate that the demand
letter, dated 16 January 1991, was not a new assessment, but rather, the latest action taken by
the BIR to collect on the tax assessments issued against PNOC and PNB in 1986.

PNB argues that the demand letter, dated 16 January 1991, introduced a new controversy. We
see it differently as the said demand letter presented the resolution by BIR Commissioner Ong of
the previous controversy involving the compromise of the 1986 tax assessments. BIR
Commissioner Ong explicitly declared therein that the compromise agreement was without legal
basis, and requested PNB, as the withholding agent, to pay the amount of withholding tax still
due.

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B. The CTA correctly retained jurisdiction over CTA Case No. 4249 by virtue of Republic
Act No. 1125.

Having established that the BIR demand letter, dated 16 January 1991, did not constitute a new
assessment, then, there could be no basis for PNB's claim that any dispute arising from the new
assessment should only be between BIR and PNB.

Still proceeding from the argument that there was a new dispute between PNB and BIR, PNB
sought the suspension of the proceedings in CTA Case No. 4249, after it contested the deficiency
withholding tax assessment against it and the demand for payment thereof before the DOJ,
pursuant to P.D. No. 242. The CTA, however, correctly sustained its jurisdiction and continued
the proceedings in CTA Case No. 4249; and, in effect, rejected DOJ's claim of jurisdiction to
administratively settle or adjudicate BIR's assessment against PNB.

The CTA assumed jurisdiction over the Petition for Review filed by private respondent Savellano
based on the following provision of Rep. Act No. 1125, the Act creating the Court of Tax Appeals:

SECTION 7. Jurisdiction. The Court of Tax Appeals shall exercise exclusive appellate
jurisdiction to review by appeal, as herein provided -

(1) Decisions of the Collector of Internal Revenue in cases involving disputed


assessments, refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under the National Internal
Revenue Code or other law or part of law administered by the Bureau of Internal
Revenue; . . . (Underscoring ours.)

In his Petition before the CTA, private respondent Savellano requested a review of the decisions
of then BIR Commissioner Tan to enter into a compromise agreement with PNOC and to reject
his claim for additional informer's reward. He submitted before the CTA questions of law
involving the interpretation and application of (1) E.O. No. 44, and its implementing rules and
regulations, which authorized the BIR Commissioner to compromise delinquent accounts and
disputed assessments pending as of 31 December 1985; and (2) Section 316(1) of the National
Internal Revenue Code of 1977 (NIRC of 1977), as amended, which granted to the informer a
reward equivalent to 15% of the actual amount recovered or collected by the BIR.54 These should
undoubtedly be considered as matters arising from the NIRC and other laws being administered
by the BIR, thus, appealable to the CTA under Section 7(1) of Rep. Act No. 1125.

PNB, however, insists on the jurisdiction of the DOJ over its appeal of the deficiency withholding
tax assessment by virtue of P.D. No. 242. Provisions on jurisdiction of P.D. No. 242 read:

SECTION 1. Provisions of law to the contrary notwithstanding, all disputes, claims and
controversies solely between or among the departments, bureaus, offices, agencies, and
instrumentalities of the National Government, including government-owned or
controlled corporations, but excluding constitutional offices or agencies, arising from the

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interpretation and application of statutes, contracts or agreements, shall henceforth be
administratively settled or adjudicated as provided hereinafter; Provided, That this shall
not apply to cases already pending in court at the time of the effectivity of this decree.

SECTION 2. In all cases involving only questions of law, the same shall be submitted to
and settled or adjudicated by the Secretary of Justice, as Attorney General and ex
officio legal adviser of all government-owned or controlled corporations and entities, in
consonance with Section 83 of the Revised Administrative Code. His ruling or
determination of the question in each case shall be conclusive and binding upon all the
parties concerned.

SECTION 3. Cases involving mixed questions of law and of fact or only factual issues shall
be submitted to and settled or adjudicated by:

(a) The Solicitor General, with respect to disputes or claims controversies


between or among the departments, bureaus, offices and other agencies of the
National Government;

(b) The Government Corporate Counsel, with respect to disputes or claims or


controversies between or among government-owned or controlled corporations
or entities being served by the Office of the Government Corporate Counsel; and

(c) The Secretary of Justice, with respect to all other disputes or claims or
controversies which do not fall under the categories mentioned in paragraphs (a)
and (b).

The PNB and DOJ are of the same position that P.D. No. 242, the more recent law, repealed
Section 7(1) of Rep. Act No. 1125,55 based on the pronouncement of this Court in Development
Bank of the Philippines v. Court of Appeals, et al., 56] quoted below:

The Court expresses its entire agreement with the conclusion of the Court of Appeals
and the basic premises thereof that there is an "irreconcilable repugnancybetween
Section 7(2) of R.A. No. 1125 and P.D. No. 242," and hence, that the later enactment (P.D.
No. 242), being the latest expression of the legislative will, should prevail over the earlier.

In the said case, it was expressly declared that P.D. No. 242 repealed Section 7(2) of Rep. Act No.
1125, which provides for the exclusive appellate jurisdiction of the CTA over decisions of the
Commissioner of Customs. PNB contends that P.D. No. 242 should be deemed to have likewise
repealed Section 7(1) of Rep. Act No. 1125, which provide for the exclusive appellate jurisdiction
of the CTA over decisions of the BIR Commissioner.57

After re-examining the provisions on jurisdiction of Rep. Act No. 1125 and P.D. No. 242, this Court
finds itself in disagreement with the pronouncement made in Development Bank of the
Philippines v. Court of Appeals, et al.,58and refers to the earlier case of Lichauco & Company, Inc.

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v. Apostol, et al.,59 for the guidelines in determining the relation between the two statutes in
question, to wit:

The cases relating to the subject of repeal by implication all proceed on the assumption
that if the act of later date clearly reveals an intention on the part of the law making
power to abrogate the prior law, this intention must be given effect; but there must
always be a sufficient revelation of this intention, and it has become an unbending rule of
statutory construction that the intention to repeal a former law will not be imputed to
the Legislature when it appears that the two statutes, or provisions, with reference to
which the question arises bear to each other the relation of general to
special. (Underscoring ours.)

When there appears to be an inconsistency or conflict between two statutes and one of the
statutes is a general law, while the other is a special law, then repeal by implication is not the
primary rule applicable. The following rule should principally govern instead:

Specific legislation upon a particular subject is not affected by a general law upon the
same subject unless it clearly appears that the provisions of the two laws are so repugnant
that the legislators must have intended by the later to modify or repeal the earlier
legislation. The special act and the general law must stand together, the one as the law
of the particular subject and the other as the general law of the land. (Ex Parte United
States, 226 U. S., 420; 57 L. ed., 281; Ex Parte Crow Dog, 109 U. S., 556; 27 L. ed., 1030;
Partee vs. St. Louis & S. F. R. Co., 204 Fed. Rep., 970.)

Where there are two acts or provisions, one of which is special and particular, and
certainly includes the matter in question, and the other general, which, if standing alone,
would include the same matter and thus conflict with the special act or provision, the
special must be taken as intended to constitute an exception to the general act or
provision, especially when such general and special acts or provisions are
contemporaneous, as the Legislature is not to be presumed to have intended a conflict.
(Crane v. Reeder and Reeder, 22 Mich., 322, 334; University of Utah vs. Richards, 77 Am.
St. Rep., 928.)60

It has, thus, become an established rule of statutory construction that between a general law and
a special law, the special law prevails Generalia specialibus non derogant.61

Sustained herein is the contention of private respondent Savellano that P.D. No. 242 is a general
law that deals with administrative settlement or adjudication of disputes, claims and
controversies between or among government offices, agencies and instrumentalities, including
government-owned or controlled corporations. Its coverage is broad and sweeping,
encompassing all disputes, claims and controversies. It has been incorporated as Chapter 14,
Book IV of E.O. No. 292, otherwise known as the Revised Administrative Code of the
Philippines.62 On the other hand, Rep. Act No. 1125 is a special law63 dealing with a specific

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subject matter the creation of the CTA, which shall exercise exclusive appellate jurisdiction over
the tax disputes and controversies enumerated therein.

Following the rule on statutory construction involving a general and a special law previously
discussed, then P.D. No. 242 should not affect Rep. Act No. 1125. Rep. Act No. 1125, specifically
Section 7 thereof on the jurisdiction of the CTA, constitutes an exception to P.D. No.
242. Disputes, claims and controversies, falling under Section 7 of Rep. Act No. 1125, even
though solely among government offices, agencies, and instrumentalities, including government-
owned and controlled corporations, remain in the exclusive appellate jurisdiction of the
CTA. Such a construction resolves the alleged inconsistency or conflict between the two statutes,
and the fact that P.D. No. 242 is the more recent law is no longer significant.

Even if, for the sake of argument, that P.D. No. 242 should prevail over Rep. Act No. 1125, the
present dispute would still not be covered by P.D. No. 242. Section 1 of P.D. No. 242 explicitly
provides that only disputes, claims and controversies solely between or among departments,
bureaus, offices, agencies, and instrumentalities of the National Government, including
constitutional offices or agencies, as well as government-owned and controlled corporations,
shall be administratively settled or adjudicated. While the BIR is obviously a government bureau,
and both PNOC and PNB are government-owned and controlled corporations, respondent
Savellano is a private citizen. His standing in the controversy could not be lightly brushed aside. It
was private respondent Savellano who gave the BIR the information that resulted in the
investigation of PNOC and PNB; who requested the BIR Commissioner to reconsider the
compromise agreement in question; and who initiated CTA Case No. 4249 by filing a Petition for
Review.

In Bay View Hotel, Inc. v. Manila Hotel Workers' Union-PTGWO, et al.,64] this Court upheld the
jurisdiction of the Court of Industrial Relations over the ordinary courts and justified its decision
in the following manner:

We are unprepared to break away from the teaching in the cases just adverted to. To
draw a tenuous jurisdictional line is to undermine stability in labor litigations. A
piecemeal resort to one court and another gives rise to multiplicity of suits. To force the
employees to shuttle from one court to another to secure full redress is a situation gravely
prejudicial. The time to be lost, effort wasted, anxiety augmented, additional expense
incurred these are considerations which weigh heavily against split jurisdiction. Indeed,
it is more in keeping with orderly administration of justice that all the causes of action
here "be cognizable and heard by only one court: the Court of Industrial Relations."

The same justification is used in the present case to reject DOJ's jurisdiction over the BIR and
PNB, to the exclusion of the other parties. The rights of all four parties in CTA Case No. 4249,
namely the BIR, as the tax collector; PNOC, the taxpayer; PNB, the withholding agent; and private
respondent Savellano, the informer claiming his reward; arose from the same factual background
and were so closely interrelated, that a pronouncement as to one would definitely have
repercussions on the others. The ends of justice were best served when the CTA continued to

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exercise its jurisdiction over CTA Case No. 4249. The CTA, which had assumed jurisdiction over
all the parties to the controversy, could render a comprehensive resolution of the issues raised
and grant complete relief to the parties.

II

Validity of the Compromise Agreement

A. PNOC could not apply for a compromise under E.O. No. 44 because its tax liability was
not a delinquent account or a disputed assessment as of 31 December 1985.

PNOC and PNB, on different grounds, dispute the decision of the CTA in CTA Case No. 4249
declaring the compromise agreement between BIR and PNOC without force and effect.

PNOC asserts that the compromise agreement was in accordance with E.O. No. 44, and its
implementing rules and regulations, and should be binding upon the parties thereto.

E.O. No. 44 granted the BIR Commissioner or his duly authorized representatives the power to
compromise any disputed assessment or delinquent account pending as of 31 December 1985,
upon the payment of an amount equal to 30% of the basic tax assessed; in which case, the
corresponding interests and penalties shall be condoned. E.O. No. 44 took effect on 04
September 1986 and remained effective until 31 March 1987.

The disputed assessments or delinquent accounts that the BIR Commissioner could compromise
under E.O. No. 44 are defined under Revenue Regulation (RR) No. 17-86, as follows:

a) Delinquent account Refers to the amount of tax due on or before December 31,
1985 from a taxpayer who failed to pay the same within the time prescribed for its
payment arising from (1) a self assessed tax, whether or not a tax return was filed, or (2)
a deficiency assessment issued by the BIR which has become final and executory.

Where no return was filed, the taxpayer shall be considered delinquent as of the time the
tax on such return was due, and in availing of the compromise, a tax return shall be filed
as a basis for computing the amount of compromise to be paid.

b) Disputed assessment refers to a tax assessment disputed or protested on or before


December 31, 1985 under any of the following categories:

1) if the same is administratively protested within thirty (30) days from the date the
taxpayer received the assessment, or

2.) if the decision of the BIR on the taxpayer's administrative protest is appealed by the
taxpayer before an appropriate court.

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PNOC's tax liability could not be considered a delinquent account since (1) it was not self-
assessed, because the BIR conducted an investigation and assessment of PNOC and PNB after
obtaining information regarding the non-withholding of tax from private respondent Savellano;
and (2) the demand letter, issued against it on 08 August 1986, could not have been a deficiency
assessment that became final and executory by 31 December 1985.

The dissenting opinion contends, however, that the tax liability of PNOC constitutes a self-
assessed tax, and is, therefore, a delinquent account as of 31 December 1985, qualifying for a
compromise under E.O. No. 44. It anchors its argument on the declaration made by this Court
in Tupaz v. Ulep,65 that internal revenue taxes are self-assessing.

It is not denied herein that the self-assessing system governs Philippine internal revenue
taxes. The dissenting opinion itself defines self-assessed tax as, "a tax that the taxpayer himself
assesses or computes and pays to the taxing authority." Clearly, such a system imposes upon the
taxpayer the obligation to conduct an assessment of himself so he could determine and declare
the amount to be used as tax basis, any deductions therefrom, and finally, the tax due.

E.O. No. 44 covers self-assessed tax, whether or not a tax return was filed. The phrase "whether
or not a tax return was filed" only refers to the compliance by the taxpayer with the obligation
to file a return on the dates specified by law, but it does not do away with the requisite that the
tax must be self-assessed in order for the taxpayer to avail of the compromise. The second
paragraph of Section 2(a) of RR No. 17-86 expressly commands, and still imposes upon the
taxpayer, who is availing of the compromise under E.O. No. 44, and who has not previously filed
any return, the duty to conduct self-assessment by filing a tax return that would be used as the
basis for computing the amount of compromise to be paid.

Section 2(a)(1) of RR No. 17-86 thus involves a situation wherein a taxpayer, after conducting a
self-assessment, discovers or becomes aware that he had failed to pay a tax due on or before 31
December 1985, regardless of whether he had previously filed a return to reflect such tax;
voluntarily comes forward and admits to the BIR his tax liability; and applies for a compromise
thereof. In case the taxpayer has not previously filed any return, he must fill out such a return
reflecting therein his own declaration of the taxable amount and computation of the tax due. The
compromise payment shall be computed based on the amount reflected in the tax return
submitted by the taxpayer himself.

Neither PNOC nor PNB, the taxpayer and the withholding agent, respectively, conducted self-
assessment in this case. There is no showing that in the absence of the tax assessment issued by
the BIR against them, that PNOC and/or PNB would have voluntarily admitted their tax liabilities,
already amounting to P385,961,580.82, as of 15 November 1986, and would have offered to
compromise the same. In fact, both PNOC and PNB were conspicuously silent about their tax
liabilities until they were assessed thereon.

Any attempt by PNOC and PNB to assess and declare by themselves their tax liabilities had
already been overtaken by the BIR's conduct of its audit and investigation and subsequent

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issuance of the assessments, dated 08 August 1986 and 08 October 1986, against PNOC and PNB,
respectively. The said tax assessments, uncontested and undisputed, presented the results of
the BIR audit and investigation and the computation of the total amount of tax liabilities of PNOC
and PNB. They should be controlling in this case, and should not be so easily and conveniently
ignored and set aside. It would be a contradiction to claim that the tax liabilities of PNOC and
PNB are self-assessed and, at the same time, BIR-assessed; when it is clear and simple that it had
been the BIR that conducted the assessment and determined the tax liabilities of PNOC and PNB.

That the BIR-assessed tax liability should be differentiated from a self-assessed one, is supported
by the provisions of RR No. 17-86 on the basis for computing the amount of compromise
payment. Note that where tax liabilities are self-assessed, the compromise payment shall be
computed based on the tax return filed by the taxpayer.66 On the other hand, where the BIR
already issued an assessment, the compromise payment shall be computed based on the tax due
on the assessment notice.67

For instances where the BIR had already issued an assessment against the taxpayer, the tax
liability could still be compromised under E.O. No. 44 only if: (1) the assessment had been final
and executory on or before 31 December 1985 and, therefore, considered a delinquent account
as of said date;68 or (2) the assessment had been disputed or protested on or before 31 December
1985.69

RMO No. 39-86, which provides the guidelines for the implementation of E.O. No. 44, does
mention different types of assessments that may be compromised under said statute (i.e.,
jeopardy assessments, arbitrary assessments, and tax assessments of doubtful validity). RMO
No. 39-86 may not have expressly stated any qualification for these particular types of
assessments; nonetheless, E.O. No. 44 specifically refers only to assessments that were
delinquent or disputed as of 31 December 1985.

E.O. No. 44 and all BIR issuances to implement said statute should be interpreted so that they
are harmonized and consistent with each other. Accordingly, this Court finds that the different
types of assessments mentioned in RMO No. 39-86 would still have to qualify as delinquent
accounts or disputed assessments as of 31 Dcember 1985, so that they could be compromised
under E.O. No. 44.

The BIR had first written to PNOC on 08 August 1986, demanding payment of the income tax on
the interest earnings and/or yields from PNOC's money placements with PNB from 15 October
1984 to 15 October 1986. This demand letter could be regarded as the first assessment notice
against PNOC.

Such an assessment, issued only on 08 August 1986, could not have been final and executory as
of 31 December 1985 so as to constitute a delinquent account. Neither was the assessment
against PNOC an assessment that could have been disputed or protested on or before 31
December 1985, having been issued on a later date.

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Given that PNOC's tax liability did not constitute a delinquent account or a disputed assessment
as of 31 December 1985, then it could not be compromised under E.O. No. 44.

The assessment against PNOC, instead, was more appropriately covered by Revenue
Memorandum Circular (RMC) No. 31-86. RMC No. 31-86 clarifies the scope of availment of the
tax amnesty under E.O. No. 4170 and compromise payments on delinquent accounts and disputed
assessments under E.O. No. 44. The third paragraph of RMC No. 31-86 reads:

[T]axpayers against whom assessments had been issued from January 1 to August 21,
1986 may settle their tax liabilities by way of compromise under Section 246 of the Tax
Code as amended by paying 30% of the basic assessment excluding surcharge, interest,
penalties and other increments thereto.

The above-quoted paragraph supports the position that only assessments that were disputed or
that were final and executory by 31 December 1985 could be the subject of a compromise under
E.O. No. 44. Assessments issued between 01 January to 21 August 1986 could still be
compromised by payment of 30% of the basic tax assessed, not anymore pursuant to E.O. No.
44, but pursuant to Section 246 of the NIRC of 1977, as amended.

Section 246 of the NIRC of 1977, as amended, granted the BIR Commissioner the authority to
compromise the payment of any internal revenue tax under the following circumstances: (1)
there exists a reasonable doubt as to the validity of the claim against the taxpayer; or (2) the
financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.71

There are substantial differences in circumstances under which compromises may be granted
under Section 246 of the NIRC of 1977, as amended, and E.O. No. 44. Although PNOC and PNB
have extensively argued their entitlement to compromise under E.O. No. 44, neither of them has
alleged, much less, has presented any evidence to prove that it may compromise its tax liability
under Section 246 of the NIRC of 1977, as amended.

B. The tax liability of PNB as withholding agent also did not qualify for compromise
under E.O. No. 44.

Before proceeding any further, this Court reconsiders the conclusion made by BIR Commissioner
Ong in his demand letter, dated 16 January 1991, that the compromise settlement executed
between the BIR and PNOC was without legal basis because withholding taxes were not actually
taxes that could be compromised, but a penalty for PNB's failure to withhold and for which it was
made personally liable.

E.O. No. 44 covers disputed or delinquency cases where the person assessed was himself the
taxpayer rather than a mere agent.72 RMO No. 39-86 expressly allows a withholding agent, who
failed to withhold the required tax because of neglect, ignorance of the law, or his belief that he
was not required by law to withhold tax, to apply for a compromise settlement of his withholding
tax liability under E.O. No. 44. A withholding agent, in such a situation, may compromise the

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withholding tax assessment against him precisely because he is being held directly accountable
for the tax.73

RMO No. 39-86 distinguishes between the withholding agent in the foregoing situation from the
withholding agent who withheld the tax but failed to remit the amount to the Government. A
withholding agent in the latter situation is the one disqualified from applying for a compromise
settlement because he is being made accountable as an agent, who held funds in trust for the
Government.74

Both situations, however, involve withholding agents. The right to compromise under these
provisions should have been claimed by PNB, the withholding agent for PNOC. The BIR held PNB
personally accountable for its failure to withhold the tax on the interest earnings and/or yields
from PNOC's money placements with PNB. The BIR sent a demand letter, dated 08 October 1986,
addressed directly to PNB, for payment of the withholding tax assessed against it, but PNB failed
to take any action on the said demand letter. Yet, all the offers to compromise the withholding
tax assessment came from PNOC and PNOC did not claim that it made the offers to compromise
on behalf of PNB.

Moreover, the general requirement of E.O. No. 44 still applies to withholding agents that the
withholding tax liability must either be a delinquent account or a disputed assessment as of 31
December 1985 to qualify for compromise settlement. The demand letter against PNB, which
also served as its assessment notice, had been issued on 08 October 1986 or two months later
than PNOC's. PNB's withholding tax liability could not be considered a delinquent account or a
disputed assessment, as defined under RR No. 17-86, for the same reasons that PNOC's tax
liability did not constitute as such. The tax liability of PNB, therefore, was also not eligible for
compromise settlement under E.O. No. 44.

C. Even assuming arguendo that PNOC and/or PNB qualified under E.O. No. 44, their
application for compromise was filed beyond the deadline.

Despite already ruling that the tax liabilities of PNOC and PNB could not be compromised under
E.O. No. 44, this Court still deems it necessary to discuss the finding of the CTA that the
compromise agreement had been filed beyond the effectivity of E.O. No. 44, since the CTA made
a declaration in relation thereto that paragraph 2 of RMO No. 39-86 was null and void for unduly
extending the effectivity of E.O. No. 44.

Paragraph 2 of RMO No. 39-86 provides that:

2. Period for availment. Filing of application for compromise settlement under the said
law shall be effective only until March 31, 1987. Applications filed on or before this date
shall be valid even if the payment or payments of the compromise amount shall be made
after the said date, subject, however, to the provisions of Executive Order No. 44 and its
implementing Revenue Regulations No. 17-86.

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It is well-settled in this jurisdiction that administrative authorities are vested with the power to
make rules and regulations because it is impracticable for the lawmakers to provide general
regulations for various and varying details of management. The interpretation given to a rule or
regulation by those charged with its execution is entitled to the greatest weight by the court
construing such rule or regulation, and such interpretation will be followed unless it appears to
be clearly unreasonable or arbitrary.75

RMO No. 39-86, particularly paragraph 2 thereof, does not appear to be unreasonable or
arbitrary. It does not unduly expand the coverage of E.O. No. 44 by merely providing that
applications for compromise filed until 31 March 1987 are still valid, even if payment of the
compromised amount is made on a later date.

It cannot be expected that the compromise allowed under E.O. No. 44 can be automatically
granted upon mere filing of the application by the taxpayer. Irrefutably, the applications would
still have to be processed by the BIR to determine compliance with the requirements of E.O. No.
44. As it is uncontested that a taxpayer could still file an application for compromise on 31 March
1987, the very last day of effectivity of E.O. No. 44, it would be unreasonable to expect the BIR
to process and approve the taxpayer's application within the same date considering the volume
of applications filed and pending approval, plus the other matters the BIR personnel would also
have to attend to. Thus, RMO No. 39-86 merely assures the taxpayers that their applications
would still be processed and could be approved on a later date. Payment, of course, shall be
made by the taxpayer only after his application had been approved and the compromised
amount had been determined.

Given that paragraph 2 of RMO No. 39-86 is valid, the next question that needs to be addressed
is whether PNOC had been able to submit an application for compromise on or before 31 March
1987 in compliance thereof. Although the compromise agreement was executed only on 22 June
1987, PNOC is claiming that it had already written a letter to the BIR, as early as 25 September
1986, offering to compromise its tax liability, and that the said letter should be considered as
PNOC's application for compromise settlement.

A perusal of PNOC's letter, dated 25 September 1986, would reveal, however, that the terms of
its proposed compromise did not conform to those authorized by E.O. No. 44. PNOC did not
offer to pay outright 30% of the basic tax assessed against it as required by E.O. No. 44; and
instead, made the following offer:

(2) That PNOC be permitted to set-off its foregoing mentioned tax liability
of P304,419,396.83 against the tax refund/credit claims of the National Power
Corporation (NPC) for specific taxes on fuel oil sold to NPC totaling P335,259,450.21,
which tax refunds/credits are actually receivable accounts of our Company from NPC. 76

PNOC reiterated the offer in its letter to the BIR, dated 14 October 1986.77 The BIR, in its letters
to PNOC, dated 8 October 198678 and 11 November 1986,79 consistently denied PNOC's offer

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because the claim for tax refund/credit of NAPOCOR was still under process, so that the offer to
set-off such claim against PNOC's tax liability was premature.

Furthermore, E.O. No. 44 does not contemplate compromise payment by set-off of a tax liability
against a claim for tax refund/credit. Compromise under E.O. No. 44 may be availed of only in
the following circumstances:

SEC. 3. Who may avail. Any person, natural or juridical, may settle thru a compromise
any delinquent account or disputed assessment which has been due as of December 31,
1985, by paying an amount equal to thirty percent (30%) of the basic tax assessed.

SEC. 6. Mode of Payment. Upon acceptance of the proposed compromise, the amount
offered as compromise in complete settlement of the delinquent account shall be paid
immediately in cash or manager's certified check.

Deferred or staggered payments of compromise amounts over P50,000 may be


considered on a case to case basis in accordance with the extant regulations of the Bureau
upon approval of the Commissioner of Internal Revenue, his Deputy or Assistant as
delineated in their respective jurisdictions.

If the Compromise amount is not paid as required herein, the compromise agreement is
automatically nullified and the delinquent account reverted to the original amount plus
the statutory increments, which shall be collected thru the summary and/or judicial
processes provided by law.

E.O. No. 44 is not for the benefit of the taxpayer alone, who can extinguish his tax liability by
paying the compromise amount equivalent to 30% of the basic tax. It also benefits the
Government by making collection of delinquent accounts and disputed assessments simpler,
easier, and faster. Payment of the compromise amount must be made immediately, in cash or
in manager's check. Although deferred or staggered payments may be allowed on a case-to-case
basis, the mode of payment remains unchanged, and must still be made either in cash or in
manager's check.

PNOC's offer to set-off was obviously made to avoid actual cash-out by the company. The offer
defeated the purpose of E.O. No. 44 because it would not only delay collection, but more
importantly, it would not guarantee collection. First of all, BIR's collection was contingent on
whether the claim for tax refund/credit of NAPOCOR would be subsequently granted. Second,
collection could not be made immediately and would have to wait until the resolution of the
claim for tax refund/credit of NAPOCOR. Third, there is no proof, other than the bare allegation
of PNOC, that NAPOCOR's claim for tax refund/credit is an account receivable of PNOC. A
possible dispute between NAPOCOR and PNOC as to the proceeds of the tax refund/credit would
only delay collection by the BIR even further.

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It was only in its letter, dated 09 June 1987, that PNOC actually offered to compromise its tax
liability in accordance with the terms and circumstances prescribed by E.O. No. 44 and its
implementing rules and regulations, by stating that:

Consequently, we reiterate our previous request for compromise under E.O. No. 44, and
convey our preparedness to settle the subject tax assessment liability by payment of the
compromise amount of P91,003,129.89, representing thirty percent (30%) of the basic
tax assessment of P303,343,766.29, in accordance with E.O. No. 44 and its implementing
BIR Revenue Memorandum Order No. 39-86.80

PNOC claimed in the same letter that it had previously requested for a compromise under the
terms of E.O. No. 44, but this Court could not find evidence of such previous request. There are
stark and substantial differences in the terms of PNOC's offer to compromise in its earlier letters,
dated 25 September 1986 and 14 October 1986 (set-off of the entire amount of its tax liability
against the claim for tax refund/credit of NAPOCOR), to those in its letter, dated 09 June 1987
(payment of the compromise amount representing 30% of the basic tax assessed against it),
making it difficult for this Court to accept that the letter of 09 June 1987 merely reiterated PNOC's
offer to compromise in its earlier letters.

This Court likewise cannot give credence to PNOC's allegation that beginning 25 September 1986,
the date of its first letter to the BIR, there were continuing negotiations between PNOC and BIR
that culminated in the compromise agreement on 22 June 1987. Aside from the exchange of
letters recounted in the preceding paragraphs, both PNOC and PNB failed to present any other
proof of the supposed negotiations.

After the BIR denied the second offer of PNOC to set-off its tax liability against the claim for tax
refund/credit of NAPOCOR in a letter, dated 11 November 1986, there is no other evidence of
subsequent communication between PNOC and the BIR. It was only after almost seven months,
or on 09 June 1987, that PNOC again wrote a letter to the BIR, this time offering to pay the
compromise amount of 30% of the basic tax assessed against. This letter was already filed
beyond 31 March 1987, after the lapse of the effectivity of E.O. No. 44 and the deadline for filing
applications for compromise under the said statute.

Evidence of meetings between PNOC and the BIR, or any other form of communication, wherein
the parties presented their offer and counter-offer to the other, would have been very valuable
in explaining and supporting BIR Commissioner Tan's decision to accept PNOC's third offer to
compromise after denying the previous two. The absence of such evidence herein negates
PNOC's claim of actual negotiations with the BIR.

Therefore, even assuming arguendo that the tax liabilities of PNOC and PNB qualify as delinquent
accounts or disputed assessments as of 31 December 1985, the application for compromise filed
by PNOC on 09 June 1987, and accepted by then BIR Commissioner Tan on 22 June 1987, was still
filed way beyond 31 March 1987, the expiration date of the effectivity of E.O. No. 44 and the
deadline for filing of applications for compromise under RMO No. 39-86.

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D. The BIR Commissioner's discretionary authority to enter into a compromise
agreement is not absolute and the CTA may inquire into allegations of abuse thereof.

The foregoing discussion supports the CTA's conclusion that the compromise agreement
between PNOC and the BIR was indeed without legal basis. Despite this lack of legal support for
the execution of the said compromise agreement, PNB argues that the CTA still had no
jurisdiction to review and set aside the compromise agreement. It contends that the authority
to compromise is purely discretionary on the BIR Commissioner and the courts cannot interfere
with his exercise thereof.

It is generally true that purely administrative and discretionary functions may not be interfered
with by the courts; but when the exercise of such functions by the administrative officer is tainted
by a failure to abide by the command of the law, then it is incumbent on the courts to set matters
right, with this Court having the last say on the matter.81

The manner by which BIR Commissioner Tan exercised his discretionary power to enter into a
compromise was brought under the scrutiny of the CTA amidst allegations of "grave abuse of
discretion and/or whimsical exercise of jurisdiction."82 The discretionary power of the BIR
Commissioner to enter into compromises cannot be superior over the power of judicial review
by the courts.

The discretionary authority to compromise granted to the BIR Commissioner is never meant to
be absolute, uncontrolled and unrestrained. No such unlimited power may be validly granted to
any officer of the government, except perhaps in cases of national emergency.83 In this case, the
BIR Commissioner's authority to compromise, whether under E.O. No. 44 or Section 246 of the
NIRC of 1977, as amended, can only be exercised under certain circumstances specifically
identified in said statutes. The BIR Commissioner would have to exercise his discretion within
the parameters set by the law, and in case he abuses his discretion, the CTA may correct such
abuse if the matter is appealed to them.84

Petitioners PNOC and PNB both contend that BIR Commissioner Tan merely exercised his
authority to enter into a compromise specially granted by E.O. No. 44. Since this Court has
already made a determination that the compromise agreement did not qualify under E.O. No.
44, BIR Commissioner Tan's decision to agree to the compromise should have been reviewed in
the light of the general authority granted to the BIR Commissioner to compromise taxes under
Section 246 of the NIRC of 1977, as amended. Then again, petitioners PNOC and PNB failed to
allege, much less present evidence, that BIR Commissioner Tan acted in accordance with Section
246 of the NIRC of 1977, as amended, when he entered into the compromise agreement with
PNOC.

E. The CTA may set aside a compromise agreement that is contrary to law and public
policy.

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PNB also asserts that the CTA had no jurisdiction to set aside a compromise agreement entered
into in good faith. It relies on the decision of this Court in Republic v. Sandiganbayan85 that a
compromise agreement cannot be set aside merely because it is too one-sided. A compromise
agreement should be respected by the courts as the res judicata between the parties thereto.

This Court, though, finds that there are substantial differences in the factual background of
Republic v. Sandiganbayan and the present case.

The compromise agreement executed between the Presidential Commission on Good


Government (PCGG) and Roberto S. Benedicto in Republic v. Sandiganbayan was judicially
approved by the Sandiganbayan. The Sandiganbayan had ample opportunity to examine the
validity of the compromise agreement since two years elapsed from the time the agreement was
executed up to the time it was judicially approved. This Court even stated in the said case that,
"We are not dealing with the usual compromise agreement perfunctorily submitted to a court
and approved as a matter of course. The PCGG-Benedicto agreement was thoroughly and, at
times, disputatiously discussed before the respondent court. There could be no deception or
misrepresentation foisted on either the PCGG or the Sandiganbayan."86

In addition, the new PCGG Chairman originally prayed for the re-negotiation of the compromise
agreement so that it could be more just, fair, and equitable, an action considered by this Court
as an implied admission that the agreement was not contrary to law, public policy or morals nor
was there any circumstance which had vitiated consent.87

The above-mentioned circumstances strongly supported the validity of the compromise


agreement in Republic v. Sandiganbayan, which was why this Court refused to set it
aside. Unfortunately for the petitioners in the present case, the same cannot be said herein.

The Court of Appeals, in upholding the jurisdiction of the CTA to set aside the compromise
agreement, ruled that:

We are unable to accept petitioner's submissions. Its formulation of the issues on CIR and
CTA's lack of jurisdiction to disturb a compromise agreement presupposes a compromise
agreement validly entered into by the CIR and not, when as in this case, it was indubitably
shown that the supposed compromise agreement is without legal support. In case of
arbitrary or capricious exercise by the Commissioner or if the proceedings were fatally
defective, the compromise can be attacked and reversed through the judicial process
(Meralco Securities Corporation v. Savellano, 117 SCRA 805, 812 [1982]; Sarah E. Ramsay,
et. al. v. U.S. 21 Ct. C1 443, aff'd 120 U.S. 214, 30 L. Ed. 582; Tyson v. U.S., 39 F. Supp. 135
cited in page 18 of decision) .88

Although the general rule is that compromises are to be favored, and that compromises entered
into in good faith cannot be set aside,89 this rule is not without qualification. A court may still
reject a compromise or settlement when it is repugnant to law, morals, good customs, public
order, or public policy.90

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The compromise agreement between the BIR and PNOC was contrary to law having been entered
into by BIR Commissioner Tan in excess or in abuse of the authority granted to him by
legislation. E.O. No. 44 and the NIRC of 1977, as amended, had identified the situations wherein
the BIR Commissioner may compromise tax liabilities, and none of these situations existed in this
case.

The compromise, moreover, was contrary to public policy. The primary duty of the BIR is to
collect taxes, since taxes are the lifeblood of the Government and their prompt and certain
availability are imperious needs.91 In the present case, however, BIR Commissioner Tan, by
entering into the compromise agreement that was bereft of any legal basis, would have caused
the Government to lose almost P300 million in tax revenues and would have deprived the
Government of much needed monetary resources.

Allegations of good faith and previous execution of the terms of the compromise agreement on
the part of PNOC would not be enough for this Court to disregard the demands of law and public
policy. Compromise may be the favored method to settle disputes, but when it involves taxes, it
may be subject to closer scrutiny by the courts. A compromise agreement involving taxes would
affect not just the taxpayer and the BIR, but also the whole nation, the ultimate beneficiary of
the tax revenues collected.

F. The Government cannot be estopped from collecting taxes by the mistake, negligence,
or omission of its agents.

The new BIR Commissioner, Commissioner Ong, had acted well within his powers when he set
aside the compromise agreement, dated 22 June 1987, after finding that the said compromise
agreement was without legal basis. When he took over from his predecessor, there was still a
pending motion for reconsideration of the said compromise agreement, filed by private
respondent Savellano on 24 March 1988. To resolve the said motion, he reviewed the
compromise agreement and, thereafter, came upon the conclusion that it did not comply with
E.O. No. 44 and its implementing rules and regulations.

It had been declared by this Court in Hilado v. Collector of Internal Revenue, et al.,92 that an
administrative officer, such as the BIR Commissioner, may revoke, repeal or abrogate the acts or
previous rulings of his predecessor in office. The construction of a statute by those administering
it is not binding on their successors if, thereafter, the latter becomes satisfied that a different
construction should be given.

It is evident in this case that the new BIR Commissioner, Commissioner Ong, construed E.O. No.
44 and its implementing rules and regulations differently from that of his predecessor, former
Commissioner Tan, which led to Commissioner Ong's revocation of the BIR approval of the
compromise agreement, dated 22 June 1987. Such a revocation was only proper considering
that the former BIR Commissioner's decision to approve the said compromise agreement was
based on the erroneous construction of the law (i.e., E.O. No. 44 and its implementing rules and
regulations) and should not give rise to any vested right on PNOC.93

24
MAS
Furthermore, approval of the compromise agreement and acceptance of the compromise
payment by his predecessor cannot estop BIR Commissioner Ong from setting aside the
compromise agreement, dated 22 June 1987, for lack of legal basis; and from demanding
payment of the deficiency withholding tax from PNB. As a general rule, the Government cannot
be estopped from collecting taxes by the mistake, negligence, or omission of its agents94 because:

. . . Upon taxation depends the Government ability to serve the people for whose benefit
taxes are collected. To safeguard such interest, neglect or omission of government
officials entrusted with the collection of taxes should not be allowed to bring harm or
detriment to the people, in the same manner as private persons may be made to suffer
individually on account of his own negligence, the presumption being that they take good
care of their personal affairs. This should not hold true to government officials with
respect to matters not of their own personal concern. This is the philosophy behind the
government's exception, as a general rule, from the operation of the principle of estoppel.
(Republic vs. Caballero, L-27437, September 30, 1977, 79 SCRA 177; Manila Lodge No.
761, Benevolent and Protective Order of the Elks, Inc. vs. Court of Appeals, L-41001,
September 30, 1976, 73 SCRA 162; Sy vs. Central Bank of the Philippines, L-41480, April
30, 1976, 70 SCRA 571; Balmaceda vs. Corominas & Co., Inc., 66 SCRA 553; Auyong Hian
vs. Court of Tax Appeals, 59 SCRA 110; Republic vs. Philippine Rabbit Bus Lines, Inc., 66
SCRA 553; Republic vs. Philippine Long Distance Telephone Company, L-18841, January 27,
1969, 26 SCRA 620; Zamora vs. Court of Tax Appeals, L-23272, November 26, 1970, 36
SCRA 77; E. Rodriguez, Inc. vs. Collector of Internal Revenue, L-23041, July 31, 1969, 28
SCRA 119).95

III

Finality of the Tax Assessment

A. The issue on whether the BIR complied with the notice requirements under RR No. 12-
85 is raised for the first time on appeal and should not be given due course.

PNB, in another effort to block the collection of the deficiency withholding tax, this time raises
doubts as to the validity of the deficiency withholding tax assessment issued against it on 16
January 1991. It submits that the BIR failed to comply with the notice requirements set forth in
RR No. 12-85.96

Whether or not the BIR complied with the notice requirements of RR No. 12-85 is a new issue
raised by PNB only before this Court. Such a question has not been ventilated before the lower
courts. For an appellate tribunal to consider a legal question, it should have been raised in the
court below.97 If raised earlier, the matter would have been seriously delved into by the CTA and
the Court of Appeals.98

B. The assessment against PNB had become final and unappealable, and therefore,
enforceable.

25
MAS
The CTA and the Court of Appeals declared as final and unappealable, and thus, enforceable, the
assessment against PNB, dated 16 January 1991, since PNB failed to protest said assessment
within the 30-day prescribed period. This Court, though, finds that the significant BIR
assessment, as far as this case is concerned, should be the one issued by the BIR against PNB on
08 October 1986.

The BIR issued on 08 October 1986 an assessment against PNB for its withholding tax liability on
the interest earnings and/or yields from PNOC's money placements with the bank. It had 30 days
from receipt to protest the BIR's assessment.99 PNB, however, did not take any action as to the
said assessment so that upon the lapse of the period to protest, the withholding tax assessment
against it, dated 8 October 1986, became final and unappealable, and could no longer be
disputed.100 The courts may therefore order the enforcement of this assessment.

It is the enforcement of this BIR assessment against PNB, dated 08 October 1986, that is in issue
in the instant case. If the compromise agreement is valid, it would effectively bar the BIR from
enforcing the assessment and collecting the assessed tax; on the other hand, if the compromise
agreement is void, then the courts can order the BIR to enforce the assessment and collect the
assessed tax.

As has been previously discussed by this Court, the BIR demand letter, dated 16 January 1991, is
not a new assessment against PNB. It only demanded from PNB the payment of the balance of
the withholding tax assessed against it on 08 October 1986. The same demand letter also has no
substantial effect or impact on the resolution of the present case. It is already unnecessary and
superfluous, having been issued by the BIR when CTA Case No. 4249 was already pending before
the CTA. At best, the demand letter, dated 16 January 1991, constitute a useful reference for the
courts in computing the balance of PNB's tax liability, after applying as partial payment thereon
the amount previously received by the BIR from PNOC pursuant to the compromise agreement.

IV

Prescription

A. The defense of prescription was never raised by petitioners PNOC and PNB, and should
be considered waived.

The dissenting opinion takes the position that the right of the BIR to assess and collect income
tax on the interest earnings and/or yields from PNOC's money placements with PNB, particularly
for taxable year 1985, had already prescribed, based on Section 268 of the NIRC of 1977, as
amended.

Section 268 of the NIRC of 1977, as amended, provides a three-year period of limitation for the
assessment and collection of internal revenue taxes, which begins to run after the last day
prescribed for filing of the return.101

26
MAS
The dissenting opinion points out that more than four years have elapsed from 25 January 1986
(the last day prescribed by law for PNB to file its withholding tax return for the fourth quarter of
1985) to 16 January 1991 (the date when the alleged final assessment of PNB's tax liability was
issued).

The issue of prescription, however, was brought up only in the dissenting opinion and was never
raised by PNOC and PNB in the proceedings before the BIR nor in any of their pleadings submitted
to the CTA and the Court of Appeals.

Section 1, Rule 9 of the Rules of Civil Procedure lays down the rule on defenses and objections
not pleaded, and reads:

SECTION 1. Defenses and objections not pleaded. Defenses and objections not pleaded
either in a motion to dismiss or in the answer are deemed waived. However, when it
appears from the pleadings or the evidence on record that the court has no jurisdiction
over the subject matter, that there is another action pending between the parties for the
same cause, or that the action is barred by prior judgment or by the statute of limitations,
the court shall dismiss the claim.

The general rule enunciated in the above-quoted provision governs the present case, that is, the
defense of prescription, not pleaded in a motion to dismiss or in the answer, is deemed
waived. The exception in same provision cannot be applied herein because the pleadings and
the evidence on record do not sufficiently show that the action is barred by prescription.

It has been consistently held in earlier tax cases that the defense of prescription of the period for
the assessment and collection of tax liabilities shall be deemed waived when such defense was
not properly pleaded and the facts alleged and evidences submitted by the parties were not
sufficient to support a finding by this Court on the matter. 102 In Querol v. Collector of Internal
Revenue,103 this Court pronounced that prescription, being a matter of defense, imposes the
burden on the taxpayer to prove that the full period of the limitation has expired; and this
requires him to positively establish the date when the period started running and when the same
was fully accomplished.

In making its conclusion that the assessment and collection in this case had prescribed, the
dissenting opinion took liberties to assume the following facts even in the absence of allegations
and evidences to the effect that: (1) PNB filed returns for its withholding tax obligations for
taxable year 1985; (2) PNB reported in the said returns the interest earnings of PNOC's money
placements with the bank; and (3) that the returns were filed on or before the prescribed date,
which was 25 January 1986.

It is not safe to adopt the first and second assumptions in this case considering that Section 269
of the NIRC of 1977, as amended, provides for a different period of limitation for assessment and
collection of taxes in case of false or fraudulent return or for failure to file a return. In such cases,

27
MAS
the BIR is given 10 years after discovery of the falsity, fraud, or omission within which to make an
assessment.104

It is also not safe to accept the third assumption since there can be a possibility that PNB filed
the withholding tax return later than the prescribed date, in which case, following the dictates of
Section 268 of the NIRC of 1977, as amended, the three-year prescriptive period shall be counted
from the date the return was actually filed.105

PNB's withholding tax returns for taxable year 1985, duly received by the BIR, would have been
the best evidence to prove actual filing, the date of filing and the contents thereof. These facts
are relevant in determining which prescriptive period should apply, and when such prescriptive
period should begin to run and when it had lapsed. Yet, the pleadings did not refer to any return,
and no return was made part of the records of the present case.

This Court could not make a proper ruling on the matter of prescription on the mere basis of
assumptions; such an issue should have been properly raised, argued, and supported by
evidences submitted by the parties themselves before the BIR and the courts below.

B. Granting that this Court can take cognizance of the defense of prescription, this Court
finds that the assessment of the withholding tax liability against PNOC and collection of
the tax assessed were done within the prescriptive period.

Assuming, for the sake of argument, that this Court can give due course to the defense of
prescription, it finds that the assessment against PNB for its withholding tax liability for taxable
year 1985 and the collection of the tax assessed therein were accomplished within the prescribed
periods for assessment and collection under the NIRC of 1977, as amended.

If this Court adopts the assumption made by the dissenting opinion that PNB filed its withholding
tax return for the last quarter of 1985 on 25 January 1986, then the BIR had until 24 January 1989
to assess PNB. The original assessment against PNB was issued as early as 08 October 1986, well-
within the three-year prescriptive period for making the assessment as prescribed by the
following provisions of the NIRC of 1977, as amended:

SEC. 268. Period of limitation upon assessment and collection. Except as provided in the
succeeding section, internal revenue taxes shall be assessed within three years after the
last day prescribed by law for the filing of the return, and no proceeding in court without
assessment for the collection of such taxes shall be begun after the expiration of such
period

SEC. 269. Exceptions as to period of limitation of assessment and collection of taxes.

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MAS
(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.

Sections 268 and 269(c) of the NIRC of 1977, as amended, should be read in conjunction with one
another. Section 268 requires that assessment be made within three years from the last day
prescribed by law for the filing of the return. Section 269(c), on the other hand, provides that
when an assessment is issued within the prescribed period provided in Section 268, the BIR has
three years, counted from the date of the assessment, to collect the tax assessed either by
distraint, levy or court action. Therefore, when an assessment is timely issued in accordance with
Section 268, the BIR is given another three-year period, under Section 269(c), within which to
collect the tax assessed, reckoned from the date of the assessment.

In the case of PNB, an assessment was issued against it by the BIR on 08 October 1986, so that
the BIR had until 07 October 1989 to enforce it and to collect the tax assessed. The filing,
however, by private respondent Savellano of his Amended Petition for Review before the CTA on
02 July 1988 already constituted a judicial action for collection of the tax assessed which stops
the running of the three-year prescriptive period for collection thereof.

A judicial action for the collection of a tax may be initiated by the filing of a complaint with the
proper regular trial court; or where the assessment is appealed to the CTA, by filing an answer to
the taxpayer's petition for review wherein payment of the tax is prayed for.106

The present case is unique, however, because the Petition for Review was filed by private
respondent Savellano, the informer, against the BIR, PNOC, and PNB. The BIR, the collecting
government agency; PNOC, the taxpayer; and PNB, the withholding agent, initially found
themselves on the same side. The prayer in the Amended Petition for Review of private
respondent Savellano reads:

WHEREFORE, in view of the foregoing, petitioner respectfully prays that the compromise
agreement of June 22, 1987 be reviewed and declared null and void, and that this Court
directs:

a) respondent Commissioner to enforce and collect and respondents PNB and/or


PNOC to pay in a joint and several capacity, the total tax
liability of P387,987,785.73, plus interests from 31 October 1986; and

b) respondent Commissioner to pay unto petitioner, as informer's reward, 15% of


the tax liability collected under clause (a) hereof.

Other equitable reliefs under the premises are likewise prayed for. 107 (Underscoring
ours.)

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MAS
Private respondent Savellano, in his Amended Petition for Review in CTA Case No. 4249, prayed
for (1) the CTA to direct the BIR Commissioner to enforce and collect the tax, and (2) PNB and/or
PNOC to pay the tax making CTA Case No. 4249 a collection case. That the Amended Petition
for Review was filed by the informer and not the taxpayer; and that the prayer for the
enforcement of the tax assessment and payment of the tax was also made by the informer, not
the BIR, should not affect the nature of the case as a judicial action for collection. In case the CTA
grants the Petition and the prayer therein, as what has happened in the present case, the
ultimate result would be the collection of the tax assessed. Consequently, upon the filing of the
Amended Petition for Review by private respondent Savellano, judicial action for collection of
the tax had been initiated and the running of the prescriptive period for collection of the said tax
was terminated.

Supposing that CTA Case No. 4249 is not a collection case which stops the running of the
prescriptive period for the collection of the tax, CTA Case No. 4249, at the very least, suspends
the running of the said prescriptive period. Under Section 271 of the NIRC of 1977, as amended,
the running of the prescriptive period to collect deficiency taxes shall be suspended for the period
during which the BIR Commissioner is prohibited from beginning a distraint or levy or instituting
a proceeding in court, and for 60 days thereafter.108 Just as in the cases of Republic v. Ker & Co.,
Ltd.109 and Protector's Services, Inc. v. Court of Appeals,110 this Court declares herein that the
pendency of the present case before the CTA, the Court of Appeals and this Court, legally
prevents the BIR Commissioner from instituting an action for collection of the same tax liabilities
assessed against PNOC and PNB in the CTA or the regular trial courts. To rule otherwise would
be to violate the judicial policy of avoiding multiplicity of suits and the rule on lis pendens.

Once again, that CTA Case No. 4249 was initiated by private respondent Savellano, the informer,
instead of PNOC, the taxpayer, or PNB, the withholding agent, would not prevent the suspension
of the running of the prescriptive period for collection of the tax. What is controlling herein is
the fact that the BIR Commissioner cannot file a judicial action in any other court for the collection
of the tax because such a case would necessarily involve the same parties and involve the same
issues already being litigated before the CTA in CTA Case No. 4249. The three-year prescriptive
period for collection of the tax shall commence to run only after the promulgation of the decision
of this Court in which the issues of the present case are resolved with finality.

Whether the filing of the Amended Petition for Review by private respondent Savellano entirely
stops or merely suspends the running of the prescriptive period for collection of the tax, it had
been premature for the BIR Commissioner to issue a writ of garnishment against PNB on 12
August 1991 and for the Central Bank of the Philippines to debit the account of PNB on 02
September 1992 pursuant to the said writ, because the case was by then, pending review by the
Court of Appeals. However, since this Court already finds that the compromise agreement is
without force and effect and hereby orders the enforcement of the assessment against PNB,
then, any issue or controversy arising from the premature garnishment of PNB's account and
collection of the tax by the BIR has become moot and academic at this point.

30
MAS
Additional Informer's Reward

Private respondent Savellano is entitled to additional informer's reward since the BIR had
already collected the full amount of the tax assessment against PNB.

PNOC insists that private respondent Savellano is not entitled to additional informer's reward
because there was no voluntary payment of the withholding tax liability. PNOC, however, fails
to state any legal basis for its argument.

Section 316(1) of the NIRC of 1977, as amended, granted a reward to an informer equivalent to
15% of the revenues, surcharges, or fees recovered, plus, any fine or penalty imposed and
collected.111 The provision was clear and uncomplicated an informer was entitled to a reward
of 15% of the total amount actually recovered or collected by the BIR based on his
information. The provision did not make any distinction as to the manner the tax liability was
collected whether it was through voluntary payment by the taxpayer or through garnishment
of the taxpayer's property. Applicable herein is another well-known maxim in statutory
construction Ubi lex non distinguit nec nos distinguere debemos when the law does not
distinguish, we should not distinguish.112

Pursuant to the writ of garnishment issued by the BIR, the Central Bank issued a debit advice
against the demand deposit account of PNB with the Central Bank for the amount
of P294,958,450.73, and credited the same amount to the demand deposit account of the
Treasurer of the Republic of the Philippines. The Treasurer of the Republic, in turn, already issued
a journal voucher transferring P294,958,450.73 to the account of the BIR.

Since the BIR had already collected P294,958,450.73 from PNB through the execution of the writ
of garnishment over PNB's deposit with the Central Bank, then private respondent Savellano
should be awarded 15% thereof as reward since the said collection could still be traced to the
information he had given.

WHEREFORE, in view of the foregoing, the Petitions of PNOC and PNB in G.R. No. 109976 and
G.R. No. 112800, respectively, are hereby DENIED. This Court AFFIRMS the assailed Decisions of
the Court of Appeals in CA-G.R. SP No. 29583 and CA-G.R. SP No. 29526, which affirmed the
decision of the CTA in CTA Case No. 4249, with modifications, to wit:

(1) The compromise agreement between PNOC and the BIR, dated 22 June 1987, is
declared void for being contrary to law and public policy, and is without force and effect;

(2)Paragraph 2 of RMO No. 39-86 remains a valid provision of the regulation;

(3)The withholding tax assessment against PNB, dated 08 October 1986, had become final
and unappealable. The BIR Commissioner is ordered to enforce the said assessment and
collect the amount of P294,958,450.73, the balance of tax assessed after crediting the

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MAS
previous payment made by PNOC pursuant to the compromise agreement, dated 22 June
1987; and

(4) Private respondent Savellano shall be paid the remainder of his informer's reward,
equivalent to 15% of the deficiency withholding tax ordered collected herein,
or P 44,243,767.61.

SO ORDERED.

Quisumbing, Sandoval-Gutierrez, Austria-Martinez, Callejo, Sr., and Garcia, JJ., concur.


Davide, Jr., C.J., Corona, and Carpio-Morales, joins J. Carpio in his dissenting opinion.
Puno, and Panganiban, J., concurs with the majority and the separate opinion of J. Tinga.
Ynares-Santiago, J., no part.
Carpio, J., see dissenting opinion.
Azcuna, J., no partwas PNB Chairman in 1991.
Tinga, J., see separate concurring opinion.

DISSENTING OPINION

CARPIO, J.:

I dissent from the majority opinion penned by Justice Minita V. Chico-Nazario.

First, the withholding tax liability of Philippine National Oil Company ("PNOC") is a delinquent
account that falls within the coverage of Executive Order No. 44 ("EO No. 44"), the tax
compromise law.

Second, PNOC filed its application for tax compromise under EO No. 44 within the period
prescribed by EO No. 44 and its implementing regulations.

Third, the tax compromise agreement made by PNOC with the Bureau of Internal Revenue ("BIR")
is now res judicata. The parties to the compromise agreement have fully implemented the
agreement in good faith.

Fourth, the BIR failed to collect the tax from within the three-year prescriptive period. Thus, the
collection of the tax is now barred by prescription.

PNOC's Tax Liability Falls under EO No. 44

On 16 January 1991, BIR Commissioner Jose U. Ong declared void the tax compromise agreement
that his predecessor Commissioner Bienvenido A. Tan made with PNOC more than three years

32
MAS
earlier. The compromise agreement, dated 22 June 1987, settled the P385,961,580.82 tax
liability of PNOC and the Philippine National Bank ("PNB") arising from PNB's failure to withhold
the final tax on interest income on money market placements of PNOC covering the years 1984
to August 1986.1 Under the compromise agreement, PNOC paid the BIR P93,955,479.12 in full
settlement of the tax liability arising from PNB's failure to withhold the final tax.

Article 2028 of the Civil Code defines a compromise as "a contract whereby the parties, by making
reciprocal concessions, avoid litigation or put an end to one already commenced." The purpose
of compromise is to settle the claims of the parties and bar all future disputes and controversies.2

In the present case, the BIR and PNOC entered into the tax compromise agreement in accordance
with the provisions of Executive Order No. 44 ("EO No. 44"), Revenue Memorandum Order No.
39-86 ("RMO No. 39-86") and Revenue Memorandum Order No. 4-87 ("RMO No. 4-87"). The
relevant provisions read:

Executive Order No. 44

SECTION 1. The Commissioner of Internal Revenue or his duly authorized representatives


may compromise any disputed assessment or delinquent account pending as of
December 31, 1985, upon the payment of an amount equal to thirty percent (30%) of the
basic tax assessed. In such cases, the Commissioner of Internal Revenue or his duly
authorized representatives shall condone the corresponding interests and penalties.
(Emphasis supplied)

xxx

SECTION 4. Section 246 of the National Internal Revenue Code, as amended, is hereby
suspended with respect to the disputed assessments and delinquent accounts referred to
herein for the duration of the effectivity hereof.

SECTION 5. All laws, orders, issuances, rules and regulations or any part thereof
inconsistent with this Executive Order is hereby repealed or modified accordingly.

SECTION 6. This Executive Order shall take effect immediately and shall remain effective
until March 31, 1987.

Revenue Memorandum Order No. 39-86

1. Coverage. - This Order shall apply only to (1) delinquent tax accounts; or (2) disputed
tax assessments pending as of December 31, 1985 within the purview of Executive Order
No. 44 and its implementing regulations. (Emphasis supplied)

1. x x x

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MAS
2. Disqualification.

3.1. There are pending assessments for withholding taxes.

By operation of law, the relationship between the Government and the withholding agent
is one of agency for which reason the withholding agent only holds the funds withheld by
him in trust for the Government. Accordingly, a withholding tax assessment issued against
a withholding agent (1) who withheld the tax (2) but did not remit the same to the
Government, shall not qualify for compromise settlement herein prescribed, even if the
assessment was issued as of December 31, 1985, because under this situation he is being
made accountable not as a taxpayer but as an agent. The disputed or delinquency cases
covered by Executive Order No. 44 refer only to those where the person assessed is
himself the taxpayer rather than a mere agent.

3.2. There is, however, another situation whereby a withholding agent did not withhold
the tax either because of neglect, ignorance of law or his belief that he is not required
by law to withhold a tax. Under this situation, such person is made directly accountable
for the tax. This latter situation shall, however, qualify for compromise settlement,
subject to the provisions of paragraph 1 hereof, in relation to implementing revenue
regulations of Executive Order No. 44. (Emphasis supplied)

xxx

8. Clearance.

8.1. 30% compromise settlement rate. - If the compromise settlement rate is equivalent
to 30% of the basic tax assessed, immediate action shall be taken on the taxpayer-
applicant's application. After payment of the compromise amount, the revenue office
which passed upon the application as referred to in paragraph 5.2 hereof, shall issue to
the taxpayer a letter, signed by the chief of the said revenue office, confirming the
payment and advising that the case is already closed. (Emphasis supplied)

xxx

Revenue Regulations No. 17-86

a) Delinquent account - Refers to the amount of tax due on or before December 31,
1985 from a taxpayer who failed to pay the same within the time prescribed for its
payment arising from (1) a self assessed tax, whether or not a return was filed, or (2) a
deficiency assessment issued by the BIR which has become final and executory. (Emphasis
supplied)

Revenue Memorandum Order No. 4-87

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MAS
2.0 Notwithstanding the lapse of Executive Order No. 41 as amended, pre-assessment
notices, assessment notices and letters of demand issued after August 21, 1986 which are
not otherwise covered by the availment of the amnesty, may nevertheless be
compromised under Sec. 246 of the Tax Code by paying 30% of the basic tax assessed or
pre-assessed.

RMO No. 39-86 expressly provides that a compromise shall include a "situation whereby a
withholding agent did not withhold the tax either because of neglect, ignorance of law or his
belief that he is not required by law to withhold a tax." In the present case, the majority opinion
states that the "BIR held the PNB personally accountable for its failure to withhold the tax on the
interest earnings and/or yields from PNOCs money placements."

PNB did not withhold and keep the tax for itself. PNB's case is a failure to withhold, not a failure
to remit to the BIR what it withheld for PNB withheld nothing. PNB is not the taxpayer here but
merely a withholding agent, burdened by law with a public duty to collect the tax for the
government. PNB is not only the withholding agent of the BIR, but also the agent of the taxpayer
in preparing the return and paying the tax. In Philippine Guaranty Co., Inc. v. Commissioner of
Internal Revenue,3 the Court held:

x x x Thus, the withholding agent is constituted the agent of both the Government and
the taxpayer. With respect to the collection and/or withholding of the tax, he is the
Government's agent. In regard to the filing of the necessary income tax return and the
payment of the tax to the Government, he is the agent of the taxpayer. The withholding
agent, therefore, is no ordinary government agent especially because under Section 53(c)
he is held personally liable for the tax he is duty bound to withhold; whereas, the
Commissioner of Internal Revenue and his deputies are not made liable by law. (Emphasis
supplied)

For failure to withhold the tax, PNB is made directly liable to pay the tax, not because it is the
taxpayer, but because it failed to comply with the law.4 PNB's legal duty is to withhold the tax,
file the prescribed quarterly return, and remit the tax to the BIR.5

PNB, which at that time was a government-owned and controlled corporation, did not withhold
because of an honest belief that there was no withholding tax on the interest income of a wholly
owned government corporation like PNOC. PNOC's application for restoration of its tax-exempt
status was then pending with the Fiscal Incentives Review Board.

Under paragraph 3.2 of RMO No. 39-86, a mere failure to withhold by the withholding agent shall
"qualify for compromise settlement." Thus, PNB's failure to withhold expressly falls within the
coverage of EO No. 44. What is outside the coverage of EO No. 44 is the failure of a withholding
agent to remit what it had withheld. In such a situation, the withholding agent absconds with
trust funds in its possession. Such a situation is definitely not subject to a tax compromise under
EO No. 44. RMO No. 39-86 provides that "a withholding tax assessment issued against a
withholding agent (1) who withheld the tax (2) but did not remit the same to the Government,

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MAS
shall not qualify for compromise settlement." PNB's case, however, is not a failure to remit the
withheld tax but a plain failure to withhold the tax. PNB did not withhold the tax and thus did not
abscond with public or trust funds.

EO No. 44, issued on 4 September 1986, is a special law enacted when then President Corazon C.
Aquino exercised legislative powers. EO No. 44 is separate and distinct from the authority of the
BIR Commissioner to compromise taxes under the Tax Code.6 EO No. 44 is a one-time tax
compromise scheme, "effective until March 31, 1987" and covering only "disputed assessment
or delinquent account pending as of December 31, 1985." EO No. 44 was issued to generate
immediate revenues for the new government following the 1986 EDSA revolution, as well as to
clear the tax dockets of the BIR as of 31 December 1985. Thus, the whereas clauses of EO No. 44
state in part:

xxx

WHEREAS, there is a need to clear this backlog of pending cases of disputed assessments
and delinquent accounts;

WHEREAS, there is a further need to raise revenues.

x x x.

The power of the BIR Commissioner to compromise under EO No. 44 is broader than his power
to compromise under the Tax Code. Under Section 204 of the Tax Code,7 the BIR Commissioner
can compromise a tax only if there is reasonable doubt as to its validity or if the taxpayer's
financial position shows a clear inability to pay the tax. EO No. 44 does not require these
conditions. A compromise under Section 204 requires an examination of the legal basis of the
assessment or the financial capacity of the taxpayer to pay the assessment. EO No. 44 does not
require such examination.

The conditions in EO No. 44 are straightforward and require no examination of the legal basis of
the assessment or financial capacity of the taxpayer. The conditions in EO No. 44 are plain and
simple: first, the disputed assessment or delinquent account is pending as of 31 December
1995; and second, the taxpayer is willing to pay thirty percent of the basic tax assessed. EO No.
44 prescribed simple, plain and straightforward conditions precisely to encourage taxpayers to
avail of the tax compromise program under EO No. 44.

EO No. 44 is a special law that prevails over Section 204 of the Tax Code. Section 4 of EO No. 44
states:

Section 4. Section 246 (now 204) of the National Internal Revenue Code, as amended, is
hereby suspended with respect to the disputed assessments and delinquent accounts
referred to herein for the duration of the effectivity hereof.

36
MAS
The stringent standards prescribed in Section 204 of the Tax Code do not apply to compromise
agreements under EO No. 44. The law expressly suspended the effectivity of Section 204 of the
Tax Code during the effectivity of EO No. 44.

Thus, during the effectivity of EO No. 44, the only tax compromise possible for delinquent
accounts as of 31 December 1985 is under EO No. 44. PNOC filed its application with the BIR for
a tax compromise during the effectivity of EO No. 44. Obviously, PNOC's application for a tax
compromise of its delinquent accounts as of 31 december 1985 meant a tax compromise under
eo no. 44. the bir had no authority to entertain any other tax compromise.

rr no. 17-86 defines a "delinquent account" to include a "self-assessed tax." the majority opinion
adopts respondents' argument that pnoc's withholding tax liability is not a "self-assessed tax"
because the bir investigated the taxpayer and assessed the tax. here lies the fundamental error
of the majority opinion. the majority opinion states:

pnoc's tax liability could not be considered a delinquent account since (1) it was not self-
assessed, because the bir conducted an investigation and assessment of pnoc and
pnb after obtaining information regarding the non-withholding of tax from private
respondent savellano; x x x. (emphasis supplied)

the majority opinion's thesis is contrary to the very concept of a self-assessed tax.

a self-assessed tax, as the term implies, is self-assessed by the taxpayer without the
intervention of an assessment by the taxing authority to create the tax liability. a self-assessed
tax means a tax that the taxpayer himself assesses or computes and pays to the taxing authority.
in Tupaz v. Ulep,8 this Court explained that a self-assessed tax is one where "no further
assessment by the government is required to create the tax liability." A self-assessed tax falls
due without need of any prior assessment by the BIR, and non-payment of a self-assessed tax on
the date prescribed by law results in penalties even in the absence of any assessment by the BIR.

A clear example of a self-assessed tax is the annual income tax, which the taxpayer himself
computes and pays without the intervention of any assessment by the BIR. The annual income
tax becomes due and payable without need of any prior assessment by the BIR. The BIR may or
may not investigate or audit the annual income tax return filed by the taxpayer. The taxpayer's
liability for the income tax does not depend on whether or not the BIR conducts such subsequent
investigation or audit.

However, if the taxing authority is first required to investigate, and after such investigation to
issue the tax assessment that creates the tax liability, then the tax is no longer self-assessed. This
is not the case of the final withholding tax on interest income on money market placements.

The computation of the amount of the final withholding tax on interest income does not require
any assessment by the BIR. The taxpayer can easily determine the amount of the tax since it is a
flat rate based on the interest paid. In fact, the bank automatically computes the amount of the

37
MAS
final withholding tax, deducts the tax from the taxpayer's interest income, and remits the tax to
the BIR. The BIR does not make any assessment. Plainly, the final withholding tax on interest
payment is a self-assessed tax.

The taxpayer's failure to pay when due a self-assessed tax, while it may result in a subsequent
investigation and assessment by the BIR, does not remove the character of the tax as a self-
assessed tax. The tax liability of the taxpayer arises on due date of the tax, and the non-payment
of the self-assessed tax on due date does not prevent the tax liability from attaching. The tax
liability is created by operation of law, even in the absence of an investigation and assessment
by the BIR. The subsequent BIR investigation and assessment is for the purpose of collecting a
past due tax, and not for the purpose of creating the tax liability. Of course, the computation by
the taxpayer of his tax liability under a self-assessed tax is not conclusive on the BIR. After
investigation or audit, the BIR can issue an assessment for any deficiency tax still due from the
taxpayer.

In Tupaz v. Ulep,9 the Court declared that "internal revenue taxes are self-assessing." The final
withholding tax on interest income is an internal revenue tax. Indeed, the Tax Code follows the
pay-as-you-file system of taxation under which the taxpayer computes his own tax liability,
prepares the return, and pays the tax as he files the return. The pay-as-you-file system is a self-
assessing tax system.

EO No. 44 is a general tax compromise program covering all delinquent taxes and disputed
assessments under the Tax Code as of 31 December 1985. EO No. 44 does not distinguish
between delinquent accounts that are or are not the subject of subsequent investigation and
assessment by the BIR. Where the law does not distinguish, courts should not distinguish. To
remove from the coverage of EO No. 44 delinquent accounts that became the subject of
subsequent investigation and assessment would severely limit the coverage of EO No. 44, a
limitation that is not found in the language or intent of EO No. 44. Indeed, such a limitation would
defeat the avowed purpose of EO No. 44 to clear the tax dockets of the BIR. The big delinquent
accounts, such as PNOC's tax liability, which normally go through subsequent investigation and
assessment, would not qualify for the general tax compromise program, preventing EO No. 44
from attaining its objectives.

Clearly, PNOC's tax liability is a delinquent account within the coverage of EO No. 44 because
it is a self-assessed tax unpaid as of 31 December 1985.10 There can be no dispute that the final
withholding tax on interest payments by PNB on PNOC's money market placements does not
require the intervention of the BIR for its assessment and remittance to the BIR.

Thus, the compromise agreement between PNOC and BIR falls within the coverage of EO No. 44
and its implementing rules. The non-payment of the final withholding tax has resulted in a
delinquent tax account of PNOC. In addition, the failure of PNB to withhold the tax falls within
the coverage of RMO No. 39-86.

38
MAS
However, the majority opinion insists that PNOC's withholding tax liability is outside the coverage
of EO 44 because there is no proof that PNOC or PNB filed the tax return in compliance with
the self-assessment system. The majority opinion states:

Neither PNOC nor PNB, the taxpayer and the withholding agent, respectively, complied
with the system and conducted self-assessment in this case. There is no showing that in
the absence of tax assessment issued by the BIR against them, that PNOC and/or PNB
would have voluntarily admitted their tax liabilities, already amounting
to P385,961,580.82, as of 15 November 1986, and would have offered to compromise the
same. In fact, both PNOC and PNB were conspicuously silent about their tax liabilities until
they were assessed thereon. (Emphasis supplied)

The majority opinion conveniently forgets that the tax compromise under EO 44 and its
implementing rules covers "a self-assessed tax, whether or not a return was filed." Revenue
Regulations No. 17-86 provides:

Delinquent account - Refers to the amount of tax due on or before December 31, 1985
from a taxpayer who failed to pay the same within the time prescribed for its payment
arising from (1) a self assessed tax, whether or not a return was filed, or (2) a deficiency
assessment issued by the BIR which has become final and executory.

Where no return was filed, the taxpayer shall be considered delinquent as of the time
the tax on such return was due, and in availing of the compromise, a tax return shall be
filed as a basis for computing the amount of compromise to be paid. (Emphasis supplied)

Clearly, the tax compromise under EO No. 44 applies to a self-assessed tax, whether or not a
return was filed, because Revenue Regulations No. 17-86 expressly so provides.

Revenue Regulations No. 17-86 even states, "Where no return was filed, the taxpayer shall be
considered delinquent as of the time the tax on such return was due, and in availing of the
compromise, a tax return shall be filed as a basis for computing the amount of compromise to
be paid." If the taxpayer failed to file the return, he can avail of the tax compromise by filing a
return, which shall serve as basis for computing the compromise amount. Revenue Regulations
No. 17-86 expressly applies to delinquent accounts of taxpayers who failed to file the returns.

EO No. 44 and its implementing rules do not require that PNOC or PNB must have "complied with
the system and conducted self-assessment" before they could avail of the tax compromise. The
BIR could not have required the thousands of taxpayers who availed of the tax compromise under
EO No. 44 to show proof that they filed their tax returns. There is no such requirement in EO No.
44 or in its implementing rules. On the contrary, Revenue Regulations No. 17-86 expressly states
"whether or not a return was filed" which means that the filing of a tax return is not a condition
for the availment of the tax compromise. The BIR never required the thousands of taxpayers who
availed of EO No. 44 to prove that they filed their tax returns. For the majority opinion to require

39
MAS
now PNOC and PNB to prove that they filed the tax returns would constitute denial of equal
protection of the law.

The tax compromise under EO No. 44 and its implementing rules applies to self-assessed
taxes, whether or not the corresponding tax returns were filed. The definition of a delinquent
account that is subject to the tax compromise expressly includes a self-assessed tax "whether or
not a return was filed." There can be no clearer language than this to express that the taxpayer
is not required to prove that he filed the tax return. There is absolutely no legal basis in requiring
PNOC or PNB to show proof that they filed the proper tax returns before they could avail of the
tax compromise. The majority opinion is patently wrong in holding that PNOC and PNB must
prove that they filed the tax returns before they can avail of the tax compromise.

The majority opinion also insists that PNOC's withholding tax liability is outside the coverage of
EO No. 44 because the BIR subsequently investigated and assessed PNOC for the withholding
tax liability. The majority opinion states:

It is important to remember that, in this case, any attempt by PNOC and PNB to assess
and declare by themselves their tax liabilities had already been overtaken by the BIR's
conduct of its audit and investigation and subsequent issuance of the assessments, dated
8 August 1986 and 8 October 1986, against PNOC and PNB, respectively. The said tax
assessments, uncontested and undisputed, already presented the results of the BIR
audit and investigation and the computation of the total amount of tax liabilities of
PNOC and PNB, and should be controlling in this case. They should not be so easily and
conveniently ignored and set aside. It would be a contradiction to claim that the tax
liabilities of PNOC and PNB are self-assessed and, at the same time, BIR-assessed; when
it is clear and simple that it had been the BIR that conducted the assessment and
determined the tax liabilities of PNOC and PNB.

The majority opinion theorizes that a taxpayer with a delinquent account consisting of a self-
assessed tax cannot avail of EO No. 44 if the BIR issued an assessment against the
taxpayer because the BIR assessment is allegedly controlling.

The majority opinion's theory that a subsequent BIR assessment removes a delinquent account
from the coverage of EO No. 44 collides directly with Revenue Memorandum Order No. 39-
8611 which implements EO No. 44. Revenue Memorandum Order No. 39-86 expressly
recognizes that the delinquent accounts subject to compromise under EO No. 44 may be
"covered by a letter of demand and assessment notice" by the BIR. Revenue Memorandum
Order No. 39-86 provides:

xxx

6. Base of the compromise settlement rate. - The compromise settlement rate shall be
applied against the basic tax assessed referred to under paragraph 5.1 hereof. In no case
may any revenue office passing upon cases covered hereunder cause any computational

40
MAS
adjustment or adjustments in determining the basic tax before applying the compromise
settlement rate, any error in the assessment and demand being compromised
notwithstanding. In all instances, the compromise settlement rate shall be applied against
the basic tax assessed. If the assessment is covered by a letter of demand and
assessment notice, the compromise settlement rate shall be applied against the basic
tax assessed as shown in the said letter of demand and assessment notice.

7. Allowable compromise settlement rates below thirty percent (30%). - The Evaluation
Committee shall apply exclusively the compromise settlement rates prescribed
hereunder:

7.1 "Jeopardy" tax assessment as defined under RMO 17-85 (while RMO 17-85
speaks only of income tax assessments, this compromise settlement shall,
however, apply to all internal revenue tax assessments in the nature of a
"jeopardy" tax assessment) - 10%

7.2 Arbitrary assessments which have been issued only and primarily to forestall
prescription - 10%

7.3 Tax assessments of doubtful validity whether as to law or as to facts - 15%

x x x.

Paragraph 6 of Revenue Memorandum Order No. 39-86 expressly provides, "If the assessment
is covered by a letter of demand and assessment notice, the compromise settlement rate shall
be applied against the basic tax assessed as shown in the said letter of demand and assessment
notice." The BIR assessment is even made the basis in applying the 30% settlement rate under
EO No. 44. Indisputably, a subsequent BIR assessment does not remove a delinquent account
from the coverage of EO No. 44.

With or without a BIR assessment, a delinquent account qualifies for tax compromise under EO
NO. 44 provided it is a self-assessed tax unpaid as of 31 December 1985. EO No. 44 and its
implementing rules do not exclude delinquent accounts that were issued BIR assessments. On
the contrary, Revenue Memorandum Order No. 39-86 expressly states that the BIR assessment
shall serve as basis in applying the compromise settlement rate under EO No. 44. The majority
opinion is mistaken in holding that EO No. 44 and its implementing rules exclude BIR-assessed
delinquent accounts from the coverage of the tax compromise. Revenue Memorandum Order
No. 39-86 even expressly includes within the coverage of EO No. 44 jeopardy assessments,
arbitrary assessments, and doubtful assessments issued by the BIR. Clearly, a subsequent BIR
assessment indeed any kind of subsequent BIR assessment - does not remove a delinquent
account from the coverage of EO No. 44.

Thousands of taxpayers availed of the tax compromise under EO No. 44 although the BIR had
issued them assessments, whether regular assessments, jeopardy assessments, arbitrary

41
MAS
assessments or doubtful assessments. For the majority opinion to exclude PNOC or PNB from
availing of the same tax compromise because the BIR issued PNOC an assessment would
constitute a denial of equal protection of the law. PNOC's and PNB's withholding tax liability
clearly falls within the coverage of EO No. 44 and its implementing rules.

The majority opinion further claims that PNOC does not fall under EO No. 44 but under Revenue
Memorandum Circular No. 31-86 because the assessment against PNOC was issued on 8 August
1986. The majority opinion states:

As has already been discussed in the main opinion, the assessment against PNOC, issued
on 08 August 1986, is more appropriately covered by the following provision of Revenue
Memorandum Circular (RMC) No. 31-86:

[T]axpayers against whom assessments had been issued from January 1 to August
21, 1986 may settle their tax liabilities by way of compromise under Section 246
of the Tax Code as amended by paying 30% of the basic tax assessment excluding
surcharge, interest, penalties and other increments thereto. (Emphasis supplied)

The majority opinion gratuitously states that PNOC is "more appropriately covered" by Revenue
Memorandum Circular No. 31-86. However, the majority opinion then declares that PNOC is still
not qualified for tax compromise under Revenue Memorandum Circular No. 31-86, thus:

However, even though the tax assessment against it was issued on 08 August 1986, PNOC
would still not be entitled to compromise its tax liability under the above-quoted
provision of RMC No. 31-86 because it failed to allege, must less present any evidence
that: (1) there existed a reasonable doubt as to the validity of the claim against it; or (2)
its financial position demonstrated a clear inability to pay the assessed tax, as required by
Section 246 of the Tax Code of 1977, as amended.

The majority opinion wants to deprive PNOC from availing of the tax compromise under EO No.
44 just because the BIR issued the assessment on 8 August 1986. There is nothing in EO No. 44
or in Revenue Regulations No. 17-86 that excludes from the tax compromise delinquent accounts
as of 31 December 1985 that were the subject of assessments issued after 31 December 1985. On
the contrary, Revenue Regulations No. 17-86 expressly provides that the delinquent accounts
may be covered by regular assessments, jeopardy assessments, arbitrary assessments and
doubtful assessments. Revenue Regulations No. 17-86 does not state that these assessments
should be issued before 1 January 1986.

In fact, taxes falling due in the fourth quarter of 1985 could never be issued assessments before
1 January 1986. The assessments for most of the taxes falling due in tax year 1985 could only
be issued from 1 January 1986 onwards. To exclude unpaid taxes falling due in 1985 just because
the BIR issued assessments on these accounts from 1 January 1986 onwards would render the
tax compromise under EO No. 44 inutile.

42
MAS
The period from 1 January to 21 August 1986 in Revenue Memorandum Circular No. 31-86 refers
to those who could not avail of the tax amnesty under Executive Order No. 4112 which was
issued on 22 August 1986. The cut-off date is 21 January 1986 because this is the day before EO
No. 41 was issued. However, this period has become irrelevant because EO No. 41, which
originally covered only tax years 1981 to 1985, was amended by Executive Order No. 9513 to
extend the tax amnesty up to 31 January 1987.

Clearly, the reference to 1 January to 21 August 1986 has nothing to do with EO No. 44 which is
different from EO No. 41. EO No. 44 is a tax compromise while EO No. 41 is a tax amnesty and
they cover different taxable years. PNOC's tax delinquency for the period 1 January 1986 onwards
is not covered by EO No. 44 which applies only to unpaid taxes as of 31 December 1985. This is
why in its letter of 26 September 1986 to the BIR requesting for a tax compromise PNOC also
invoked Section 246 of the Tax Code to cover the period from 1 January 1986 onwards.

Although PNB is not a signatory to the compromise agreement, the subject matter of the
compromise falls expressly within the coverage of EO No. 44 and its implementing rules. The
compromise agreement absolved PNOC from any tax liability after PNOC paid the compromise
amount. The BIR can no longer recover the foregone tax, either from PNOC or from PNB. Unless
an express reservation is made in the compromise agreement and there is none here, the
compromise amount stands in the place of the amount originally assessed against PNOC.

PNOC Filed its Tax Compromise Application on Time

The majority opinion states that PNOC filed its application for tax compromise under EO No.
44 out of time. The majority opinion asserts:

More importantly, even assuming arguendo that the liabilities of PNOC and PNB qualify
as delinquent accounts, the application for compromise filed by PNOC on 09 June 1987,
and accepted by then BIR Commissioner Tan on 22 June 1987, was filed way beyond 31
March 1987, the expiration date of the effectivity of E.O. No. 44 and the deadline for
filing of applications for compromise under Revenue Memorandum Order (RMO) No. 39-
86. (Emphasis supplied)

Revenue Memorandum Order No. 39-86 fixes the period for availing of the tax compromise
under EO No. 44. Paragraph 2 of Revenue Memorandum Order No. 39-86 provides:

2. Period for availment. - Filing of application for compromise settlement under the said
law shall be effective only until March 31, 1987. Applications filed on or before this date
shall be valid even if the payment or payments of the compromise amount shall be
made after the said date, subject, however, to the provisions of Executive Order No. 44
and its implementing Revenue Regulations No. 17-86.

The deadline for filing the application is 31 March 1987. Applications filed on or before 31 March
1987 "shall be valid" even if the compromise amount is paid after 31 March 1987.

43
MAS
Contrary to the majority opinion's claim that the effectivity of EO No. 44 expires on 31 March
1987, Revenue Memorandum Order No. 39-86 provides that applications filed on or before 31
March 1987 shall be valid even if the payment is made after 31 March 1987. Thus, the crucial
issue is whether PNOC filed any application to avail of the tax compromise under EO No. 44 on
or before the deadline of 31 March 1987.

On 25 September 1986, long before the 31 March 1987 deadline, PNOC wrote the BIR submitting
a compromise settlement pursuant to EO No. 44 as well as Section 246 of the Tax Code. PNOC's
letter reads:

We would like to amicably settle this liability with the BIR. In this regard, we wish to
invoke the authority vested by law in your office, particularly under Section 246 of the
National Internal Revenue Code, as amended, and the spirit underlying Executive Order
No. 44 dated September 4, 1986. Consequently, we hereby request for a compromise
settlement and submit our offer for compromise of the matter, as follows: x x x.14

More than five months before the deadline of 31 March 1987, PNOC had already applied with
the BIR for a tax compromise under EO No. 44 and Section 246 of the Tax Code. Apparently, PNOC
invoked EO No. 44 for its delinquent tax liability from 15 October 1984 to 31 December 1985,
and Section 246 of the Tax Code for its tax liability from 1 January 1986 onwards since EO No. 44
covered only delinquent accounts as of 31 December 1985.

PNOC filed its application for tax compromise on 25 September 1986, during the effectivity of EO
No. 44. EO No. 44 suspended during the effectivity of EO No. 44 the BIR Commissioner's power
to enter into tax compromises under Section 204 of the Tax Code. This suspension refers to
delinquent accounts as of 31 December 1985, the delinquencies covered under EO No. 44. Thus,
when PNOC applied for tax compromise of its delinquent accounts as of 31 December 1985,
the application for tax compromise could only have referred to EO No. 44 and not to any other
tax compromise law. During the effectivity of EO No. 44, the BIR Commissioner had no power
to compromise tax delinquencies as of 31 December 1985 under any law except EO No. 44.
PNOC's application for tax compromise of its delinquent accounts as 31 December 1985 was
clearly based on EO No. 44 as the only law then governing tax compromises for such
delinquencies.

After the BIR received PNOC's letter of 26 September 1986, several meetings took place between
the BIR and PNOC on PNOC's request to avail of the tax compromise under EO No. 44. On 14
October 1986, PNOC reiterated its compromise settlement proposal to the BIR. There were also
several exchanges of communications between the BIR and PNOC. On 9 June 1987, the PNOC
wrote again the BIR in this manner:

If your office will recall, our Company (even under the administration of then PNOC
Chairman and President Vicentc T. Paterno) had originally requested in writing and
negotiated for the compromise of the subject tax assessment pursuant to the beneficial

44
MAS
provisions of E.0. No. 44, as early as September, 1986, shortly after the effectivity of
Executive Order.

It appears, however, that the provisions of BIR Revenue Memorandum Order No. 39-86
may not have been applied or considered at length in evaluating the legal basis and merits
of our compromise request, in our favor, since most of the negotiations and the earlier
decisions of your office were made prior to the promulgation of BIR Revenue
Memorandum Order No. 39-86 on November 18, 1986. (In fact, the last letter in the 1986
series of correspondences between your office and our Company is dated November 11,
1986.)

We cite in particular the provisions of Section 3.2 of your Revenue Memorandum Order
No. 39-86, by virtue of which the subject tax assessment is qualified for compromise
settlement under E.0. No. 44. Under these provisions, the tax liability resulting from the
situation "whereby a withholding agent did not withhold the tax either because of
neglect, ignorance of law or his belief that he is not required by law to withhold a tax,"
is deemed qualified for compromise settlement under E.O. No. 44.

The case contemplated by the cited provisions of BIR Revenue Memorandum Order No.
39-86 squarely covers our present case, considering that the final withholding tax on the
interest earnings of our Company's placements with PNB were not withheld by PNB
because of PNB's honest belief then, that it was not required by law to commence
withholding the tax. At that time, it was the clear impression and understanding of both
PNB and our Company that PNOC's tax exemptions continued to subsist during the
pendency of PNOC's tax exemption restoration application with the Fiscal Incentives
Review Board (FIRB), until and unless the application is categorically denied or resolved
to the contrary. In fact, it was only in the course of the subject BIR tax assessment that
the effective loss of PNOC's tax exemptions was categorically raised by the BIR.

Consequently, we reiterate our previous request for compromise under E.O. No. 44, and
convey our preparedness to settle the subject tax assessment liability by payment of
the compromise amount of P91,003,129.89, representing thirty percent (30%) of the
basic tax assessment of P303,343,766.29, in accordance with E.O. No. 44 and its
implementing BIR Revenue Memorandum Order No. 39-86.15 (Emphasis supplied)

PNOC's letter of 9 June 1987 explains why the BIR could not immediately act on its 26 September
1986 request for tax compromise under EO No. 44. When PNOC wrote the 26 September 1986
letter, only EO No. 44 and Revenue Regulations No. 17-86 were in existence. The BIR
Commissioner had not yet issued Revenue Memorandum Order No. 39-86 which clarified that
the failure to withhold taxes did not prevent the taxpayer or withholding agent from availing of
the tax compromise under EO No. 44, which was the situation of PNOC and PNB. It was only
during the course of the negotiations between PNOC and the BIR that the BIR Commissioner
issued Revenue Memorandum Order No. 39-86.

45
MAS
As a result of the negotiations, PNOC reiterated its 26 September 1986 application for tax
compromise under EO No. 44 by writing the 9 June 1987 letter to the BIR. In turn, the BIR
Commissioner approved the tax compromise on 22 June 1987. Thereafter, PNOC paid the full
amount of the tax compromise in three installments from June to October 1987. Revenue
Regulations No. 17-86 authorized the instalment payment because the compromise amount was
over P50,000.16 Clearly, PNOC's 26 September 1986 letter-request for tax compromise under EO
No. 44 culminated successfully on 22 June 1987 in the approval of the tax compromise under EO
No. 44. This is actual compliance with the requirement that the application for tax compromise
under EO No. 44 should be filed on or before 31 March 1987.

Indeed, the BIR knew that PNOC filed its application for tax compromise "under E.O. 44 as early
as September 1986." The Memorandum dated 16 January 199117 submitted by Venancia M.
Pangilinan, Chief of the BIR Litigation Division, and approved by BIR Commissioner Ong, states:

PNOC, through the letter of its legal counsel dated June 9, 1987, offered to
pay P91,003,129.89 representing 30% of the basic withholding tax of P303,343,766.29
pursuant to E.O. 44 which took effect on September 4, 1986, to be paid on installment
basis, viz:

xxx

x x x From the tenor of the above letter, it appears PNOC has made a previous offer of
settlement of this case under E.O. 44 as early as September 1986, shortly after the
effectivity of said E.O. (Emphasis supplied)

The Tax Compromise is now Res Judicata

A compromise agreement constitutes a final and definite settlement of the controversy between
the parties.18 A compromise agreement, even if not judicially approved, has the effect of res
judicata on the parties. Article 2037 of the Civil Code provides:

A compromise has upon the parties the effect and authority of res judicata; but there
shall be no execution except in compliance with a judicial compromise. (Emphasis
supplied)

The compromise agreement has the force of law between the parties and no party may discard
unilaterally the compromise agreement.19 Under Section 8.1 of RMO No. 39-86, upon payment
of the compromise amount, the tax "case is already closed." The Solicitor General, who withdrew
as counsel for the BIR, maintains that the compromise agreement is valid.

Where a party has received the consideration for the compromise agreement, such party is
estopped from questioning its terms and asking for the reopening of the case on the ground of
mistake.20 As explained in McCarthy v. Barber Steamship Lines:21

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MAS
Hence it is general rule in this country, that compromises are to be favored, without
regard to the nature of the controversy compromised, and that they cannot be set aside
because the event shows all the gain to have been on one side, and all the sacrifice on the
other, if the parties have acted in good faith, and with a belief of the actual existence of
the rights which they have respectively waived or abandoned; and if a settlement be
made in regard to such subject, free from fraud or mistake, whereby there is a surrender
or satisfaction, in whole or in part, of a claim upon one side in exchange for or in
consideration of a surrender or satisfaction of a claim in whole or in part, or of something
of value, upon the other, however baseless may be the claim upon either side or harsh
the terms as to either of the parties, the other cannot successfully impeach the agreement
in a court of justice * * *. Where the compromise is instituted and carried through in good
faith, the fact that there was a mistake as to the law or as to the facts, except in certain
cases where the mistake was mutual and correctable as such in equity, cannot afford a
basis for setting a compromise aside or defending against a suit brought thereon * * *

xxx

And whether one or the other party understood the law of the case more correctly than
the other, cannot be material to the validity of the bargain. For if it were, then it would
follow that contracts by the parties settling their own disputes, would at last be made to
stand or fall, according to the opinion of the appellate court how the law would have
determined it. (Emphasis supplied)

In People v. Magdaluyo,22 the BIR Commissioner approved the agreement which compromised
the taxpayer's violation of the Tax Code. The taxpayer paid the compromise amount before the
filing of the criminal information in court. The Court ruled that the government could no longer
prosecute the taxpayer for violation of the Tax Code.

The same principle holds true in the present case. The parties to the compromise agreement
have voluntarily settled the tax liability arising from PNB's failure to withhold the final tax on
PNOC's interest income. The parties have fully implemented in good faith the compromise
agreement. The new BIR Commissioner cannot just annul the legitimate compromise agreements
made by his predecessors in the performance of their regular duties where the parties entered
into the compromise agreements in good faith and had already fully implemented the
compromise agreements.23

To rule otherwise would subject the validity and finality of a tax compromise agreement to
depend on the different interpretations of succeeding BIR Commissioners. Such lack of finality of
tax compromises would discourage taxpayers from entering into tax compromises with the BIR,
considering that compromises entail admissions by taxpayers of violations of tax laws. A tax
compromise cannot be invalidated except in case of mistake, fraud, violence, undue influence,
or falsity of documents. Article 2038 of the Civil Code provides:

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MAS
Article 2038. A compromise in which there is mistake, fraud, violence, intimidation,
undue influence, or falsity of documents, is subject to the provisions of Article 1330 of
this Code.

x x x (Emphasis supplied)

Article 1330 of the Civil Code makes compromises tainted with such circumstances voidable.24 In
the present case, there is no mistake because PNOC's delinquent account clearly falls within the
coverage of EO No. 44. Also, PNOC clearly filed its application for tax compromise before the
deadline. Thus, none of the circumstances that make a compromise voidable is present in this
case.

PNB was a government-owned and controlled corporation when it failed to withhold the tax.
PNOC, the taxpayer primarily liable for the tax, was then also a government-owned and
controlled corporation, and remains so until now. PNB did not abscond with any tax money
because this is a case of failure to withhold the tax and not a failure to remit a withheld tax. No
fraud or bad faith is ascribable to PNB or PNOC in the execution of the compromise agreement.

Collection of Tax is Barred by Prescription

PNB regularly filed its quarterly returns covering the final withholding tax on all money market
placements with PNB for the years 1984 to 1985.25 Under Revenue Regulations No. 12-80, PNB
prepared its quarterly returns using BIR Form No. 1745,26 as follows:

SECTION 4. Manner of Computation of Tax Base. For purposes of Section 3 above, tax
bases of the following taxes shall be computed in the following manner:

(a) Final withholding tax on savings deposits. x x x

xxx

(c) Final withholding tax on yield of deposit substitutes.- The final withholding tax on
yield of deposit substitute shall be based on the adjusted gross interest or yield paid or
accrued by banks or non-bank financial intermediaries on all of its deposit substitute
debt instruments issued.

The adjusted gross interest or yield paid or accrued is arrived at after deducting from the
total interest or yield paid or accrued on deposit substitutes, the sum of

(1) All interest and/or yield paid or accrued on deposit substitute earned by tax-exempt
entities;

(2) All interest and/or yield paid or accrued on inter-bank loans, including those between
or among quasi-banks;

48
MAS
(3) All interest and/or yield paid or accrued on borrowings from World Bank, Asian
Development Bank, International Finance Corporation and similar institutions; and

(4) All interest and/or yield paid or accrued on deposit substitutes exempt from
withholding tax.

The adjusted gross interest and/or yield paid or accrued on deposit substitute debt
instruments shall further be detailed as to amount subjected in full to the twenty per
centum (20%) final withholding tax and amount subjected to preferential final
withholding tax rates in the prescribed from (B.I.R. Form No. _____). (Emphasis supplied)

Thus, the computation for the quarterly returns already took into account "[A]ll interest and/or
yield paid or accrued on deposit substitute earned by tax-exempt entities," including interest
income of PNOC on its money market placements since PNB believed in good faith that PNOC
was exempt from the withholding tax. After filing of the quarterly returns, the BIR had every
opportunity to investigate and audit the correctness of the PNB's computation.

The last day for filing the quarterly return for the last quarter of 1985 was 25 January 1986. The
BIR and PNOC signed the compromise agreement on 22 June 1987. BIR Commissioner Ong
abrogated the compromise agreement on 16 January 1991, the same day the BIR issued the final
assessment against PNOC and PNB for the P294,958,450.73 foregone tax. From 25 January 1986,
the last day for PNB to file the fourth quarter return for 1985, to the issuance of the final
assessment for the foregone tax on 16 January 1991, more than four years had lapsed. The Tax
Code requires the BIR to assess and collect the tax within three years from the last day of filing
of the tax return.

In the present case, the BIR had until 25 January 1990 to assess and collect the tax. Otherwise,
the right of the government to assess or collect the tax would prescribe. Section 318 of the Tax
Code, the section governing prescription during the taxable years 1984 and 1985, then provided
as Section 20327 of the Tax Code now similarly provides:

Sec. 318. Period of limitation upon assessment and collection Except as provided in the
succeeding section, internal revenue taxes shall be assessed within three years after the
last day prescribed by law for the filing of the return, and no proceeding in court without
assessment for the collection of such taxes shall be begun after the expiration of such
period: Provided, That in case where a return is filed beyond the period prescribed by law,
the three-year period shall be counted from the day the return was filed. For the purposes
of this section, a return filed before the last day prescribed by law for the filing thereof
shall be considered as filed on such last day.

The law prescribes two conditions for the collection of internal revenue taxes. First, the BIR must
assess the tax on the taxpayer within three years from the last day of filing of the tax
return. Second, the BIR must collect judicially or administratively the tax also within three years
from the last day of filing of the tax return. In short, the BIR must institute both the assessment

49
MAS
and the collection case within three years from the last day of filing of the return, but the
assessment must precede the collection case. One textbook writer put it succinctly in this
manner:

As mandated by law (Sec. 203, 1997 NIRC), the Government must assess on time, that is
to say, not later than three years counted from and after the period fixed by law for the
filing of the tax return or the actual date of filing, whichever is the later date.

xxx

In the case of self-assessed taxes like the income tax that the taxpayer himself assesses
and reflects on his return, the collection thereof may proceed without any further
assessment; in which case, therefore, the prescriptive period of collection applies.
Hence, the BIR must collect such tax, either by summary or judicial remedies, within
three (3) years from the date of filing of the tax return. This is so because the date of
assessment in the case of self-assessed taxes would be the date of the actual filing of the
return as it is on such date when the tax is said to have been assessed (Sec. 222[c], 1997
NIRC).28 (Emphasis supplied)

Since more than four years had lapsed since the filing of the last quarterly return on 25 January
1986, the BIR could no longer assess the foregone tax on PNOC when the BIR abrogated the
compromise agreement on 16 January 1991. The reckoning date for the three-year prescriptive
period for withholding taxes due before the last quarter of 1985 is even earlier than 25 January
1986. Even assuming that the BIR had assessed the tax within the three-year prescriptive period,
the BIR could no longer collect the foregone tax when it demanded payment from PNOC and PNB
on 16 January 1991, the date the BIR abrogated the compromise agreement. The BIR must issue
the tax assessment, and judicially collect the assessed tax, within three years from the last day
of filing of the last quarterly return.

Of course, the BIR may also administratively collect the assessed tax by distraint of personal
property or levy on real property.29 However, the BIR must take these summary remedies within
the three-year prescriptive period for collecting the assessed tax. In the present case, the BIR
issued the warrant of garnishment against PNB on 12 August 1991, more than five years from
the last day of filing of the last quarterly return on 25 January 1986. Thus, the garnishment of
PNB's account with the Central Bank on 23 August 1991 is void since the right of the BIR to collect
the tax had already prescribed by then.

Section 318 (now 203) of the Tax Code clearly provides that the three-year prescriptive period is
counted from the due date of the filing of the return. The BIR must assess and collect the tax
within three years from the filing of the tax return.

In the present case, the majority opinion expressly admits that the BIR issued the assessment
against PNB on 8 October 1986, and that the BIR had until 7 October 1989, or three years from
the issuance of the assessment, to collect the tax. The majority opinion declares:

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MAS
Neither has the three-year prescriptive period for the collection of the tax prescribed.
Considering that the assessment against PNB was issued on 8 October 1986, the BIR had
until 7 October 1989 to enforce collection based thereon. (Emphasis and underscoring
supplied)

The majority opinion is mistaken in stating that the three-year period is counted from the date
of issuance of the assessment. Section 318 (now 203) of the Tax Code clearly states that the
three-year period is counted from the due date of the filing of the return. This means that the
prescriptive period in the present case expired on 24 January 1989 since the last quarterly
return was due on 25 January 1986. This is almost 9 months earlier than the 7 October 1989
expiry date that the majority opinion claims.

The majority opinion further claims that there is no proof that PNB filed its quarterly withholding
tax returns. The majority opinion asserts:

In making its conclusions that the assessment and collection in this case has prescribed,
the dissenting opinion has taken liberties to assume the following facts even in the
absence of allegations and evidences to the effect that: (1) PNB filed returns for its
withholding tax obligations for taxable year 1985; (2) PNB reported in the said returns the
interest earnings of PNOC's money placements with the bank; and (3) that the returns
were filed on or before the prescribed date, which was 25 January 1986.

Contrary to the majority opinion's claim, the BIR audit report on PNB's failure to withhold the tax
from 1984 to 1985 does not state that PNB failed to file its quarterly return. Had PNB failed to
file its quarterly return, the tax assessment against PNB would have been increased by a penalty
equivalent to either 25% or 50% of the tax due as mandated by Section 248 of the Tax Code,
thus:

SEC. 248. Civil Penalties. (A) There shall be imposed, in addition to the tax required to
be paid, a penalty equivalent to twenty-five percent (25%) of the amount due, in the
following cases:

(1) Failure to file any return and pay the tax due thereon as required under the
provisions of this Code or rules and regulations on the date prescribed; or

xxx

(B) In case of willful neglect to file the return within the period prescribed by the Code
or by the rules and regulations, x x x the penalty to be imposed shall be fifty percent
(50%) of the tax x x x.

The tax assessment against PNB, made after the investigation and audit of PNB's failure to
withhold the tax for the years 1984 and 1985, does not include the 25% or 50% penalty for failure
to file the return. The assessment letter to PNB dated 8 October 1986 states:

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MAS
Please be informed that upon investigation, there was found due from you as a withholding
agent within the provisions of Section 31 of the National Internal Revenue Code, the total sum of
P376,301,133.23, representing deficiency withholding final tax inclusive of interests, as the yield
of the deposit substitutes placed with your Bank by the Philippine National Oil Company, as
shown below:

Deficiency withholding final Tax - P298,863,332.51


on the total yield
of P1,960,881,332.25 covering
the period from October 15,
1984 to July 31, 1986

Interests due - computed up to - P77,455,580.72


October 15, 1986

Total Deficiency Amount P376,301,133.23

As you will note the interest due on the deficiency withholding final tax was computed up to
October 15, 1986. Should you fail to pay the total deficiency amount on due date, the provisions
of Section 283, NIRC, provide that in case of failure to pay "a deficiency tax, or any surcharge or
interest therein, on due date appearing in the notice and demand of the Commissioner, there
shall be assessed and collected, on the unpaid amount, interest at the rate prescribed in
paragraph (a) hereof until the amount is fully paid, which amount shall form part of the tax." x x
x.30

Nowhere in the assessment letter does it state that PNB failed to file the returns and thus should
be liable for the mandatory 25% or even 50% penalty. This only means that PNB did not fail to
file the quarterly returns.

Even assuming for the sake of argument that PNB failed to file the quarterly returns, PNOC filed
an amended return when the BIR Commissioner approved on 22 June 1987 the tax compromise.
Under Revenue Regulations No. 17-86, the taxpayer who avails of the tax compromise under EO
No. 44 must file a tax return for the income covered by the delinquent account. Section 2 (a) of
Revenue Regulations No. 17-86 provides:

a) x x x

Where no return was filed, the taxpayer shall be considered delinquent as of the time the
tax on such return was due, and in availing of the compromise, a return shall be filed as
a basis for computing the amount of compromise to be paid. (Emphasis and
underscoring supplied)

Thus, PNOC for sure filed a return in June 1987 even assuming its agent, PNB, failed to file the
return on 25 January 1986. Under the worst-case scenario that PNB failed to file the return on 25

52
MAS
January 1986, the BIR still had only until June 1990 to collect the tax from PNOC and PNB,
applying the three-year period from PNOC's actual filing of the return in June 1987. This is the
rule in Section 318 (now 203) of the Tax Code, which provides:

x x x Provided, That in case where a return is filed beyond the period prescribed by law,
the three (3)-year period shall be counted from the day the return was filed. x x x.
(Emphasis supplied)

Whether the BIR had only until 24 January 1989, or 7 October 1989, or even until the end of June
1990 to collect the tax would not really matter. The collection of the tax would still be time-
barred in the present case under any of these three prescriptive periods.

The BIR garnished PNB's funds with the Central Bank on 2 September 1992, long after the
prescriptive period had expired under any of the three prescriptive periods. The garnishment
was thus void since the BIR's right to collect the tax had already prescribed. The BIR did not also
file any collection case in court against PNB within any of the three prescriptive periods. The
present case is not even a collection case against PNB or PNOC. Before 2004, the year Republic
Act No. 9282 took effect, the Court of Tax Appeals had no jurisdiction to enforce the collection
of taxes. Prior to 2004, judicial action to collect internal revenue taxes fell under the jurisdiction
of the regular trial courts.

In the case of PNOC, the BIR issued the assessment even earlier, on 8 August 1986. If we follow
the majority opinion's erroneous computation that the three-year period begins from the
issuance of the assessment, the BIR had only until 7 August 1989 to collect from PNOC the tax
administratively or judicially. If we assume, for the sake of argument, that there was a failure to
file the return, the BIR had also only until 7 August 1989, or three years after the issuance of
the assessment, to collect the tax from PNOC. This is pursuant to Section 319 (now 222) of the
Tax Code, which provided:

Sec. 319. Exceptions as to period of limitation of assessment and collection of taxes - (a)
In the case of x x x 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 years after discovery of the x x x omission: x x x

xxx

(a) Any internal revenue tax which has been assessed within the period of limitation
above-specified may be collected within three years following the assessment of the
tax.31 (Emphasis supplied)

Until now, after a lapse of more than 18 years, the BIR has made no distraint or levy on PNOC's
assets. Neither has the BIR filed any collection case in court against PNOC. In short, the pleadings
and the evidence on record clearly establish that prescription had long set in to bar the
collection of the tax against PNB and PNOC.

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MAS
The majority opinion, however, claims that prescription cannot bar the collection of PNOC's or
PNB's withholding tax liability because neither PNOC nor PNB raised the defense of prescription.
The majority opinion contends:

The undersigned believes that the defense of prescription of the period for the
assessment and collection of tax liabilities should be considered waived since it was not
raised in the answers or any other pleadings filed by PNOC and PNB. Such a defense had
not been properly pleaded and the facts alleged and evidences submitted by the parties
were not sufficient to support a finding by the Cout on the matter. In Querol v. Collector
of Internal Revenue, this Court ruled that prescription, being a matter of defense,
imposes on the taxpayer to prove that the full period of the limitation has expired, and
this requires him to positively establish the date when the period started running and
when the same was fully accomplished.

The majority opinion is clearly mistaken.

While the rule is that prescription is waived if not raised as a defense, the present case falls under
the express exception to this rule. Section 1, Rule 9 of the 1997 Rules of Civil Procedure provides:

Section 1. Defenses and objections not pleaded. - Defenses and objections not pleaded
either in a motion to dismiss or in the answer are deemed waived. However, when it
appears from the pleadings or the evidence on record that the court has no jurisdiction
over the subject matter, that there is another action pending between the same parties
for the same cause, or that the action is barred by prior judgment or by the statute of
limitations, the court shall dismiss the claim. (Emphasis and underscoring supplied)

Thus, if the pleadings or evidence on record show that the action is barred by prescription, the
court is mandated to dismiss the action even if prescription is not raised as a defense.

Justice Florence D. Regalado, in Volume I of his Remedial law Compendium, 32 explains this
exception as follows:

Under the amended provision, the following defenses are not waived even if not raised
in a motion to dismiss or in the answer: (a) lack of jurisdiction over the subject matter;
(b) litis pendentia; (c) res judicata; and (d) prescription of the action.

xxx

Res judicata and prescription of the claim have also been added as exceptions since they
are grounds for extinguishment of the claim. It would appear to be unduly technical, if
not contrary to the rule on unjust enrichment, to have the defending party respond all
over again for the same claim which has already been resolved or is no longer recoverable
under the law. It is worth mentioning in this connection that, in Sec. 5 of Rule 16 as

54
MAS
amended, an order granting a motion to dismiss on the grounds, inter alia, of res
judicata or prescription shall bar the refiling of the same action or claim.

The presence of any of these four grounds authorizes the court to motu proprio dismiss
the claim, that is, the claims asserted in the complaint, counterclaim, crossclaim, third
(fourth, etc.) party complaint or complaint-in-intervention (see Sec. 2, Rule 6). In order
that it may do so, it is necessary, however, that such grounds be raised in a motion to
dismiss or in the answer with evidence duly adduced to prove the same, or where such
grounds appear in the other pleadings filed or in the evidence of record in the case.

Specifically with respect to the defense of prescription, the present provision is similar to
the rule adopted in civil cases, but dissimilar to the rule and rationale in criminal cases. In
civil cases, it has been held that the defense of prescription may be considered only if the
same is invoked in the answer, except where the fact of prescription appears in the
allegations in the complaint or the evidence presented by the plaintiff, in which case
such defense is not deemed waived (Ferrer vs. Ericta, et al., L-41767, Aug. 23, 1978;
Garcia vs. Mathis, et al., L-48577, Sept. 30, 1980). It would thus appear that the non-
waiver is dependent on the timeliness of the invocation of the defense, or where such
defense is a matter of record or evidence. (Emphasis supplied)

The ruling of this Court in Gicano, et al. v. Gegato, et al.,33 decided in January 1988, became the
basis of the present Section 1 of Rule 9. In Gicano this Court ruled:

x x x We have ruled that trial courts have authority and discretion to dismiss an action on
the ground of prescription when the parties' pleadings or other facts on record show it to
be indeed time-barred; (Francisco v. Robles, Feb. 15, 1954; Sison v. McQuaid, 50 O.G. 97;
Bambao v. Lednicky, Jan. 28, 1961; Cordova v. Cordova, Jan. 14, 1958; Convets, Inc. v.
NDC, Feb. 28, 1958; 32 SCRA 529; Sinaon v. Sorongan, 136 SCRA 408); and it may do so
on the basis of a motion to dismiss, or an answer which sets up such ground as an
affirmative defense; or even if the ground is alleged after judgment on the merits, as in a
motion for reconsideration; or even if the defense has not been asserted at all, as where
no statement thereof is found in the pleadings, or where a defendant has been declared
in default. What is essential only, to repeat, is that the facts demonstrating the lapse of
the prescriptive period, be otherwise sufficiently and satisfactorily apparent on the
record: either in the averments of the plaintiffs complaint, or otherwise established by
the evidence. (Emphasis supplied)

Thus, even before the adoption of the present Section 1 of Rule 9, prevailing jurisprudence had
already recognized the exceptions laid down in Section 1 of Rule 9.

The majority opinion further claims that the running of the prescriptive period was suspended
when petitioner filed with the Court of Tax Appeals on 8 April 1988 the present petition to declare
void the tax compromise between the BIR and PNOC. The majority opinion asserts that the
running of the prescriptive period remains suspended up to now. The majority opinion contends:

55
MAS
x x x However, the running of the prescriptive period for the collection of the
assessment against PNB is for the meantime suspended during the pendency of the case
before the CTA, then before the Court of Appeals, and finally before this Court, because
the issue for resolution by the courts is whether or not the assessment should actually
be enforced.

The majority opinion's contention collides with the applicable provision of the Tax Code. Section
223 of the Tax Code governs the suspension of the running of the prescriptive period to assess
and collect internal revenue taxes. Section 223 provides:

SEC. 223. Suspension of Running of Statute of Limitations. The running of the Statute
of Limitations provided in Sections 203 and 222 on the making of assessment and the
beginning of distraint or levy or a proceeding in court for collection, in respect of any
deficiency, shall be suspended for the period during which the Commissioner is
prohibited from making the assessment or beginning distraint or levy or a proceeding
in court and for sixty (60) days thereafter; when the taxpayer requests for a
reinvestigation which is granted by the Commissioner; when the taxpayer cannot be
located in the address given by him in the return filed upon which a tax is being assessed
or collected: 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. (Emphasis supplied)

Section 223 suspends the running of the prescriptive period if the BIR Commissioner "is
prohibited from x x x beginning distraint or levy or a proceeding in court" to enforce collection
of the tax assessed. In the present case, the Court of Tax Appeals, Court of Appeals and this
Court never prohibited the BIR Commissioner from commencing a distraint, levy or civil suit
against PNB or PNOC to collect the tax. No court ever issued an order prohibiting the BIR from
collecting the tax from PNB or PNOC. In Republic v. Ret,34 this Court ruled:

As heretofore stated, the plaintiff-appellant made the assessment on January 20, 1951
and had up to January 20, 1956 to file the necessary action. It was only on September 5,
1957, that an action was filed in Court for the collection of alleged deficiency income tax
far beyond the 5 year period. This notwithstanding, plaintiff-appellant argues that
during the pendency of the criminal cases, it was prohibited from instituting the civil
action for the collection of the deficiency taxes. This contention is untenable. The present
complaint against the defendant-appellee is not for the recovery of civil liability arising
from the offense of falsification; it is for the collection of deficiency income tax. The
provisions of Section 1, Rule 107 (supra) that "after a criminal action has been
commenced, no civil action arising from the same offense can be prosecuted", is not
applicable. The said criminal cases would not affect, one way or another, the running of
the prescriptive period for the commencement of the civil suit. The criminal actions are
entirely separate and distinct from the present civil suit. There is nothing in the law which

56
MAS
would have stopped the plaintiff-appellant from filing this civil suit simultaneously with
or during the pendency of the criminal cases. Assuming the applicability of the rule, at
most, the prosecution of the civil action would be suspended but not its filing within the
prescribed period. Section 332 of the Tax Code provides: "the running of the statutory
limitation . . . shall be suspended for the period during which the Collector of Internal
Revenue is prohibited from making the assessment, or beginning distraint or levy or a
proceeding in court, and for sixty days thereafter". As heretofore stated, the plaintiff-
appellant was not prohibited by any order of the court or by any law from commencing
or filing a proceeding in court. x x x (Emphasis supplied)

The BIR could have filed a collection suit against PNB or PNOC with the proper regional trial court,
which before 2004 had jurisdiction over tax collection cases. At the very least, the BIR should
have filed with the proper regional trial court a collection case ad cautelam during the pendency
of the present case in court. This would have suspended the running of the prescriptive period.
However, the BIR neglected to file a collection case before 7 October 1989, the expiration of the
prescriptive period to collect the tax from PNB.

The BIR could also have administratively collected the tax from PNB and PNOC. In fact, during
the pendency of the case in the Court of Tax Appeals, the BIR Commissioner administratively
garnished PNB's funds with the Central Bank, although the garnishment is void because the
prescriptive period had already expired even by the majority opinion's own computation of the
prescriptive period. This only proves that nothing prevented the BIR from administratively
garnishing PNB's or PNOC's accounts even during the pendency of the present case. However,
the BIR garnished PNB's funds only after the prescriptive period had expired on 7 October 1989.

Obviously, the BIR failed to collect the tax before 7 October 1989 because of the fault or
negligence of the BIR, and not because a court order prevented the BIR from collecting the tax
before the expiration of the prescriptive period on 7 October 1989. The BIR was free at any time
to distrain or levy on the assets of PNB or PNOC, as well as to file a collection suit before the
regular courts against PNB or PNOC, even during the pendency of the present petition in the
various courts.

In particular, the BIR could have distrained or levied on the assets of PNB at any time because
PNB was not even a party to the tax compromise between the BIR and PNOC. Indeed, the BIR did
garnish the funds of PNB, but only after the expiration of the prescriptive period. The BIR simply
slept on its rights.

Neither PNOC nor PNB instituted the present case against the BIR to prevent the collection of the
tax. Private respondent Tirso B. Savellano, who is not the taxpayer, originally filed this petition
against the BIR Commissioner only, and later on impleaded PNOC and PNB. This Court has applied
Section 223 of the Tax Code suspending the running of the prescriptive period in cases where
the taxpayer sued the BIR Commissioner to prevent the collection of a tax, as when the taxpayer
disputed the validity or amount of the assessment before the Court of Tax Appeals. 35 This is not
the situation in the present case since PNOC and PNB have not sued the BIR Commissioner to

57
MAS
prevent the collection of the tax, and they do not dispute the validity or amount of the
assessment issued against them.

Nothing legally prevented the BIR from collecting the tax, administratively or judicially, from
PNOC or PNB at any time before 7 October 1989. Thus, the BIR cannot invoke Section 223 of the
Tax Code to claim the suspension of the running of the prescriptive period during the pendency
of the present case in the courts.

Conclusion

To conclude, the compromise agreement between the BIR and PNOC falls within the coverage of
EO No. No. 44 and its implementing rules. The compromise agreement is not contrary to law,
morals, good customs, public order, or public policy.36 Thus, the compromise agreement is valid,
and has the effect of res judicata on the BIR and PNOC. In any event, the collection of the
foregone tax is barred by prescription.

Accordingly, I dissent from the majority opinion. I vote to grant the petition, to declare valid the
22 June 1987 tax compromise between PNOC and the BIR, and to deny the claim of private
respondent Tirso B. Savellano for an additional informer's reward of P43,800,915.25.

SEPARATE OPINION

TINGA, J.:

I agree with the ponencia that no valid compromise agreement had been entered into between
the Philippine National Oil Company (PNOC) and the Bureau of Internal Revenue (BIR).

First, the coverage of the governing special compromise tax measure.

Executive Order No. 44, on which the compromise agreement was predicated, explicitly
delineates the parameters within which the amnesty provided therein may be availed of. Section
1 thereof allows the compromise of disputed assessments or delinquent accounts pending as of
31 December 1985, viz.:

SECTION 1. The Commissioner of Internal Revenue or his duly authorized representatives


may compromise any disputed assessment or delinquent account pending as of
December 31, 1985, upon the payment of an amount equal to thirty percent (30%) of the
basic tax assessed. In such cases, the Commissioner of Internal Revenue or his duly
authorized representatives shall condone the corresponding interests and penalties.
(Emphasis supplied)

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MAS
The directive in Section 1 is reiterated in the first paragraph of Revenue Memorandum Circular
No. 31-861, Sections 2 and 3 of Revenue Regulation No. 17-862, and Section 1 of Revenue
Memorandum Order No. 39-86.3

Evidently, E.O. No. 44 applies only to "disputed assessment or delinquent account pending as of
December 31, 1985". This is not an executive issuance meant to give blanket authority on the
Commissioner of Internal Revenue to compromise away tax liabilities. In fact, the "cut-off" period
stipulated in the executive order refers to a date nine months prior to the date of the
promulgation of the issuance, 4 September 1986.

The authority to compromise was delegated for a specific purpose, as stated in E.O. No. 44.
Significantly in that regard, the Executive Order is not a mere executive issuance but a legislative
edict in much the same fashion as an Act of Congress, issued as it was by then President Corazon
C. Aquino in the exercise of her legislative powers under the Freedom Constitution. The
perambulatory clauses of E.O. No. 44 state the need to clear the backlog of pending cases of
disputed assessments and delinquent accounts4 in view of the fact that the records of Bureau of
Internal Revenue show that over the past ten years, a great number of cases involving disputed
assessments and delinquent accounts for internal revenue had accumulated.5 The interpretation
of the provisions of E.O. No. 44 cannot be strained in order to cover taxes that accrued after 31
December 1985, since this would no longer be included in the "backlog" adverted to in the
issuance. Parenthetically, the Executive Order is akin to a tax exemption statute which should be
construed strictly against the taxpayer.

The taxes sought to be compromised in this case concern the final tax on interest income
representing the earnings and/or yield from PNOC's money placements with the Philippine
National Bank (PNB) for the period from 15 October 1984 to 15 October 1986. Evidently, a cursory
glance reveals that the PNOC cannot invoke E.O. No. 44 with reference to its entire tax liability,
as the period covered under the Executive Order was only up to 31 December 1985. The
withholding taxes due for the period of 01 January 1986 to 16 October 1986 are neither disputed
assessments nor delinquent accounts pending as of 31 December 1985.

Moreover, these are taxes that accrue from the yield of interest income of money market
placements, and clearly not at the time such placements were made by the PNOC. Even if the
money market placements were made in 1984 or 1985, it would not necessarily mean that the
interest yields on these placements were paid out or credited during those years. It is unclear
when exactly between 1984 to 1986 did such interest incomes had accrued, but admittedly this
is a question of fact that need not be reviewed by this Court.

Nonetheless, I maintain that even without need of ascertaining when exactly such interest
income accrued, the compromise agreement in question is null and void in its entirety for being
contrary to E.O. No. 44.

While PNB failed to submit any application for compromise, PNOC submitted two offers not
applications for compromise settlement. PNOC's first proposal, contained in a letter dated 22

59
MAS
September 1986, offered to clear its basic6 tax liability through a set-off thereof against the claim
for tax refund/credit of the National Power Corporation (NPC), which amount was also
supposedly a receivable of PNOC from NPC. This proposal was reiterated in another letter dated
14 October 1986. The operative portions of the first letter read:

We would like to amicably settle this liability with the BIR. In this regard, we wish to invoke
the authority vested by law in your office, particularly under Section 246 of the national
Internal Revenue Code, as amended, and the spirit underlying Executive Order No. 44
dated September 4, 1986. Consequently, we hereby request for a compromise settlement
and submit our offer for a compromise of the matter. xxx

(2) That PNOC be permitted to set-off its foregoing mentioned tax liability
of P304,419,396.83 against the tax refund/credit claims of the National Power
Corporation (NPC) for specific taxes on fuel oil sold to NPC totaling P335,239,450.21,
which tax refunds/credits are actually receivable accounts of our Company from NPC. 7

Section 1 of E.O. No. 44 is explicit in declaring that the compromise of a disputed assessment or
delinquent account is accomplished through payment of an amount equal to thirty percent (30%)
of the basic tax assessed, a generous sum if I may add. Payment, as defined in this jurisdiction,
means the delivery of money or the performance of an obligation8. It institutes a totally different
mode of extinguishment of an obligation from compensation and/or confusion or merger9. PNOC
invokes the concepts of compensation and/or confusion or merger as it seeks to have the NPC,
which allegedly had outstanding payables due to PNOC, absorb PNOC's tax liabilities with its own
outstanding tax credit due from the BIR.

However, as noted by the BIR in its initial response to PNOC's proposal, NPC's claim was still under
process. Hence, at the time PNOC offered its terms for compromise to the BIR, no extinguishment
of PNOC's tax liability could have taken place whether by compensation, confusion or merger.
There was no mutual creditor-debtor relationship between PNOC and the BIR the existence of
which is one of the requisites for compensation to take place.10 Also, neither was there an
outstanding creditor-debtor relationship between the NPC and the BIR. Moreover, the "credit"
which PNOC proposed to use for the purpose of offsetting emanated from a segregate obligation
than that due the BIR from PNOC; hence, there could be no confusion or merger 11 which could
lead to payment.

In short, there was no legal basis for the NPC then to offset PNOC's tax liabilities through its own
"tax credit," as the said "tax credit" had not, in the first place, yet ripened as an existing
obligation.

For that reason, PNOC cannot be deemed as having made payment, or even a valid offer of
payment through its first two letters, as there was no legal basis to effect its proposed mode of
payment. In the meantime, the outstanding tax liability had accrued and eventually, the deadline
set forth in RMO No. 39-86 passed.

60
MAS
So now, the prescribed period of availment and the effective duration of the special compromise
tax measure.

RMO No. 39-86 pertains to "Guidelines for Implementation of Executive Order No. 44 re
compromise settlement of (1) delinquent tax accounts; or (2) disputed tax assessments as of
December 31, 1985". Paragraph 2 thereof is explicit as to the period for availment of the
compromise settlement:

2. Period for availment. Filing of application for compromise settlement under the said
law shall be effective only until March 31, 1987. Applications filed on or before this date
shall be valid even if the payment or payments of the compromise amount shall be made
after the said date, subject, however, to the provisions of Executive Order No. 44 and its
implementing Revenue Regulations No. 17-86. (emphasis supplied)

The deadline was occasioned by Section 6 of E.O. No. 44, which itself provides for the term of
effectivity of the period for compromise:

Section 6. This Executive Order shall take effect immediately and shall remain effective until
March 31, 1987.

The plain meaning of paragraph (2), in relation to Section 6, E.O. No. 44, is that the deadline for
the submission of an application for compromise settlement shall be effective only until 31 March
1987. As of that point, had PNOC submitted an application for compromise settlement within the
contemplation of law?

Plainly, the two letters in 1986 of PNOC are not in the form of an "application for compromise
settlement". Though the Court need not be strict in demanding obeisance with the formal
requisites, I would consider any valid form of an application for compromise should concede the
liability for tax, and make a valid offer of payment. To require otherwise would render a mockery
of the offer of tax compromise. Owing to the legal implausibility of the initial offer of PNOC to
the BIR, I could not consider the first two letters as a valid application for compromise settlement.
Moreover, the BIR expressly rejected this application, if it could be construed as such, as early as
November of 1986. If there was indeed a bona fide intent on the part of PNOC to comply with
E.O. No. 44 and its attendant revenue issuances, it should have exerted efforts to comply with
this deadline set forth under RMO No. 39-86, in light of the BIR's rejection of its earlier offer.
Instead, the 31 March 1987 deadline passed without a word or renewed offer from the PNOC.

Instead, on 09 June 1987, or two months after the deadline had elapsed, PNOC made a second,
different offer, proposing by way of compromise to pay thirty (30%) of its basic tax liability,
specifically invoking Section 1 of E.O. 44. This new offer was subsequently accepted by the BIR.

The contrary view argues that owing to the administrative power of the tax commissioner, such
subsequent acceptance can be deemed as an effective extension of the deadline set forth under

61
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RMO No. 39-86. However, E.O. No. 44 is explicit in declaring that its effectivity subsists only until
31 March 1987, a fact which is similarly demonstrated by paragraph (2) of RMO No. 39-86.

The dissent relies on the fact that E.O. No. 44, issued in the exercise of legislative powers then
vested in President Aquino, is a special law of more specific application in this case than the Tax
Code. Yet the delegation of authority to the tax commissioner to effect compromises is limited
by the confines of E.O. No. 44, which is explicit in stating that its effectivity runs only until 31
March 1987. Hence, contrary to the dissenting view, the BIR Commissioner had no authority to
extend the effectivity of E.O. No. 44, or the deadline prescribed thereupon. RMO No. 39-86
properly recognizes such limitation, and assuming that the subsequent acts of the tax
commissioner contravene the deadline set by law and regulation, those acts should be deemed
as beyond the ambit of delegated power, and thus void. Under the circumstances, only Congress
could have validly extended the effectivity of the special compromise tax measure.

Thus, the ponencia correctly concludes that the compromise agreement entered into on 22 June
1987 is void. It was entered into after the lapse of the authority of BIR Commissioner to effect
such compromise agreement, owing to the prescribed effectivity of E.O. No. 44, from which such
authority was derived. Needless to say, much trouble would have been saved had the PNOC been
timely in seeking a compromise agreement with the BIR, and prudent enough in proposing one
that had basis under law. It cannot rely upon its status as a component of the government as
basis for relief.

We should not discount the damage inflicted by the void compromise agreement on the
informer, Tirso Savellano. The financial remuneration to be obtained by the informer is designed
to alleviate whatever socio-political stigma that may attach as a result of the information that is
divulged. The informer's right is predicated on the amount actually paid, and if the amount paid
is less than what is due as a result of an unauthorized compromise, then the informer indubitably
has an interest to assail the said compromise.

Finally, the dissent raises the argument that prescription had run to bar the annulment of the
compromise agreement. Notably, this issue was not raised before any of the fora involved, by
the Court of Tax Appeals, the Court of Appeals, or this Court. Neither was it discussed in any of
the assailed rulings.

The proper taxes due in this case have actually been paid to the government. Petitioners
unfortunately seek the refund of what has been already collected, despite the fact that they have
all along conceded, not denying at all, the basis for their tax liability. The Court should not be
privy to the divestiture of the huge tax payment already remitted to the cash-strapped
government if there is no unequivocal basis for the return thereof. More so, should it not be a
party to the forfeiture of the informer's reward to which the private respondent has a vested
right as a matter of law and equity.

I vote to DENY the petitions.

62
MAS
Footnotes

1 Rollo (G.R. No. 109976), pp. 7-29.

2 Rollo (G.R. No. 112800), pp. 7-27.

3Penned by Associate Justice Regina G. Ordonez-Benitez, with Associate Justices Arturo


B. Buena and Eduardo G. Montenegro, concurring, on 23 April 1993.

4Penned by Associate Justice Oscar M. Herrera, with Associate Justices Consuelo Y.


Santiago (now Supreme Court Associate Justice) and Corona I. Somera, concurring, on 23
November 1993.

5Penned by Associate Judge Constante C. Roaquin, with Presiding Judge Ernesto D. Acosta
and Acting Associate Judge Stella Dadivas-Farrales, concurring, on 28 May 1992.

6 CTA Rollo, p. 643.

7 Ibid., pp. 199-200.

8 Ibid., pp. 17-18.

9 Ibid., p. 644.

10 Id.

11 Ibid., pp. 19-20.

12 Ibid., pp. 196-198.

13 Ibid., p. 645.

14 Id.

15 Ibid. p. 21.

16 Ibid., p. 22.

17 Ibid., pp. 202-208.

18 Ibid., pp. 1-16.

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MAS
19 Ibid., pp. 50-66.

20 Ibid., pp. 32-40.

21 Ibid., pp. 99-103, 106-112.

22Penned by Presiding Judge Amante Filler, with Associate Judges Alex Z. Reyes and
Constante C. Roaquin, concurring; Ibid., p. 141.

23 Ibid., pp. 158-164.

24 Ibid., pp. 168-172.

25This Court, in the case of Commissioner of Internal Revenue v. Commission on


Audit (G.R. No. 101976, 29 January 1993, 218 SCRA 203, 214), set aside the disallowance
in audit by the Commission on Audit (COA) and affirmed the payment by the BIR
Commissioner of informer's reward to Savellano, private respondent in the present case,
ruling thus:

That the informer's reward was sought and given to tax delinquencies of government
agencies provides no reason for disallowance. The law on the matter makes no
distinction whatsoever between delinqent taxpayers in this regard, whether private
persons or corporation, or public or quasi-public agencies, it being sufficient for its
operation that the person or entity concerned is subject to, and violated, revenue laws,
and the informer's report thereof resulted in the recovery of revenues.

26Resolution, dated 28 December 1989, penned by Presiding Judge Amante Filler, with
Associate Judges Alex Z. Reyes and Constante C. Roaquin, concurring; CTA Rollo, pp. 233-
234.

27Resolution, dated 17 May 1990, penned by Presiding Judge Amante Filler, with
Associate Judge Alex Z. Reyes and Constante C. Roaquin, concurring; Ibid., pp. 281-282.

28 Ibid., pp. 398-399.

29 Ibid., pp. 433-435, 439-442.

30 Ibid., pp. 447-448.

31 Rollo (G.R. No. 112800), p. 21.

32 CA Rollo (CA-G.R. SP No. 29526), p. 11.

33 CTA Rollo, pp. 538-541.

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MAS
34 Ibid., pp. 449-458.

35Penned by Presiding Judge Alex Z. Reyes, with Associate Judges Ernesto D. Acosta and
Constante C. Roaquin, concurring; Ibid., pp. 484-485.

36 Penned by Presiding Judge Alex Z. Reyes; CTA Rollo, p. 489.

37 Ibid, p. 490.

38 Ibid., pp. 490-493.

39 Ibid., pp. 523-527.

40 Ibid., pp. 528-543.

41 Ibid., p. 565.

42 Ibid., pp. 566-571, 572-580.

43 Ibid., pp. 598-603.

44 Ibid., pp. 605-607, 608-610.

45 Ibid., p. 800.

46Penned by Presiding Judge Ernesto D. Acosta, with Associate Judges Ramon O. De Veyra
and Manuel K. Gruba, concurring; Ibid., pp. 834-841.

47 CA Rollo (CA-G.R. SP No. 29583), p. 83.

48 Ibid., p. 84.

49 Ibid., p. 124.

50 Ibid., p. 122.

51 Rollo (G.R. No. 109976), pp. 7-29.

52 Rollo (G.R. No. 112800), pp. 7-27.

53 The full text of the BIR demand letter reads as follows:

Lungsod ng Quezon

65
MAS
January 16, 1991

PHILIPPINE NATIONAL BANK


Escolta, Manila

G e n t l e m e n:

This is in connection with the withholding taxes assessed against you in the
amount of P303,343,765.32, plus interest of P82,617,815.50 or a total of
P385,961,580.82 on the interest earnings on the money market placements of
Philippine National Oil Company (PNOC) subject matter of our letter dated
November 11, 1986, copy attached.

It appears that the aforesaid withholding taxes have been compromised in the
amount of P91,003,129.83 representing 30% of P303,343,765.32 (basic tax)
pursuant to E.O. 44.

After a circumspect study of the case, this Office has arrived at the conclusion that
the compromise settlement is without legal basis considering that E.O. 44
contemplates disputed or delinquent taxes. The withholding taxes are actually
not tax but penalty for your failure to withhold the same from PNOC (National
Development Corp. vs. Comm. Of Int. Rev., G.R. No. 539611, June 30,
1987.) Moreover, the obligation to withhold the tax is your personal liability as
withholding agent (Comm. Of Int. Rev. vs. Malayan Insurance Co., G.R. No. L-
21913, November 18, 1967.) Such liability is imposed under Section 51(e) of the
NIRC.

Accordingly, there is still due from you the amount of P294,958,450.93 arrived at
as follows:

Withholding tax, plus interest under P 385,961,580.82


letter of demand dated November
11, 1986
Less: Amount paid under E.O. 44 P 91,003,129.89
Amount still due and collectible P 294,958,450.73

IN VIEW THEREOF, it is requested that you cause to be paid to the Chief,


Receivable Accounts/Billing Division, thru the Chief, Litigation Division, Room 703,
BIR National Office Building, Diliman, Quezon City, within thirty (30) days from
receipt hereof in order that this case may be considered closed and terminated.

66
MAS
Very truly yours,
(SGD) JOSE U. ONG

(CTA Rollo, pp. 447-448).

54Section 282(A) of the National Internal Revenue Code of 1997 still provide for
informer's reward to persons instrumental in the discovery of violations of the Code,
equivalent to ten percent (10%) of the revenues, surcharges or fees recovered and/or fine
or penalty imposed and collected or P1,000,000.00 per case, whichever is lower.

55Rep. Act No. 1125 became effective on 16 June 1954, while P.D. No. 242 was
promulgated on 09 July 1973.

56 G.R. No. 86625, 22 December 1989, 180 SCRA 609, 617.

57 Section 7 of Rep. Act No. 1125 provides that:

SECTION 7. Jurisdiction. The Court of Tax Appeals shall exercise exclusive


appellate jurisdiction to review by appeal, as herein provided -

(1) Decisions of the Collector of Internal Revenue in cases involving disputed


assessments, refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under the National Internal
Revenue Code or other law or part of law administered by the Bureau of Internal
Revenue;

(2) Decisions of the Commissioner of Customs in cases involving liability for


customs duties, fees or other money charges; seizure, detention or release of
property affected; fines, forfeitures or other penalties imposed in relation thereto;
or other or other matters arising under the Customs Law or other law or part of
law administered by the Bureau of Customs; and

(3) Decisions of provincial or city Boards of Assessment Appeals in cases


involving the assessment and taxation of real property or other matters arising
under the Assessment Law, including rules and regulations relative thereto.

58 Supra, note 56.

59 44 Phil 138, 149 (1922).

60 Lichauco & Company, Inc. v. Apostol, et al., 44 Phil 138, 146-147 (1922).

61 Manila Railroad Co. v. Rafferty, 40 Phil 224 (1919).

67
MAS
62National Power Corporation v. Hon. Presiding Judge, RTC, Br. XXV, G.R. No. 72477, 16
October 1990, 190 SCRA 477.

63Mison v. Natividad, G.R. No. 82586, 11 September 1992, 213 SCRA 734; Marubeni
Corporation v. Commissioner of Internal Revenue, G.R. No. 76573, 14 September 1989,
177 SCRA 500; Papa, et al. v. Mago, et al., 130 Phil 886 (1968).

64 G.R. No. L-21803, 17 December 1966, 18 SCRA 946, 953.

65G.R. No. 127777, 01 October 1999, 316 SCRA 118, citing Vitug and Acosta, Tax Law and
Jurisprudence, 1st Edition, 1997, p. 267.

66 Revenue Regulations No. 17-86, Section 2(a), paragraph 2.

67 Revenue Regulations No. 17-86, Section 2(c)(4).

68 Revenue Regulations No. 17-86, Section 2(a)(2) defines delinquent accounts as:

a) Delinquent Account refers to the amount of tax due on or before


December 31, 1985 from a taxpayer who failed to pay the same within the time
prescribed for its payment, arising from (2) a deficiency assessment issued by
the BIR which has become final and executory.

69 Revenue Regulations No. 17-86, Section 2(b) provides:

b) Disputed Assessment refers to a tax assessment disputed or protested on


or before December 31, 1985 under any of the following categories:

1) if the same is administratively protested within thirty (30) days from the
date the taxpayer received the assessment; or

2) if the decision of the BIR on the taxpayer's administrative protest is appealed


by the taxpayer before an appropriate Court.

70E.O. No. 41 offers tax amnesty to taxpayers who failed to declare the correct amount
of taxes from 01 January 1981 to 31 December 1985. To avail of said tax amnesty, the
taxpayer must filed a return and pay a tax equivalent to 10% of the increase in his/its net
worth from 31 December 1980 to 31 December 1985, provided that in no case shall the
tax be less than P5,000 for individuals and P10,000 for juridical persons.

71The exact text of Section 246(1) of the National Internal Revenue Code of 1977, as
amended, is reproduced below:

68
MAS
SEC. 246. Authority of the Commissioner to compromise, abate, and
refund/credit taxes. The Commissioner may

(1) Compromise the payment of any internal revenue tax when

(a) A reasonable doubt as to the validity of the claim against the taxpayer
exists; or

(b) The financial position of the taxpayer demonstrates a clear inability to


pay the assessed tax.

Now Section 204(A) of the National Internal Revenue Code of 1997.

72 Revenue Memorandum Order No. 39-86, par. 3.1.

73 Revenue Memorandum Order No. 39-86, par. 3.2.

74 Supra, note 72.

75 Geukeko v. Araneta, 102 Phil 706 (1957).

76 Supra., note 7.

77There is no copy in the records of PNOC's letter to the BIR, dated 14 October 1986. The
second paragraph of BIR's letter to PNOC, dated 11 November 1986 (Supra., note 11),
however, made reference to PNOC's letter stating therein that:

In your letter to us dated October 14, 1986, you submitted a proposal to settle
this tax liability by off-setting the outstanding claim for refund/credit of the
National Power Corporation with this Bureau, in the total sum
of P335,259,450.21. which you claim will ultimately be assigned to Petrophil
Corporation, your subsidiary, against the unpaid basic withholding final tax
liability; and you further requested this Office to reconsider the waiver of the
deficiency interests due for the same reason that the 25% surcharge was waived
by this Office.

78 Supra., note 8.

79 Supra., note 11.

80 Supra., note 12.

69
MAS
81 Leongson, et al. v. Court of Appeals, 151 Phil 314 (1973).

82 CTA Rollo, pp. 56-57.

83 Primicias v. Fugoso, 80 Phil 71 (1948).

84 Antiquera v. Baluyot, 91 Phil 213 (1952); Gatmaitan v. Pascual, 76 Phil. 315 (1946).

85 G.R. No. 108292, 10 September 1993, 226 SCRA 314.

86 Ibid., p. 328.

87 Id.

88 Rollo (G.R. No. 112800), p. 58.

89Mayuga, et al. v. Court of Appeals, et al., G.R. No. L-46953, 28 September 1987, 154
SCRA 309.

90Republic of the Philippines v. Sandiganbayan, supra, note 85; First Philippine Holdings
Corp. v. Sandiganbayan, G.R. No. 95197, 30 September 1991, 202 SCRA 212.

91Commissioner of Internal Revenue v. Pineda, G.R. No. L-22734, 15 September 1967, 21


SCRA 105.

92 100 Phil 288 (1956).

93 Id.

94Atlas Consolidated Mining and Development Corp. v. Commissioner of Internal Revenue,


G.R. No. L-26911, 27 January 1981, 102 SCRA 246; Philippine Guaranty Company, Inc. v.
Commissioner of Internal Revenue, et al., 121 Phil 755 (1965).

95 Vera, et al. v. Fernandez, et al., G.R. No. L-31364, 30 March 1979, 89 SCRA 199, 204.

96 Revenue Regulations No. 12-85 provides the procedure for the issuance of an
assessment by the BIR, as well as, the procedure for protesting an assessment. According
to Revenue Regulations No. 12-85, when the BIR Commissioner or his duly authorized
representative had found that taxes should be assessed, he should notify the taxpayer of
the findings. The pre-assessment notice should be in writing and sent to the taxpayer's
address as indicated in his returns or at his last known address. The BIR could proceed to
issuing an assessment notice only in the event that the taxpayer failed to respond to the
pre-assessment notice within the prescribed period, or when the taxpayer's response was
unmeritorious.

70
MAS
97Aguinaldo Industries Corporation v. Commissioner of Internal Revenue, G.R. No. L-
29790, 25 February 1982, 112 SCRA 136.

98Atlas Consolidated Mining and Development Corp. v. Commissioner of Internal


Revenue, supra, note 94.

99 Revenue Regulations No. 12-85, Section 7.

100 Revenue Regulations No. 12-85, Section 9.

101 Section 268 of the National Internal Revenue Code of 1977, as amended, reads in full
as:

SEC. 268. Period of limitation upon assessment and collection. Except as


provided in the succeeding section, internal revenue taxes shall be assessed within
three years after the last day prescribed by law for the filing of the return, and no
proceeding in court without assessment for the collection of such taxes shall be
begun after the expiration of such period; Provided, that in a case where a return
is filed beyond the period prescribed by law, the three-year period shall be
counted from the day the return was filed. For purposes of this section, a return
filed before the last day prescribed by law for the filing thereof shall be considered
filed on such last day.

Now Section 203 of the National Internal Revenue Code of 1997.

102Navare v. Court of Appeals, G.R. No. 56838, 26 April 1990, 184 SCRA
584; Commissioner of Internal Revenue v. Yusay, 124 Phil 1395 (1966); Bollozos v. Court
of Tax Appeals, 121 Phil 440 (1965); Hodges v. Salas, 63 Phil 567 (1936).

103 116 Phil 615 (1962).

104 Section 269 (a) of the National Internal Revenue Code of 1977, as amended, reads:

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 for 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 the
collection thereof.

Now Section 222(a) of the National Internal Revenue Code of 1997.

71
MAS
105 Supra., note 101.

106Palanca, et al. v. Commissioner of Internal Revenue, 114 Phil 203, citing the unreported
case of Alhambra Cigar and Cigarette Mfg. Co. v. Collector of Internal Revenue, G.R. No.
L-12026 and L-12131, 29 May 1959.

107 CTA Rollo, p. 65.

108 Section 271 of the National Internal Revenue Code of 1977, as amended, is reproduced
in full below:

SEC. 271. Suspension of running of statute. The running of the statute of


limitations provided in Sections 268 and 269 on the making of assessment and the
beginning of distraint or levy or a proceeding in court for collection, in respect of
any deficiency, shall be suspended for the period during which the Commissioner
is prohibited from making the assessment or beginning distraint or levy or a
proceeding in court and for sixty days thereafter; when the taxpayer requests for
a reinvestigation which is granted by the Commissioner; when the taxpayer
cannot be located in the address given by him in the return filed upon which a tax
is being assessed or collected; 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 and 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.

Now Section 223 of the National Internal Revenue Code of 1997.

109 G.R. No. L-21609, 29 September 1966, 18 SCRA 207.

110 386 Phil 611 (2000).

111 Section 316(1) of the National Internal Revenue Code of 1977, as amended, reads:

SEC. 316. Informer's reward to persons instrumental in the discovery of


violations of the National Internal Revenue Code and in the discovery and seizure
of smuggled goods.

(1) For violations of the National Internal Revenue Code. Any person, except
an internal revenue official or employee, or other public official, or his relative
within the sixth degree of consanguinity, who voluntarily gives definite and sworn
information, not yet in the possession of the Bureau of Internal Revenue, leading
to the discovery of frauds upon the internal revenue laws or violations of any of
the provisions thereof, thereby resulting in the recovery of revenues, surcharges

72
MAS
and fees and/or the conviction of the guilty party and/or the imposition of any fine
or penalty shall be rewarded in a sum equivalent to fifteen per centum of the
revenues, surcharges or fees recovered and/or fine or penalty imposed and
collected. The same amount of reward shall also be given to an informer where
the offender has offered to compromise the violation of law committed by him
and his offer has been accepted by the Commissioner and in such a case, the
fifteen per centum reward fixed herein shall be based on the amount agreed upon
in the compromise and collected from the offender; Provided, That should no
revenue, surcharges or fees be actually recovered or collected, such person shall
not be entitled to a reward; Provided, further, That the information mentioned
herein shall not refer to a case already pending or previously investigated or
examined by the Commissioner or any of his deputies, agents or examiners, or the
Minister of Finance or any of his deputies or agents; Provided, finally, That the
reward provided herein shall be paid under regulations issued by the
Commissioner of Internal Revenue with the approval of the Minister of Finance.

Now Section 282(A) of the National Internal Revenue Code of 1997, with
modifications, supra., note 54.

112Philippine British Assurance Co., Inc. v. Intermediate Appellate Court, G.R. No. 72005,
29 May 1987, 150 SCRA 520; Loc Cham v. Ocampo, 77 Phil. 636 (1946).

CARPIO, J.:

1Executive Order No. 44 covers the tax liability from 1984 to 31 December 1985, while
Revenue Memorandum Circular No. 31-86 covers the tax liability from 1 January 1986 to
21 August 1986.

2 Araneta v. Perez, No. L-16187, 30 April 1963, 7 SCRA 923.

3 G.R. No. L-22074, 6 September 1965.

4Commissioner of Internal Revenue v. Court of Appeals, Court of Tax Appeals and A.


Soriano Corporation, G.R. No. 108576, 20 January 1999.

5 Sections 57 and 58, Tax Code.

6 National Internal Revenue Code.

7Section 204 of the Tax Code provides: "Authority of the Commissioner to compromise,
abate, and refund/credit taxes. The Commissioner may

(1) Compromise the payment of any internal revenue tax, when:

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MAS
(a) A reasonable doubt as to the validity of the claim against the taxpayer exists;
or

(b) The financial position of the taxpayer demonstrates a clear inability to pay the
assessed tax.

x x x."

8316 SCRA 118 (1999), citing Vitug and Acosta, Tax Law and Jurisprudence, 1st Edition,
1997, p. 267.

9 Ibid.

10The withholding tax liability from 1 January 1986 to 21 August 1986 is not covered by
EO No. 44 but by Revenue Memorandum Circular No. 31-86.

11Guidelines for implementation of Executive Order No. 44 re compromise settlement of


(1) delinquent accounts; or (2) disputed tax assessments, as of December 31, 1985.

12Declaring A One-Time Tax Amnesty Covering Unpaid Income Taxes For The Years 1981
To 1985. The amnesty tax amount is 10% of the taxpayer's net worth from 31 December
1980 to 31 December 1985.

13Section 1 of Executive Order No. 95 dated 17 December 1986 provides: "The period
within which taxpayers may avail themselves of the expanded tax amnesty under
Executive Order No. 41, as amended, is hereby extended up to January 31, 1987."

14 Exhibit "4", PNOC, CTA Records, p. 199.

15 Exhibit "1", PNOC, CTA Records, pp.196-197.

16 Section 5 of Revenue Regulations No. 17-86 provides: "Mode of Payment. - x x x.

Deferred or staggered payments of compromise amounts over P50,000 may be


considered on a case to case basis in accordance with the extant regulations of the Bureau
upon approval of the Commissioner of Internal Revenue, his Deputy or Assistant as
delineated in their respective jurisdictions.

17Annex "Y" of Omnibus Motion dated 21 February 1991 submitted by Tirso B. Savellano
with the Court of Tax Appeals, CTA Records, pp. 449-450.

18 Republic of the Philippines v. Hon. Estenzo, 134 Phil. 139 (1968).

19 Hernaez v. Yan Kao, 123 Phil. 1147 (1966).

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20 Sabino v. Cuba, 125 Phil. 140 (1966).

21 45 Phil. 488 (1923).

22 111 Phil. 609 (1961).

23 See Republic v. Sandiganbaya, G.R. No. 108292, 10 September 1993, 226 SCRA 314.

24
Article 1330 of the Civil Code states: "A contract where consent is given through
mistake, violence, intimidation, undue influence, or fraud is voidable."

25Section 58(A) of the Tax Code provides in part: "The return for final withholding tax
shall be filed and the payment made within twenty-five (25) days from the close of each
calendar quarter, x x x."

26 Revenue Regulations No. 1-84.

27Section 203 of the Tax Code provides: "Period of Limitation Upon Assessment and
Collection. - Except as provided in Section 222, internal revenue taxes shall be assessed
within three (3) years after the last day prescribed by law for the filing of the return, and
no proceeding in court without assessment for the collection of such taxes shall be begun
after the expiration of such period: Provided, That in case where a return is filed beyond
the period prescribed by law, the three-year prescriptive period shall be counted from
the day the return was filed. For purposes of this Section, a return filed before the last
day prescribed by law for the filing thereof shall be considered as filed on such last day."

28 Benjamin B. Aban, The Law of Basic Taxation in the Philippines, pp. 267-268 (2001).

29 Section 207, Tax Code.

30Annex "A" of Petition for Review dated 5 April 1988 filed by Tirso B. Savellana with the
Court of Tax Appeals, CTA Records, pp. 1-16.

31Under the present Section 222(c) of the Tax Code as amended by RA No. 8424 which
took effect on 1 January 1998, this period has been increased to five years.

32 7th Edition, 1999.

33 G.R. No. L-63575, 20 January 1988, 157 SCRA 140.

34 G.R. No. L-13754, 31 March 1962, 4 SCRA 783.

35Protector's Services v. Court of Appeals, 386 Phil. 611 (2000); Republic v. Ker &
Company, 124 Phil. 822 (1966).

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36 Article 1306 of the Civil Code.

TINGA, J.:

1Revenue Memorandum Circular No. 31-86, 12 September 1986: x x x [U]nder Executive


Order No. 44, the Commissioner of Internal Revenue or his duly authorized
representatives shall accept compromise payments by taxpayers with outstanding
delinquent accounts and disputed assessments (except withholding taxes whether final
or creditable) pending as of December 31, 1985.

2 Revenue Regulation No. 17-86, 08 October1986:

SECTION 2. Definition of terms. In applying the provisions of these regulations


the following terms shall have the meaning indicated below:

a) Delinquent account Refers to the amount of tax due on or before December


31, 1985 from a taxpayer who failed to pay the same within the time prescribed
for its payment arising from (1) a self assessed tax, whether or not a tax return
was filed, or (2) a deficiency assessment issued by the BIR which has become final
and executory.

Where no return was filed, the taxpayer shall be considered delinquent as of the
time the tax on such return was due, and in availing of the compromise, a tax
return shall be filed as a basis for computing the amount of compromise to be
paid. x x x

SECTION 3. Who may avail. Any person, natural or juridical, may settle thru a
compromise, any delinquent account or disputed assessment which has been due
as of December 31, 1985, by paying an amount equal to thirty (30%) per cent of
the basic tax assessed.

3 Revenue Memorandum Order No. 39-86, 18 November 1986:

Par. 2. Period for availment. - Filing of application for compromise settlement


under the said law shall be effective only until March 31, 1987. Applications filed
on or before this date shall be valid even if the payment or payments of the
compromise amount shall be made after the said date, subject, however, to the
provisions of Executive Order No. 44 and its implementing Revenue Regulations
No. 17-86.

4 E.O. No. 44, s. 1986, second whereas clause.

5 E.O. No. 44, s. 1986, first whereas clause.

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6 Excluding interest and surcharges as of 31 July 1986.

7 Rollo, p. 19.

8 Article 1232, Civil Code.

9 Article 1231, Civil Code.

10 See Article 1278, Civil Code.

11 See Article 1275, Civil Code, in relation to 1231(5), Civil Code.

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2. CIR vs ALBERTO D. BENIPAYO
G.R. No. L-13656; January 31, 1962

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

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

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


vs.
ALBERTO D. BENIPAYO, respondent.

Office of the Solicitor General for petitioner.


Carlos J. Antiporda for respondent.

DIZON, J.:

This is an appeal taken by the Collector of Internal Revenue from the decision of the Court of Tax
Appeals dated January 23, 1948, reversing the one rendered by the former, thereby relieving
respondent Alberto D. Benipayo from the payment of the deficiency amusement tax assessed
against him in the total amount of P12,093.45.

Respondent is the owner and operator of the Lucena Theater located in the municipality of
Lucena, Quezon. On October 3, 1953 Internal Revenue Agent Romeo de Guia investigated
respondent's amusement tax liability in connection with the operation of said theater during the
period from August, 1952 to September, 1953. On October 15, 1953 De Guia submitted his report
to the Provincial Revenue Agent to the effect that respondent had disproportionately issued tax-
free 20-centavo children's tickets. His finding was that during the years 1949 to 1951 the average
ratio of adults and children patronizing the Lucena Theater was 3 to 1, i.e., for every three adults
entering the theater, one child was also admitted, while during the period in question, the
proportion is reversed - three children to one adult. From this he concluded that respondent
must have fraudulently sold two tax-free 20-centavo tickets, in order to avoid payment of the
amusement tax prescribed in Section 260 of the National Internal Revenue Code. Based on the
average ratio between adult and children attendance in the past years, Examiner de Guia
recommended a deficiency amusement tax assessment against respondent in the sum of
P11,193.45, inclusive of 25% surcharge, plus a suggested compromise penalty of P900.00 for
violation of section 260 of the National Internal Revenue Code, or a total sum of P12,093.45
covering the period from August, 1952 to September, 1953 inclusive. On July 14, 1954, petitioner

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issued a deficiency amusement tax assessment against respondent, demanding from the latter
the payment of the total sum of P12,152.93 within thirty days from receipt thereof. On August
16, 1954, respondent filed the corresponding protest with the Conference Staff of the Bureau of
Internal Revenue. After due hearing, the Conference Staff submitted to petitioner Collector of
Internal Revenue its finding to the effect that the "meager reports of these fieldmen (Examiner
de Guia and the Provincial Revenue Agent of Quezon) are mere presumptions and conclusions,
devoid of findings of the fact of the alleged fraudulent practices of the herein taxpayer". In view
thereof, and as recommended by the Conference Staff, petitioner referred the case back to the
Provincial Revenue Agent of Quezon for further investigation. The report submitted by Provincial
Revenue Officer H.I. Bernardo after this last investigation partly reads as follows:.

The returns from July 1 to July 11, showed that 31.43% of the entire audience of 12,754
consisted of adults, the remaining 68.57% of children. During this said period due,
perhaps, to the absence of agents in the premises, subject taxpayer was able to
manipulate the issuance of tickets in the way and manner alleged in Asst. De Guia's
indorsement report mentioned above. But during the period from July 14 to July 24, 1955,
when agents of this Office supervised in the sales of admission tickets the sales for adults
soared upwards to 76% while that for children dropped correspondingly to 24%.

It is opined without fear of contradiction that the ratio of three (3) adults to every one (1)
child in the audience or a proportion of 75:25 as reckoned in Asst. De Guia's indorsement
report to this Office's new findings of a proportion of 76:24, represents and conveys the
true picture of the situation under the law of averages, provided that the film being shown
is not a children's show. There is no hard and fast rule in this regard, but this findings
would seem to admit no contradiction.

Please note that the new findings of this Office is not a direct proof of what has transpired
during the period investigated by Asst. De Guia and now pending before the Conference
Staff", . . (Exh. 3, BIR Record, p. 137-138).

After considering said report, the Conference Staff of the Bureau of Internal Revenue
recommended to the Collector of Internal Revenue the issuance of the deficiency amusement
tax assessment in question.

The only issue in this appeal is whether or not there is sufficient evidence in the record showing
that respondent, during the period under review, sold and issued to his adult customers two tax-
free 20-centavo children's tickets, instead of one 40-centavo ticket for each adult customer; to
cheat or defraud the Government. On this question the Court of Tax Appeals said the following
in the appealed decision:.

To our mind, the appealed decision has no factual basis and must be reversed. An
assessment fixes and determines the tax liability of a taxpayer. As soon as it is served, an
obligation arises on the part of the taxpayer concerned to pay the amount assessed and
demanded. Hence, assessments should not be based on mere presumptions no matter

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MAS
how reasonable or logical said presumptions may be. Assuming arguendo that the
average ratio of adults and children patronizing the Lucena Theater from 1949 to 1951
was 3 to 1, the same does not give rise to the inference that the same conditions existed
during the years in question (1952 and 1953). The fact that almost the same ratio existed
during the month of July, 1955 does not provide a sufficient inference on the conditions
in 1952 and 1953. . .

In order to stand the test of judicial scrutiny, the assessment must be based on actual
facts. The presumption of correctness of assessment being a mere presumption cannot
be made to rest on another presumption that the circumstances in 1952 and 1953 are
presumed to be the same as those existing in 1949 to 1951 and July 1955. In the case
under consideration there are no substantial facts to support the assessment in question.
...

A review of the records has not disclosed anything sufficient to justify a reversal of the above
finding made by the Court of Tax Appeals. It should be borne in mind that to sustain the deficiency
tax assessed against respondent would amount, in effect, to a finding that he had, for a
considerable period of time, cheated and defrauded the government by selling to each adult
patron two children's tax-free tickets instead of one ticket subject to the amusement tax provided
for in Section 260 of the National Internal Revenue Code. Fraud is a serious charge and, to be
sustained, it must be supported by clear and convincing proof which, in the present case, is
lacking.

The claim that respondent admitted having resorted to the anomalous practice already
mentioned is not entirely correct. What respondent appears to have admitted was that during a
certain limited period he had adopted a sort of rebate system applicable to cases where adults
and children came in groups and were al anomalous practice already mentioned is not entirely
correct. What respondent appears to have admitted was that during a certain limited period he
had adopted a sort of rebate ystem applicable to cases where adults and children came in group
and were all charged 20 centavo admission tickets. This practice was, however, discontinued
when he was informed by the Bureau of Internal Revenue that it was not in accordance with law.

WHEREFORE, the appealed judgment is hereby affirmed with costs.

Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera, Paredes and De Leon, JJ.,
concur.
Bengzon, C.J., took no part.

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MAS
3. CIR vs ENRON SUBIC POWER CORPORATION
G.R. No. 166387; January 19, 2009

Republic of the Philippines


SUPREME COURT
Manila

FIRST DIVISION
EN BANC

G.R. No. 166387 January 19, 2009

COMMISSIONER OF INTERNAL REVENUE, Petitioners,


vs.
ENRON SUBIC POWERCORPORATION, Respondents.

RESOLUTION

CORONA, J.:

In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner
Commissioner of Internal Revenue (CIR) assails the November 24, 2004 decision 1 of the Court of
Appeals (CA) annulling the formal assessment notice issued by the CIR against respondent Enron
Subic Power Corporation (Enron) for failure to state the legal and factual bases for such
assessment.

Enron, a domestic corporation registered with the Subic Bay Metropolitan Authority as a freeport
enterprise,2 filed its annual income tax return for the year 1996 on April 12, 1997. It indicated a
net loss of P7,684,948. Subsequently, the Bureau of Internal Revenue, through a preliminary five-
day letter,3 informed it of a proposed assessment of an alleged P2,880,817.25 deficiency income
tax.4 Enron disputed the proposed deficiency assessment in its first protest letter.5

On May 26, 1999, Enron received from the CIR a formal assessment notice6 requiring it to pay
the alleged deficiency income tax of P2,880,817.25 for the taxable year 1996. Enron protested
this deficiency tax assessment.7

Due to the non-resolution of its protest within the 180-day period, Enron filed a petition for
review in the Court of Tax Appeals (CTA). It argued that the deficiency tax assessment disregarded
the provisions of Section 228 of the National Internal Revenue Code (NIRC), as amended, 8and
Section 3.1.4 of Revenue Regulations (RR) No. 12-999 by not providing the legal and factual bases
of the assessment. Enron likewise questioned the substantive validity of the assessment.10

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In a decision dated September 12, 2001, the CTA granted Enrons petition and ordered the
cancellation of its deficiency tax assessment for the year 1996. The CTA reasoned that the
assessment notice sent to Enron failed to comply with the requirements of a valid written notice
under Section 228 of the NIRC and RR No. 12-99. The CIRs motion for reconsideration of the CTA
decision was denied in a resolution dated November 12, 2001.

The CIR appealed the CTA decision to the CA but the CA affirmed it. The CA held that the audit
working papers did not substantially comply with Section 228 of the NIRC and RR No. 12-99
because they failed to show the applicability of the cited law to the facts of the assessment. The
CIR filed a motion for reconsideration but this was deemed abandoned when he filed a motion
for extension to file a petition for review in this Court.

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

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

We reiterate the well-established doctrine that as a matter of practice and principle, [we] will not
set aside the conclusion reached by an agency, like the CTA, especially if affirmed by the [CA]. By
the very nature of its function, it has dedicated itself to the study and consideration of tax
problems and has necessarily developed an expertise on the subject, unless there has been an
abuse or improvident exercise of authority on its part, which is not present here.

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

A notice of assessment is:

[A] declaration of deficiency taxes issued to a [t]axpayer who fails to respond to a Pre-Assessment
Notice (PAN) within the prescribed period of time, or whose reply to the PAN was found to be
without merit. The Notice of Assessment shall inform the [t]axpayer of this fact, and that the
report of investigation submitted by the Revenue Officer conducting the audit shall be given due
course.

The formal letter of demand calling for payment of the taxpayers deficiency tax or taxes shall
state the fact, the law, rules and regulations or jurisprudence on which the assessment is based,
otherwise the formal letter of demand and the notice of assessment shall be void. (emphasis
supplied)12

Section 228 of the NIRC provides that the taxpayer shall be informed in writing of the law and
the facts on which the assessment is made. Otherwise, the assessment is void. To implement the
provisions of Section 228 of the NIRC, RR No. 12-99 was enacted. Section 3.1.4 of the revenue
regulation reads:

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MAS
3.1.4. Formal Letter of Demand and Assessment Notice. The formal letter of demand and
assessment notice shall be issued by the Commissioner or his duly authorized representative. The
letter of demand calling for payment of the taxpayers deficiency tax or taxes shall state the
facts, the law, rules and regulations, or jurisprudence on which the assessment is based,
otherwise, the formal letter of demand and assessment notice shall be void. The same shall be
sent to the taxpayer only by registered mail or by personal delivery. xxx (emphasis supplied)

It is clear from the foregoing that a taxpayer must be informed in writing of the legal and factual
bases of the tax assessment made against him. The use of the word shall in these legal
provisions indicates the mandatory nature of the requirements laid down therein. We note the
CTAs findings:

In [this] case, [the CIR] merely issued a formal assessment and indicated therein the supposed
tax, surcharge, interest and compromise penalty due thereon. The Revenue Officers of the [the
CIR] in the issuance of the Final Assessment Notice did not provide Enron with the written bases
of the law and facts on which the subject assessment is based. [The CIR] did not bother to explain
how it arrived at such an assessment. Moreso, he failed to mention the specific provision of the
Tax Code or rules and regulations which were not complied with by Enron.13

Both the CTA and the CA concluded that the deficiency tax assessment merely itemized the
deductions disallowed and included these in the gross income. It also imposed the preferential
rate of 5% on some items categorized by Enron as costs. The legal and factual bases were,
however, not indicated.

The CIR insists that an examination of the facts shows that Enron was properly apprised of its tax
deficiency. During the pre-assessment stage, the CIR advised Enrons representative of the tax
deficiency, informed it of the proposed tax deficiency assessment through a preliminary five-day
letter and furnished Enron a copy of the audit working paper 14 allegedly showing in detail the
legal and factual bases of the assessment. The CIR argues that these steps sufficed to inform
Enron of the laws and facts on which the deficiency tax assessment was based.

We disagree. The advice of tax deficiency, given by the CIR to an employee of Enron, as well as
the preliminary five-day letter, were not valid substitutes for the mandatory notice in writing of
the legal and factual bases of the assessment. These steps were mere perfunctory discharges of
the CIRs duties in correctly assessing a taxpayer.15 The requirement for issuing a preliminary or
final notice, as the case may be, informing a taxpayer of the existence of a deficiency tax
assessment is markedly different from the requirement of what such notice must contain. Just
because the CIR issued an advice, a preliminary letter during the pre-assessment stage and a final
notice, in the order required by law, does not necessarily mean that Enron was informed of the
law and facts on which the deficiency tax assessment was made.

The law requires that the legal and factual bases of the assessment be stated in the formal letter
of demand and assessment notice. Thus, such cannot be presumed. Otherwise, the express
provisions of Article 228 of the NIRC and RR No. 12-99 would be rendered nugatory. The alleged

83
MAS
factual bases in the advice, preliminary letter and audit working papers did not suffice. There
was no going around the mandate of the law that the legal and factual bases of the assessment
be stated in writing in the formal letter of demand accompanying the assessment notice.

We note that the old law merely required that the taxpayer be notified of the assessment made
by the CIR. This was changed in 1998 and the taxpayer must now be informed not only of the law
but also of the facts on which the assessment is made.16 Such amendment is in keeping with the
constitutional principle that no person shall be deprived of property without due process.17 In
view of the absence of a fair opportunity for Enron to be informed of the legal and factual bases
of the assessment against it, the assessment in question was void. We reiterate our ruling
in Reyes v. Almanzor, et al.:18

Verily, taxes are the lifeblood of the Government and so should be collected without unnecessary
hindrance. However, such collection should be made in accordance with law as any arbitrariness
will negate the very reason for the Government itself.

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

No costs.

SO ORDERED.

RENATO C. CORONA
Associate Justice

WE CONCUR:

REYNATO S. PUNO
Chief Justice
Chairperson

ANTONIO T. CARPIO ADOLFO S. AZCUNA


Associate Justice Associate Justice

TERESITA J. LEONARDO-DE CASTRO


Associate Justice

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MAS
CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation,
I certify that the conclusions in the above Decision had been reached in consultation before the
case was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice

Footnotes

1Penned by Associate Justice Magdangal M. De Leon and concurred in by Associate


Justices Romeo A. Brawner (deceased) and Mariano C. Del Castillo of the Ninth Division
of the Court of Appeals. Rollo, pp. 68-74.

2It is entitled to a 5% preferential rate pursuant to RA 7227 (Bases Conversion and


Development Act of 1992).

3Rollo, p. 78. Paragraph 8, Joint Stipulation of Facts and Issues, C.T.A. Case No. 5993,
dated April 18, 2000, states: Prior to the issuance of the FAN, the Petitioner was informed
of the proposed assessment by the way of a Preliminary Five (5) day Letter From Revenue
District Office No. 19; xxx.

4 Id., p. 41.

5 Id., pp. 78, 81-88.

6 FAN No. 019-44-96-0000371 dated May 12, 1999. Id., p. 89.

7 Dated June 14, 1999. Id, pp. 90-101.

8Section 228. Protesting of Assessment. When the Commissioner or his duly


authorizedrepresentative finds that proper taxes should be assessed, he shall first notify
the taxpayer of his findings: xxx

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

9 Dated September 6, 1999.

10The arguments raised were: (a) the supervision fees reimbursed by the Subic Power
Corporation (SBC) and Batangas Power Corporation (BPC) were not subject to tax as these
represented the actual cost incurred by Enron in the performance of its obligations under
the Operating and Maintenance Supervision Agreement; (b) the plant restoration cost

85
MAS
incurred in 1996 should be allowed as a deductible expense; (c) the plant insurance
expense formed part of its direct cost that should be allowed as a deduction from its
gross income earned; and (d) the tax withheld by the National Power Corporation on
its bank deposit interests should be allowed as tax credit.

11 G.R. No. 133834, 28 August 2006, 499 SCRA 664, 669.

12 http://www.bir.gov.ph/taxpayerrights/taxpayerrights.htm.

13 Rollo, p. 109.

14 Id. at 114-118.

15 CIR v. Reyes, G.R. No. 159694, 27 January 2006, 480 SCRA 382, 393.

16 Id.

17 CONSTITUTION, Art. III, Sec. 1.

18 G.R. Nos. 49839-46, 26 April 1991, 196 SCRA 322, 329.

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MAS
4. LUCAS G. ADAMSON, et al. vs COURT OF APPEALS
G.R. No. 120935; May 21, 2009

Republic of the Philippines


SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 120935 May 21, 2009

LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON, and SARA S. DE LOS REYES, in their
capacities as President, Treasurer and Secretary of Adamson Management
Corporation, Petitioners,
vs.
COURT OF APPEALS and LIWAYWAY VINZONS-CHATO, in her capacity as Commissioner of the
Bureau of Internal Revenue, Respondents.

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

G.R. No. 124557 May 21, 2009

INTERNAL REVENUE, Petitioner,


vs.
COMMISSIONER OF COURT OF APPEALS, COURT OF TAX APPEALS, ADAMSON MANAGEMENT
CORPORATION, LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON, and SARA S. DE LOS
REYES, Respondents.

DECISION

PUNO, C.J.:

Before the Court are the consolidated cases of G.R. No. 120935 and G.R. No. 124557.

G.R. No. 120935 involves a petition for review on certiorari filed by petitioners LUCAS G.
ADAMSON, THERESE JUNE D. ADAMSON, and SARA S. DE LOS REYES (private respondents), in
their respective capacities as president, treasurer and secretary of Adamson Management
Corporation (AMC) against then Commissioner of Internal Revenue Liwayway Vinzons-Chato
(COMMISSIONER), under Rule 45 of the Revised Rules of Court. They seek to review and reverse
the Decision promulgated on March 21, 1995 and Resolution issued on July 6, 1995 of the Court

87
MAS
of Appeals in CA-G.R. SP No. 35488 (Liwayway Vinzons-Chato, et al. v. Hon. Judge Erna Falloran-
Aliposa, et al.).

G.R. No. 124557 is a petition for review on certiorari filed by the Commissioner, assailing the
Decision dated March 29, 1996 of the Court of Appeals in CA-G.R. SP No. 35520, titled
Commissioner of Internal Revenue v. Court of Tax Appeals, Adamson Management Corporation,
Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes. In the said Decision, the
Court of Appeals upheld the Resolution promulgated on September 19, 1994 by the Court of Tax
Appeals (CTA) in C.T.A. Case No. 5075 (Adamson Management Corporation, Lucas G. Adamson,
Therese Adamson and Sara de los Reyes v. Commissioner of Internal Revenue).

The facts, as culled from the findings of the appellate court, follow:

On June 20, 1990, Lucas Adamson and AMC sold 131,897 common shares of stock in Adamson
and Adamson, Inc. (AAI) to APAC Holding Limited (APAC). The shares were valued
at P7,789,995.00.1 On June 22, 1990, P159,363.21 was paid as capital gains tax for the
transaction.

On October 12, 1990, AMC sold to APAC Philippines, Inc. another 229,870 common shares of
stock in AAI for P17,718,360.00. AMC paid the capital gains tax of P352,242.96.

On October 15, 1993, the Commissioner issued a "Notice of Taxpayer" to AMC, Lucas G.
Adamson, Therese June D. Adamson and Sara S. de los Reyes, informing them of deficiencies on
their payment of capital gains tax and Value Added Tax (VAT). The notice contained a schedule
for preliminary conference.

The events preceding G.R. No. 120935 are the following:

On October 22, 1993, the Commissioner filed with the Department of Justice (DOJ) her Affidavit
of Complaint2against AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes
for violation of Sections 45 (a) and (d)3 , and 1104 , in relation to Section 1005 , as penalized under
Section 255,6 and for violation of Section 2537 , in relation to Section 252 (b) and (d) of the
National Internal Revenue Code (NIRC).8

AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes filed with the DOJ a
motion to suspend proceedings on the ground of prejudicial question, pendency of a civil case
with the Supreme Court, and pendency of their letter-request for re-investigation with the
Commissioner. After the preliminary investigation, State Prosecutor Alfredo P. Agcaoili found
probable cause. The Motion for Reconsideration against the findings of probable cause was
denied by the prosecutor.

On April 29, 1994, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes were
charged before the Regional Trial Court (RTC) of Makati, Branch 150 in Criminal Case Nos. 94-
1842 to 94-1846. They filed a Motion to Dismiss or Suspend the Proceedings. They invoked the

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MAS
grounds that there was yet no final assessment of their tax liability, and there were still pending
relevant Supreme Court and CTA cases. Initially, the trial court denied the motion. A Motion for
Reconsideration was however filed, this time assailing the trial courts lack of jurisdiction over
the nature of the subject cases. On August 8, 1994, the trial court granted the Motion. It ruled
that the complaints for tax evasion filed by the Commissioner should be regarded as a decision
of the Commissioner regarding the tax liabilities of Lucas G. Adamson, Therese June D. Adamson
and Sara S. de los Reyes, and appealable to the CTA. It further held that the said cases cannot
proceed independently of the assessment case pending before the CTA, which has jurisdiction to
determine the civil and criminal tax liability of the respondents therein.

On October 10, 1994, the Commissioner filed a Petition for Review with the Court of Appeals
assailing the trial courts dismissal of the criminal cases. She averred that it was not a condition
prerequisite that a formal assessment should first be given to the private respondents before she
may file the aforesaid criminal complaints against them. She argued that the criminal complaints
for tax evasion may proceed independently from the assessment cases pending before the CTA.

On March 21, 1995, the Court of Appeals reversed the trial courts decision and reinstated the
criminal complaints. The appellate court held that, in a criminal prosecution for tax evasion,
assessment of tax deficiency is not required because the offense of tax evasion is complete or
consummated when the offender has knowingly and willfully filed a fraudulent return with intent
to evade the tax.9 It ruled that private respondents filed false and fraudulent returns with intent
to evade taxes, and acting thereupon, petitioner filed an Affidavit of Complaint with the
Department of Justice, without an accompanying assessment of the tax deficiency of private
respondents, in order to commence criminal action against the latter for tax evasion. 10

Private respondents filed a Motion for Reconsideration, but the trial court denied the motion on
July 6, 1995. Thus, they filed the petition in G.R. No. 120935, raising the following issues:

1. WHETHER OR NOT THE RESPONDENT HONORABLE COURT OF APPEALS ERRED IN APPLYING


THE DOCTRINE IN UNGAB V. CUSI (Nos. L-41919-24, May 30, 1980, 97 SCRA 877) TO THE CASE
AT BAR.

2. WHETHER OR NOT AN ASSESSMENT IS REQUIRED UNDER THE SECOND CATEGORY OF THE


OFFENSE IN SECTION 253 OF THE NIRC.

3. WHETHER OR NOT THERE WAS A VALID ASSESSMENT MADE BY THE COMMISSIONER IN THE
CASE AT BAR.

4. WHETHER OR NOT THE FILING OF A CRIMINAL COMPLAINT SERVES AS AN IMPLIED


ASSESSMENT ON THE TAX LIABILITY OF THE TAXPAYER.

5. WHETHER OR NOT THE FILING OF THE CRIMINAL INFORMATION FOR TAX EVASION IN THE
TRIAL COURT IS PREMATURE BECAUSE THERE IS YET NO BASIS FOR THE CRIMINAL CHARGE OF
WILLFULL INTENT TO EVADE THE PAYMENT OF A TAX.

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6. WHETHER OR NOT THE DOCTRINES LAID DOWN IN THE CASES OF YABES V. FLOJO (No. L-46954,
July 20, 1982, 115 SCRA 286) AND CIR V. UNION SHIPPING CORP. (G.R. No. 66160, May 21, 1990,
185 SCRA 547) ARE APPLICABLE TO THE CASE AT BAR.

7. WHETHER OR NOT THE COURT OF TAX APPEALS HAS JURISDICTION OVER THE DISPUTE ON
WHAT CONSTITUTES THE PROPER TAXES DUE FROM THE TAXPAYER.

In parallel circumstances, the following events preceded G.R. No. 124557:

On December 1, 1993, AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los
Reyes filed a letter request for re-investigation with the Commissioner of the "Examiners
Findings" earlier issued by the Bureau of Internal Revenue (BIR), which pointed out the tax
deficiencies.

On March 15, 1994 before the Commissioner could act on their letter-request, AMC, Lucas G.
Adamson, Therese June D. Adamson and Sara S. de los Reyes filed a Petition for Review with the
CTA. They assailed the Commissioners finding of tax evasion against them. The Commissioner
moved to dismiss the petition, on the ground that it was premature, as she had not yet issued a
formal assessment of the tax liability of therein petitioners. On September 19, 1994, the CTA
denied the Motion to Dismiss. It considered the criminal complaint filed by the Commissioner
with the DOJ as an implied formal assessment, and the filing of the criminal informations with
the RTC as a denial of petitioners protest regarding the tax deficiency.

The Commissioner repaired to the Court of Appeals on the ground that the CTA acted with grave
abuse of discretion. She contended that, with regard to the protest provided under Section 229
of the NIRC, there must first be a formal assessment issued by the Commissioner, and it must be
in accord with Section 6 of Revenue Regulation No. 12-85. She maintained that she had not yet
issued a formal assessment of tax liability, and the tax deficiency amounts mentioned in her
criminal complaint with the DOJ were given only to show the difference between the tax returns
filed and the audit findings of the revenue examiner.

The Court of Appeals sustained the CTAs denial of the Commissioners Motion to Dismiss. Thus,
the Commissioner filed the petition for review under G.R. No. 124557, raising the following
issues:

1. WHETHER OR NOT THE INSTANT PETITION SHOULD BE DISMISSED FOR FAILURE TO COMPLY
WITH THE MANDATORY REQUIREMENT OF A CERTIFICATION UNDER OATH AGAINST FORUM
SHOPPING;

2. WHETHER OR NOT THE CRIMINAL CASE FOR TAX EVASION IN THE CASE AT BAR CAN PROCEED
WITHOUT AN ASSESSMENT;

3. WHETHER OR NOT THE COMPLAINT FILED WITH THE DEPARTMENT OF JUSTICE CAN BE
CONSTRUED AS AN IMPLIED ASSESSMENT; and

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4. WHETHER OR NOT THE COURT OF TAX APPEALS HAS JURISDICTION TO ACT ON PRIVATE
RESPONDENTS PETITION FOR REVIEW FILED WITH THE SAID COURT.

The issues in G.R. No. 124557 and G.R. No. 120935 can be compressed into three:

1. WHETHER THE COMMISSIONER HAS ALREADY RENDERED AN ASSESSMENT (FORMAL OR


OTHERWISE) OF THE TAX LIABILITY OF AMC, LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON
AND SARA S. DE LOS REYES;

2. WHETHER THERE IS BASIS FOR THE CRIMINAL CASES FOR TAX EVASION TO PROCEED AGAINST
AMC, LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON AND SARA S. DE LOS REYES; and

3. WHETHER THE COURT OF TAX APPEALS HAS JURISDICTION TO TAKE COGNIZANCE OF BOTH
THE CIVIL AND THE CRIMINAL ASPECTS OF THE TAX LIABILITY OF AMC, LUCAS G. ADAMSON,
THERESE JUNE D. ADAMSON AND SARA S. DE LOS REYES.

The case of CIR v. Pascor Realty, et al.11 is relevant. In this case, then BIR Commissioner Jose U.
Ong authorized revenue officers to examine the books of accounts and other accounting records
of Pascor Realty and Development Corporation (PRDC) for 1986, 1987 and 1988. This resulted in
a recommendation for the issuance of an assessment in the amounts of P7,498,434.65
and P3,015,236.35 for the years 1986 and 1987, respectively.

On March 1, 1995, the Commissioner filed a criminal complaint before the DOJ against PRDC, its
President Rogelio A. Dio, and its Treasurer Virginia S. Dio, alleging evasion of taxes in the total
amount of P10,513,671.00. Private respondents filed an Urgent Request for
Reconsideration/Reinvestigation disputing the tax assessment and tax liability.

The Commissioner denied the urgent request for reconsideration/reinvestigation because she
had not yet issued a formal assessment.

Private respondents then elevated the Decision of the Commissioner to the CTA on a petition for
review. The Commissioner filed a Motion to Dismiss the petition on the ground that the CTA has
no jurisdiction over the subject matter of the petition, as there was yet no formal assessment
issued against the petitioners. The CTA denied the said motion to dismiss and ordered the
Commissioner to file an answer within thirty (30) days. The Commissioner did not file an answer
nor did she move to reconsider the resolution. Instead, the Commissioner filed a petition for
review of the CTA decision with the Court of Appeals. The Court of Appeals upheld the CTA order.
However, this Court reversed the Court of Appeals decision and the CTA order, and ordered the
dismissal of the petition. We held:

An assessment contains not only a computation of tax liabilities, but also a demand for payment
within a prescribed period. It also signals the time when penalties and interests begin to accrue
against the taxpayer. To enable the taxpayer to determine his remedies thereon, due process
requires that it must be served on and received by the taxpayer. Accordingly, an affidavit, which

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was executed by revenue officers stating the tax liabilities of a taxpayer and attached to a criminal
complaint for tax evasion, cannot be deemed an assessment that can be questioned before the
Court of Tax Appeals.

Neither the NIRC nor the revenue regulations governing the protest of assessments 12 provide a
specific definition or form of an assessment. However, the NIRC defines the specific functions
and effects of an assessment. To consider the affidavit attached to the Complaint as a proper
assessment is to subvert the nature of an assessment and to set a bad precedent that will
prejudice innocent taxpayers.

True, as pointed out by the private respondents, an assessment informs the taxpayer that he or
she has tax liabilities. But not all documents coming from the BIR containing a computation of
the tax liability can be deemed assessments.

To start with, an assessment must be sent to and received by a taxpayer, and must demand
payment of the taxes described therein within a specific period. Thus, the NIRC imposes a 25
percent penalty, in addition to the tax due, in case the taxpayer fails to pay the deficiency tax
within the time prescribed for its payment in the notice of assessment. Likewise, an interest of
20 percent per annum, or such higher rate as may be prescribed by rules and regulations, is to
be collected from the date prescribed for its payment until the full payment.13

The issuance of an assessment is vital in determining the period of limitation regarding its proper
issuance and the period within which to protest it. Section 20314 of the NIRC provides that
internal revenue taxes must be assessed within three years from the last day within which to file
the return. Section 222,15 on the other hand, specifies a period of ten years in case a fraudulent
return with intent to evade was submitted or in case of failure to file a return. Also, Section
22816 of the same law states that said assessment may be protested only within thirty days from
receipt thereof. Necessarily, the taxpayer must be certain that a specific document constitutes
an assessment. Otherwise, confusion would arise regarding the period within which to make an
assessment or to protest the same, or whether interest and penalty may accrue thereon.

It should also be stressed that the said document is a notice duly sent to the taxpayer. Indeed,
an assessment is deemed made only when the collector of internal revenue releases, mails or
sends such notice to the taxpayer.17

In the present case, the revenue officers Affidavit merely contained a computation of
respondents tax liability.lawphil.net It did not state a demand or a period for payment. Worse,
it was addressed to the justice secretary, not to the taxpayers.

Respondents maintain that an assessment, in relation to taxation, is simply understood to mean:

"A notice to the effect that the amount therein stated is due as tax and a demand for payment
thereof."18

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"Fixes the liability of the taxpayer and ascertains the facts and furnishes the data for the proper
presentation of tax rolls."19

Even these definitions fail to advance private respondents case. That the BIR examiners Joint
Affidavit attached to the Criminal Complaint contained some details of the tax liabilities of private
respondents does not ipso facto make it an assessment. The purpose of the Joint Affidavit was
merely to support and substantiate the Criminal Complaint for tax evasion. Clearly, it was not
meant to be a notice of the tax due and a demand to the private respondents for payment
thereof.

The fact that the Complaint itself was specifically directed and sent to the Department of Justice
and not to private respondents shows that the intent of the commissioner was to file a criminal
complaint for tax evasion, not to issue an assessment. Although the revenue officers
recommended the issuance of an assessment, the commissioner opted instead to file a criminal
case for tax evasion. What private respondents received was a notice from the DOJ that a criminal
case for tax evasion had been filed against them, not a notice that the Bureau of Internal Revenue
had made an assessment.

Private respondents maintain that the filing of a criminal complaint must be preceded by an
assessment. This is incorrect, because Section 222 of the NIRC specifically states that in cases
where a false or fraudulent return is submitted or in cases of failure to file a return such as this
case, proceedings in court may be commenced without an assessment. Furthermore, Section 205
of the same Code clearly mandates that the civil and criminal aspects of the case may be pursued
simultaneously. In Ungab v. Cusi,20 petitioner therein sought the dismissal of the criminal
Complaints for being premature, since his protest to the CTA had not yet been resolved. The
Court held that such protests could not stop or suspend the criminal action which was
independent of the resolution of the protest in the CTA. This was because the commissioner of
internal revenue had, in such tax evasion cases, discretion on whether to issue an assessment or
to file a criminal case against the taxpayer or to do both.

Private respondents insist that Section 222 should be read in relation to Section 255 of the
NIRC,21 which penalizes failure to file a return. They add that a tax assessment should precede a
criminal indictment. We disagree. To reiterate, said Section 222 states that an assessment is not
necessary before a criminal charge can be filed. This is the general rule. Private respondents failed
to show that they are entitled to an exception. Moreover, the criminal charge need only be
supported by a prima facie showing of failure to file a required return. This fact need not be
proven by an assessment.

The issuance of an assessment must be distinguished from the filing of a complaint. Before an
assessment is issued, there is, by practice, a pre-assessment notice sent to the taxpayer. The
taxpayer is then given a chance to submit position papers and documents to prove that the
assessment is unwarranted. If the commissioner is unsatisfied, an assessment signed by him or
her is then sent to the taxpayer informing the latter specifically and clearly that an assessment
has been made against him or her. In contrast, the criminal charge need not go through all these.

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The criminal charge is filed directly with the DOJ. Thereafter, the taxpayer is notified that a
criminal case had been filed against him, not that the commissioner has issued an assessment. It
must be stressed that a criminal complaint is instituted not to demand payment, but to penalize
the taxpayer for violation of the Tax Code.

In the cases at bar, the Commissioner denied that she issued a formal assessment of the tax
liability of AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes. She admits
though that she wrote the recommendation letter22 addressed to the Secretary of the DOJ
recommending the filing of criminal complaints against AMC and the aforecited persons for
fraudulent returns and tax evasion.

The first issue is whether the Commissioners recommendation letter can be considered as a
formal assessment of private respondents tax liability.

In the context in which it is used in the NIRC, an assessment is a written notice and demand made
by the BIR on the taxpayer for the settlement of a due tax liability that is there definitely set and
fixed. A written communication containing a computation by a revenue officer of the tax liability
of a taxpayer and giving him an opportunity to contest or disprove the BIR examiners findings is
not an assessment since it is yet indefinite.23

We rule that the recommendation letter of the Commissioner cannot be considered a formal
assessment. Even a cursory perusal of the said letter would reveal three key points:

1. It was not addressed to the taxpayers.

2. There was no demand made on the taxpayers to pay the tax liability, nor a period for
payment set therein.

3. The letter was never mailed or sent to the taxpayers by the Commissioner.

In fine, the said recommendation letter served merely as the prima facie basis for filing criminal
informations that the taxpayers had violated Section 45 (a) and (d), and 110, in relation to Section
100, as penalized under Section 255, and for violation of Section 253, in relation to Section 252
9(b) and (d) of the Tax Code.24

The next issue is whether the filing of the criminal complaints against the private respondents by
the DOJ is premature for lack of a formal assessment.

Section 269 of the NIRC (now Section 222 of the Tax Reform Act of 1997) provides:

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:

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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

The law is clear. When fraudulent tax returns are involved as in the cases at bar, a proceeding in
court after the collection of such tax may be begun without assessment. Here, the private
respondents had already filed the capital gains tax return and the VAT returns, and paid the taxes
they have declared due therefrom. Upon investigation of the examiners of the BIR, there was a
preliminary finding of gross discrepancy in the computation of the capital gains taxes due from
the sale of two lots of AAI shares, first to APAC and then to APAC Philippines, Limited. The
examiners also found that the VAT had not been paid for VAT-liable sale of services for the third
and fourth quarters of 1990. Arguably, the gross disparity in the taxes due and the amounts
actually declared by the private respondents constitutes badges of fraud.

Thus, the applicability of Ungab v. Cusi25 is evident to the cases at bar. In this seminal case, this
Court ruled that there was no need for precise computation and formal assessment in order for
criminal complaints to be filed against him. It quoted Mertens Law of Federal Income Taxation,
Vol. 10, Sec. 55A.05, p. 21, thus:

An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to


defeat and evade the income tax. A crime is complete when the violator has knowingly and
willfully filed a fraudulent return, with intent to evade and defeat the tax. The perpetration of
the crime is grounded upon knowledge on the part of the taxpayer that he has made an
inaccurate return, and the governments failure to discover the error and promptly to assess has
no connections with the commission of the crime.

This hoary principle still underlies Section 269 and related provisions of the present Tax Code.

We now go to the issue of whether the CTA has no jurisdiction to take cognizance of both the
criminal and civil cases here at bar.1avvphi1

Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals) as amended, the rulings
of the Commissioner are appealable to the CTA, thus:

SEC. 7. Jurisdiction. The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to
review by appeal, as herein provided -

(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto,
or other matters arising under the National Internal Revenue Code or other laws or part of law
administered by the Bureau of Internal Revenue;

Republic Act No. 8424, titled "An Act Amending the National Internal Revenue Code, As
Amended, And For Other Purposes," later expanded the jurisdiction of the Commissioner and,
correspondingly, that of the CTA, thus:

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SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. The power
to interpret the provisions of this Code and other tax laws shall be under the exclusive and
original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising under this Code or other
laws or portions thereof administered by the Bureau of Internal Revenue is vested in the
Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.

The latest statute dealing with the jurisdiction of the CTA is Republic Act No. 9282.26 It provides:

SEC. 7. Section 7 of the same Act is hereby amended to read as follows:

Sec. 7. Jurisdiction. The CTA shall exercise:

(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:

(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed


assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the National Internal Revenue or
other laws administered by the Bureau of Internal Revenue;

(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed


assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the National Internal Revenue
Code or other laws administered by the Bureau of Internal Revenue, where the
National Internal Revenue Code provides a specific period of action, in which case
the inaction shall be deemed a denial;

(3) Decisions, orders or resolutions of the Regional Trial Courts in local tax cases
originally decided or resolved by them in the exercise of their original or appellate
jurisdiction;

xxx

(b) Jurisdiction over cases involving criminal offenses as herein provided:

(1) Exclusive original jurisdiction over all criminal offenses arising from violations
of the National Internal Revenue Code or Tariff and Customs Code and other laws
administered by the Bureau of Internal Revenue or the Bureau of Customs:
Provided, however, That offenses or felonies mentioned in this paragraph where
the principal amount of taxes and fees, exclusive of charges and penalties, claimed
is less than One million pesos (P1,000,000.00) or where there is no specified
amount claimed shall be tried by the regular courts and the jurisdiction of the CTA

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shall be appellate. Any provision of law or the Rules of Court to the contrary
notwithstanding, the criminal action and the corresponding civil action for the
recovery of civil liability for taxes and penalties shall at all times be simultaneously
instituted with, and jointly determined in the same proceeding by the CTA, the
filing of the criminal action being deemed to necessarily carry with it the filing of
the civil action, and no right to reserve the filling of such civil action separately
from the criminal action will be recognized.

(2) Exclusive appellate jurisdiction in criminal offenses:

(a) Over appeals from the judgments, resolutions or orders of the Regional Trial
Courts in tax cases originally decided by them, in their respected territorial
jurisdiction.

(b) Over petitions for review of the judgments, resolutions or orders of the
Regional Trial Courts in the exercise of their appellate jurisdiction over tax cases
originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and
Municipal Circuit Trial Courts in their respective jurisdiction.

(c) Jurisdiction over tax collection cases as herein provided:

(1) Exclusive original jurisdiction in tax collection cases involving final and
executory assessments for taxes, fees, charges and penalties: Provided,
however, That collection cases where the principal amount of taxes and
fees, exclusive of charges and penalties, claimed is less than One million
pesos (P1,000,000.00) shall be tried by the proper Municipal Trial Court,
Metropolitan Trial Court and Regional Trial Court.

(2) Exclusive appellate jurisdiction in tax collection cases:

(a) Over appeals from the judgments, resolutions or orders of the


Regional Trial Courts in tax collection cases originally decided by
them, in their respective territorial jurisdiction.

(b) Over petitions for review of the judgments, resolutions or


orders of the Regional Trial Courts in the exercise of their appellate
jurisdiction over tax collection cases originally decided by the
Metropolitan Trial Courts, Municipal Trial Courts and Municipal
Circuit Trial Courts, in their respective jurisdiction.

These laws have expanded the jurisdiction of the CTA. However, they did not change the
jurisdiction of the CTA to entertain an appeal only from a final decision or assessment of the
Commissioner, or in cases where the Commissioner has not acted within the period prescribed

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by the NIRC. In the cases at bar, the Commissioner has not issued an assessment of the tax liability
of private respondents.

Finally, we hold that contrary to private respondents stance, the doctrines laid down in CIR v.
Union Shipping Co. and Yabes v. Flojo are not applicable to the cases at bar. In these earlier cases,
the Commissioner already rendered an assessment of the tax liabilities of the delinquent
taxpayers, for which reason the Court ruled that the filing of the civil suit for collection of the
taxes due was a final denial of the taxpayers request for reconsideration of the tax assessment.

IN VIEW WHEREOF, premises considered, judgment is rendered:

1. In G.R. No. 120935, AFFIRMING the CA decision dated March 21, 1995, which set aside
the Regional Trial Courts Order dated August 8, 1994, and REINSTATING Criminal Case
Nos. 94-1842 to 94-1846 for further proceedings before the trial court; and

2. In G.R. No. 124557, REVERSING and SETTING ASIDE the Decision of the Court of Appeals
dated March 29, 1996, and ORDERING the dismissal of C.T.A. Case No. 5075.

No costs.

SO ORDERED.

REYNATO S. PUNO
Chief Justice

WE CONCUR:

ANTONIO T. CARPIO
Associate Justice

RENATO C. CORONA TERESITA J. LEONARDO-DE CASTRO


Associate Justice Associate Justice

LUCAS P. BERSAMIN
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above
decision had been reached in consultation before the case was assigned to the writer of the
opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice

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Footnotes

1Lucas G. Adamson and AMC v. CA and APAC Holding Limited, G.R. No. 106879, May 27,
1994, 232 SCRA 602.

2 I.S. No. 93-581.

3The NIRC of the Philippines, Annotated, 16th and Revised Edition, Nolledo, J. and
Nolledo, M. (1993), p. 414.

Section 45. Corporation Returns. -

(A) Requirements. - Every corporation, subject to the tax herein imposed,


except foreign corporations not engaged in trade or business in the
Philippines shall render, in duplicate, a true and accurate quarterly income
tax return and final or adjustment return in accordance with the provisions
of Chapter IX of this Title. The return shall be filed by the president, vice-
president or other principal officer, and shall be sworn to by such officer
and by the treasurer or assistant treasurer.

xxx

(D) Return on Capital Gains Realized from Sale of Shares of Stock. - Every
corporation deriving capital gains from the sale or exchange of shares of
stock not traded thru a local stock exchange as prescribed under Sections
24 (e) 2 A, 25 (a) (6) (C) (i), 25(b)(5)(C) (i), shall file a return within thirty
(30) days after each transactions and a final consolidated return of all
transactions during the taxable year on or before the fifteenth (15th) day
of the fourth (4th) month following the close of the taxable year.

4 SECTION 110. Return and Payment of Value-Added Tax.

(A) Where to File the Return and Pay the Tax. - Every person subject to value-
added tax shall file a quarterly return of his gross sales or receipts and pay the tax
due thereon to a bank duly accredited by the Commissioner located in the revenue
district where such person is registered or required to be registered. However, in
cases where there are no duly accredited agent banks within the city or
municipality, the return shall be filed and any amount due shall be paid to any duly
accredited bank within the district, or to the Revenue District Officer, Collection
Agent or duly authorized Treasurer of the city or municipality where such taxpayer
has his principal place of business. Only one consolidated return shall be filed by

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the taxpayer for all the branches and lines of business subject to value-added tax.
If no tax is payable because the amount of input tax and any amount authorized
to be offset against the output tax is equal to or is in excess of the output tax due
on the return, the taxpayer shall file the return with the Revenue District Officer,
Collection Agent or authorized municipal treasurer where the taxpayers principal
place of business is located.

(B) Time for filing of return and payment of tax. The return shall be filed and the
tax paid within 20 days following the end of each quarter specifically prescribed
for a VAT-registered person under regulations to be promulgated by the Secretary
of Finance: Provided, however, That any person whose registration is cancelled in
accordance with paragraph (e) of Section 107 shall file a return within 20 days
from the cancellation of such registration.

(C) Initial returns. The Commissioner may prescribe an initial taxable period for
any VAT-registered person for his first return, which in no case shall exceed 5
months.

5 Supra note 3 at pp. 588-590.

Section 100. Value-Added Tax on Sale of Goods. -

(A) Rate and Base of Tax. - There shall be levied, assessed and collected on every
sale, barter or exchange of goods, a value-added tax equivalent to 10% of the gross
selling price or gross value in money of the goods or properties sold, bartered or
exchanged, such tax to be paid by the seller or transferor: Provided, That the
following sales by VAT-registered persons shall be subject to zero percent (0%):

(1) Export sales; and

(2) Sales to persons or entities whose exemption under special laws or


international agreements to which the Philippines is a signatory effectively
subjects such sales to zero rate.

"Export Sales" means the sale and shipment or exportation of goods from
the Philippines to a foreign country, irrespective of any shipping
arrangement that may be agreed upon which may influence or determine
the transfer of ownership of the goods so exported, or foreign currency
denominated sales. "Foreign currency denominated sales," means sales to
nonresidents of goods assembled or manufactured in the Philippines, for
delivery to residents in the Philippines and paid for in convertible foreign
currency remitted through the banking system in the Philippines.

(B) Transactions Deemed Sale. - The following transactions shall be deemed sale:

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(1) Transfer, use or consumption not in the course of business of goods
originally intended for sale or for use in the course of business;

(2) Distribution or transfer to:

(a) Shareholders or investors as share in the profits of the


registered person; or

(b) Creditors in payment of debt;

(3) Consignment of goods if actual sale is not made within sixty (60) days
following the date such goods were consigned;

(4) Retirement from or cessation of business, with respect to inventories


of taxable goods existing as of such retirement or cessation.

(C) Changes in or Cessation of Status of a VAT-registered Person. - The tax imposed


in paragraph (a) of this Section shall also apply to goods disposed of or existing as
of a certain date if under circumstances to be prescribed in Regulations to be
promulgated by the Secretary of Finance, the status of a person as a VAT-
registered person changes or is terminated.

(D) Determination of the Tax. -

(1) Tax billed as a separate item in the invoice. If the tax is billed as a
separate item in the invoice, the tax shall be based on the gross selling
price, excluding the tax. "Gross selling price" means the total amount of
money or its equivalent which the purchaser pays or is obligated to pay to
the seller in consideration of the sale, barter or exchange of the goods,
excluding the value-added tax. The excise tax, if any, on such goods or
properties shall form part of the gross selling price.

(2) Tax not billed separately or is billed erroneously in the invoice. In case
the tax is not billed separately or is billed erroneously in the invoice, the
tax shall be determined by multiplying the gross selling price, including th
amount intended by the seller to cover the tax or the tax billed
erroneously, by the factor 1/11 or such factor as may be prescribed by
regulations in case of persons partially exempt under special laws.

(3) Sales Returns, Allowances and Sales Discounts. - The value of goods sold
and subsequently returned or for which allowances were granted by a
VAT-registered person may be deducted from the gross sales or receipts
for the quarter in which a refund is made or a credit memorandum or

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refund is issued. Sales discount granted and indicated in the invoice at the
time of sale may be excluded from the gross sales within the same quarter.

(4) Authority of the Commissioner to Determine the Appropriate Tax Base.


- The Commissioner shall, by regulations, determine the appropriate tax
base in cases where a transaction is deemed a sale, barter or exchange of
goods under paragraph (b) hereof, or where the gross selling price is
unreasonably lower than the actual market value.

6 Id. at 1022.

Section 255. Penal Liability of Corporations. Any corporation, association or


general co-partnership liable for any of the acts or omissions penalized under this
Code, in addition to the penalties imposed herein upon the responsible corporate
officers, partners or employees, shall, upon conviction, for each act or omission
be fined for not less than ten thousand pesos but not more than one hundred
thousand pesos.

7 Id. at 1021.

Section 253. Attempt to evade or defeat tax. -- Any person who willfully attempts
in any manner to evade or defeat any tax imposed under this Code or the payment
thereof shall, in addition to other penalties provided by law, upon conviction
thereof, be fined not more than ten thousand pesos or imprisoned for not more
than two years, or both.

8 Id., pp. 1020-1021.

Section 252. General provisions.

xxx

(b) Any person who willfully aids or abets in the commission of a crime penalized
herein or who causes the commission of any such offense by another, shall be
liable in the same manner as the principal.

xxx

(d) In the case of associations, partnerships, or corporations, the penalty shall be


imposed on the partner, president, general manager, branch manager, treasurer,
officer-in-charge, and employees responsible for the violation.

9 Rollo, p. 65.

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MAS
10 Id. at 64.

11 G.R. No. 128315, June 29, 1999, 309 SCRA 402.

12 Revenue Regulation No. 12-85.

13 NIRC (1997)

"Sec. 205. Remedies for the Collection of Delinquent Taxes. -- The civil remedies
for the collection of internal revenue, fees, or charges, and increment thereto
resulting from delinquency shall be:

(a) By distraint of goods, chattels, or effects, and other personal property


of whatever character, including stocks and other securities, debts, credits,
bank accounts, and interest in and rights to personal property, and by levy
upon real property and interest in or rights to real property; and

(b) By civil or criminal action.

Either of these remedies or both simultaneously may be pursued in the discretion


of the authorities charged with the collection of such taxes: Provided, however,
That the remedies of distraint and levy shall not be availed of where the amount
of tax involved is not more than One hundred pesos (P100).

The judgment in the criminal case shall not only impose the penalty but shall also
order payment of the taxes subject of the criminal case as finally decided by the
Commissioner.

The Bureau of Internal Revenue shall advance the amounts needed to defray costs
of collection by means of civil or criminal action, including the preservation or
transportation of personal property distrained and the advertisement and sale
thereof, as well as of real property and improvements thereon."

14 Id.

"SEC. 203. Period of Limitation Upon Assessment and Collection. -- Except as


provided in Section 222, internal revenue taxes shall be assessed within three (3)
years after the last day prescribed by law for the filing of the return, and no
proceeding in court without assessment for the collection of such taxes shall be
begun after the expiration of such period: Provided, That in a case where a return
is filed beyond the period prescribed by law, the three (3)-year period shall be
counted from the day the return was filed. For purposes of this Section, a return
filed before the last day prescribed by law for the filing thereof shall be considered
as filed on such last day."

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15 Id.

"Sec. 222. 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 for the collection
of such tax may be filed 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.

(b) If before the expiration of the time prescribed in the Section 203 for the
assessment of the tax, both the Commissioner and the taxpayer have agreed in
writing to its assessment after such time, the tax may be assessed within the
period agreed upon. The period so agreed upon may be extended by subsequent
written agreement made before the expiration of the period previously agreed
upon.

(c) Any internal revenue tax which has been assessed within the period of
limitation as prescribed in paragraph (a) hereof may be collected by distraint or
levy or by a proceeding in court within five (5) years following the assessment of
the tax.

(d) Any internal revenue tax, which has been assessed within the period agreed
upon as provided in paragraph (b) hereinabove, may be collected by distraint or
levy or by a proceeding in court within the period agreed upon writing before the
expiration of the five (5)-year period. The period so agreed upon may be extended
by subsequent written agreements made before the expiration of the period
previously agreed upon.

(e) Provided, however, That nothing in the immediately preceding Section and
paragraph (a) hereof shall be construed to authorize the examination and
investigation or inquiry into any tax return filed in accordance with the provisions
of any tax amnesty law or decree."

16 Id.

"Section 228. Protesting of Assessment. -- When the Commissioner or his duly


authorized representative finds that proper taxes should be assessed, he shall first
notify the taxpayer of his findings: Provided, however, That a reassessment notice
shall not be required in the following cases:

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

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

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

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

(e) When an article locally purchased or imported by an exempt person,


such as, but not limited to, vehicles, capital equipment, machineries and
spare parts, has been sold, traded or transferred to non-exempt persons.

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

Within a period to be prescribed by implementing rules and regulations, the


taxpayer shall be required to respond to said notice. If the taxpayer fails to
respond, the Commissioner or his duly authorized representative shall issue an
assessment based on his findings."

17Basilan Estates v. Commissioner of Internal Revenue, No. L-22492, September 5, 1967,


21 SCRA 17.

18 Citing Philippine Law Dictionary, 2nd ed., p. 49.

19 Citing Blacks Law Dictionary, 5th ed., p. 107.

20 Nos. L-41919-24, May 30, 1980, 97 SCRA 877.

21"SEC 255. Failure to File Return, Supply Correct and Accurate Information, Pay Tax,
Withhold and Remit Tax and Refund Excess Taxes Withheld on Compensation. -- Any
person required under this Code or by rules and regulations promulgated thereunder to
pay any tax, make a return, keep any record, or supply correct and accurate any
information, who willfully fails to pay such tax, make such return, keep such record, or
supply correct and accurate information, or withhold or remit taxes withheld, or refund
excess taxes withheld on compensation, at the time or times required by law or rules and

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regulations shall, in addition to other penalties provided by law, upon conviction thereof,
be punished by a fine of not less than one (1) year but not more than ten (10) years.

Any person who attempts to make it appear for any reason that he or another has
in fact filed a return or statement, or actually files a return or statement and
subsequently withdraws the same return or statement after securing the official
receiving seal or stamp of receipt of an internal revenue office wherein the same
was actually filed shall, upon conviction therefor, be punished by a fine of not less
than Ten thousand pesos (P10,000) but not more than Twenty thousand pesos
(P20,000) and suffer imprisonment of not less than one (1) year but not more than
three (3) years."

22 Annex "F," rollo (G.R. No. 120935), pp. 252-258.

23 Tax Law and Jurisprudence, 2nd Edition, Vitug, J. and Acosta, E., (2000), p. 282.

24 Supra, 3-8.

25 Nos. L-41919-24, May 30, 1980, 97 SCRA 877.

26An Act Expanding The Jurisdiction Of The Court Of Tax Appeals (CTA), Elevating Its Rank
To The Level Of A Collegiate Court With Special Jurisdiction And Enlarging Its Membership,
Amending For The Purpose Certain Sections Of Republic Act No. 1125, As Amended,
Otherwise Known As The Law Creating The Court Of Tax Appeals, And For Other Purposes.

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MAS
5. BARCELON, ROXAS SECURITIES, INC. vs CIR
G. R. No. 157064; August 7, 2006

Republic of the Philippines


SUPREME COURT
Manila

FIRST DIVISION

G. R. No. 157064 August 7, 2006

BARCELON, ROXAS SECURITIES, INC. (now known as UBP Securities, Inc.) Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari, under Rule 45 of the Rules of Court, seeking to set aside
the Decision of the Court of Appeals in CA-G.R. SP No. 60209 dated 11 July 2002, 1 ordering the
petitioner to pay the Government the amount of P826,698.31 as deficiency income tax for the
year 1987 plus 25% surcharge and 20% interest per annum. The Court of Appeals, in its assailed
Decision, reversed the Decision of the Court of Tax Appeals (CTA) dated 17 May 2000 2 in C.T.A.
Case No. 5662.

Petitioner Barcelon, Roxas Securities Inc. (now known as UBP Securities, Inc.) is a corporation
engaged in the trading of securities. On 14 April 1988, petitioner filed its Annual Income Tax
Return for taxable year 1987. After an audit investigation conducted by the Bureau of Internal
Revenue (BIR), respondent Commissioner of Internal Revenue (CIR) issued an assessment for
deficiency income tax in the amount of P826,698.31 arising from the disallowance of the item on
salaries, bonuses and allowances in the amount of P1,219,093,93 as part of the deductible
business expense since petitioner failed to subject the salaries, bonuses and allowances to
withholding taxes. This assessment was covered by Formal Assessment Notice No. FAN-1-87-91-
000649 dated 1 February 1991, which, respondent alleges, was sent to petitioner through
registered mail on 6 February 1991. However, petitioner denies receiving the formal assessment
notice. 3

On 17 March 1992, petitioner was served with a Warrant of Distraint and/or Levy to enforce
collection of the deficiency income tax for the year 1987. Petitioner filed a formal protest, dated
25 March 1992, against the Warrant of Distraint and/or Levy, requesting for its cancellation. On

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

On 31 July 1998, petitioner filed a petition for review with the CTA. After due notice and hearing,
the CTA rendered a decision in favor of petitioner on 17 May 2000. The CTA ruled on the primary
issue of prescription and found it unnecessary to decide the issues on the validity and propriety
of the assessment. It maintained that while a mailed letter is deemed received by the addressee
in the course of mail, this is merely a disputable presumption. It reasoned that the direct denial
of the petitioner shifts the burden of proof to the respondent that the mailed letter was actually
received by the petitioner. The CTA found the BIR records submitted by the respondent
immaterial, self-serving, and therefore insufficient to prove that the assessment notice was
mailed and duly received by the petitioner. 5 The dispositive portion of this decision reads:

WHEREFORE, in view of the foregoing, the 1988 deficiency tax assessment against petitioner is
hereby CANCELLED. Respondent is hereby ORDERED TO DESIST from collecting said deficiency
tax. No pronouncement as to costs. 6

On 6 June 2000, respondent moved for reconsideration of the aforesaid decision but was denied
by the CTA in a Resolution dated 25 July 2000. Thereafter, respondent appealed to the Court of
Appeals on 31 August 2001. In reversing the CTA decision, the Court of Appeals found the
evidence presented by the respondent to be sufficient proof that the tax assessment notice was
mailed to the petitioner, therefore the legal presumption that it was received should
apply. 7 Thus, the Court of Appeals ruled that:

WHEREFORE, the petition is hereby GRANTED. The decision dated May 17, 2000 as well as the
Resolution dated July 25, 2000 are hereby REVERSED and SET ASIDE, and a new on entered
ordering the respondent to pay the amount of P826,698.31 as deficiency income tax for the year
1987 plus 25% surcharge and 20% interest per annum from February 6, 1991 until fully paid
pursuant to Sections 248 and 249 of the Tax Code. 8

Petitioner moved for reconsideration of the said decision but the same was denied by the Court
of Appeals in its assailed Resolution dated 30 January 2003. 9

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

WHETHER OR NOT LEGAL BASES EXIST FOR THE COURT OF APPEALS FINDING THAT THE COURT
OF TAX APPEALS COMMITTED "GROSS ERROR IN THE APPRECIATION OF FACTS."

II

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

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III

WHETHER OR NOT THE RIGHT OF THE BUREAU OF INTERNAL REVENUE TO ASSESS PETITIONER
FOR ALLEGED DEFICIENCY INCOME TAX FOR 1987 HAS PRESCRIBED.

IV

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

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

VI

WHETHER OR NOT THE SUBJECT ASSESSMENT IS VIOLATIVE OF THE RIGHT OF PETITIONER TO


DUE PROCESS. 10

This Court finds the instant Petition meritorious.

The core issue in this case is whether or not respondents right to assess petitioners alleged
deficiency income tax is barred by prescription, the resolution of which depends on reviewing
the findings of fact of the Court of Appeals and the CTA.

While the general rule is that factual findings of the Court of Appeals are binding on this Court,
there are, however, recognized exceptions 11 thereto, such as when the findings are contrary to
those of the trial court or, in this case, the CTA. 12

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

Jurisprudence is replete with cases holding that if the taxpayer denies ever having received an
assessment from the BIR, it is incumbent upon the latter to prove by competent evidence that
such notice was indeed received by the addressee. The onus probandi was shifted to respondent
to prove by contrary evidence that the Petitioner received the assessment in the due course of
mail. The Supreme Court has consistently held that while a mailed letter is deemed received by
the addressee in the course of mail, this is merely a disputable presumption subject to
controversion and a direct denial thereof shifts the burden to the party favored by the
presumption to prove that the mailed letter was indeed received by the addressee (Republic vs.
Court of Appeals, 149 SCRA 351). Thus as held by the Supreme Court in Gonzalo P. Nava vs.
Commissioner of Internal Revenue, 13 SCRA 104, January 30, 1965:

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

In the instant case, Respondent utterly failed to discharge this duty. No substantial evidence was
ever presented to prove that the assessment notice No. FAN-1-87-91-000649 or other supposed
notices subsequent thereto were in fact issued or sent to the taxpayer. As a matter of fact, it only
submitted the BIR record book which allegedly contains the list of taxpayers names, the
reference number, the year, the nature of tax, the city/municipality and the amount (see Exh. 5-
a for the Respondent). Purportedly, Respondent intended to show to this Court that all
assessments made are entered into a record book in chronological order outlining the details of
the assessment and the taxpayer liable thereon. However, as can be gleaned from the face of the
exhibit, all entries thereon appears to be immaterial and impertinent in proving that the
assessment notice was mailed and duly received by Petitioner. Nothing indicates therein all
essential facts that could sustain the burden of proof being shifted to the Respondent. What is
essential to prove the fact of mailing is the registry receipt issued by the Bureau of Posts or the
Registry return card which would have been signed by the Petitioner or its authorized
representative. And if said documents cannot be located, Respondent at the very least, should
have submitted to the Court a certification issued by the Bureau of Posts and any other pertinent
document which is executed with the intervention of the Bureau of Posts. This Court does not
put much credence to the self serving documentations made by the BIR personnel especially if
they are unsupported by substantial evidence establishing the fact of mailing. Thus:

"While we have held that an assessment is made when sent within the prescribed period, even
if received by the taxpayer after its expiration (Coll. of Int. Rev. vs. Bautista, L-12250 and L-12259,
May 27, 1959), this ruling makes it the more imperative that the release, mailing or sending of
the notice be clearly and satisfactorily proved. Mere notations made without the taxpayers
intervention, notice or control, without adequate supporting evidence cannot suffice; otherwise,
the taxpayer would be at the mercy of the revenue offices, without adequate protection or
defense." (Nava vs. CIR, 13 SCRA 104, January 30, 1965).

xxxx

The failure of the respondent to prove receipt of the assessment by the Petitioner leads to the
conclusion that no assessment was issued. Consequently, the governments right to issue an
assessment for the said period has already prescribed. (Industrial Textile Manufacturing Co. of
the Phils., Inc. vs. CIR CTA Case 4885, August 22, 1996). 13

Jurisprudence has consistently shown that this Court accords the findings of fact by the CTA with
the highest respect. In Sea-Land Service Inc. v. Court of Appeals 14 this Court recognizes that the
Court of Tax Appeals, which by the very nature of its function is dedicated exclusively to the

110
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consideration of tax problems, has necessarily developed an expertise on the subject, and its
conclusions will not be overturned unless there has been an abuse or improvident exercise of
authority. Such findings can only be disturbed on appeal if they are not supported by substantial
evidence or there is a showing of gross error or abuse on the part of the Tax Court. 15 In the
absence of any clear and convincing proof to the contrary, this Court must presume that the CTA
rendered a decision which is valid in every respect.

Under Section 203 16 of the National Internal Revenue Code (NIRC), respondent had three (3)
years from the last day for the filing of the return to send an assessment notice to petitioner. In
the case of Collector of Internal Revenue v. Bautista, 17 this Court held that an assessment is made
within the prescriptive period if notice to this effect is released, mailed or sent by the CIR to the
taxpayer within said period. Receipt thereof by the taxpayer within the prescriptive period is not
necessary. At this point, it should be clarified that the rule does not dispense with the
requirement that the taxpayer should actually receive, even beyond the prescriptive period, the
assessment notice which was timely released, mailed and sent.

In the present case, records show that petitioner filed its Annual Income Tax Return for taxable
year 1987 on 14 April 1988. 18 The last day for filing by petitioner of its return was on 15 April
1988, 19 thus, giving respondent until 15 April 1991 within which to send an assessment notice.
While respondent avers that it sent the assessment notice dated 1 February 1991 on 6 February
1991, within the three (3)-year period prescribed by law, petitioner denies having received an
assessment notice from respondent. Petitioner alleges that it came to know of the deficiency tax
assessment only on 17 March 1992 when it was served with the Warrant of Distraint and Levy. 20

In Protectors Services, Inc. v. Court of Appeals, 21 this Court ruled that when a mail matter is sent
by registered mail, there exists a presumption, set forth under Section 3(v), Rule 131 of the Rules
of Court, 22 that it was received in the regular course of mail. The facts to be proved in order to
raise this presumption are: (a) that the letter was properly addressed with postage prepaid; and
(b) that it was mailed. While a mailed letter is deemed received by the addressee in the ordinary
course of mail, this is still merely a disputable presumption subject to controversion, and a direct
denial of the receipt thereof shifts the burden upon the party favored by the presumption to
prove that the mailed letter was indeed received by the addressee. 23

In the present case, petitioner denies receiving the assessment notice, and the respondent was
unable to present substantial evidence that such notice was, indeed, mailed or sent by the
respondent before the BIRs right to assess had prescribed and that said notice was received by
the petitioner. The respondent presented the BIR record book where the name of the taxpayer,
the kind of tax assessed, the registry receipt number and the date of mailing were noted. The BIR
records custodian, Ingrid Versola, also testified that she made the entries therein. Respondent
offered the entry in the BIR record book and the testimony of its record custodian as entries in
official records in accordance with Section 44, Rule 130 of the Rules of Court, 24 which states that:

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Section 44. Entries in official records. - Entries in official records made in the performance of his
duty by a public officer of the Philippines, or by a person in the performance of a duty specially
enjoined by law, are prima facie evidence of the facts therein stated.

The foregoing rule on evidence, however, must be read in accordance with this Courts
pronouncement in Africa v. Caltex (Phil.), Inc., 25 where it has been held that an entrant must
have personal knowledge of the facts stated by him or such facts were acquired by him from
reports made by persons under a legal duty to submit the same.

There are three requisites for admissibility under the rule just mentioned: (a) that the entry was
made by a public officer, or by another person specially enjoined by law to do so; (b) that it was
made by the public officer in the performance of his duties, or by such other person in the
performance of a duty specially enjoined by law; and (c) that the public officer or other person
had sufficient knowledge of the facts by him stated, which must have been acquired by him
personally or through official information x x x.

In this case, the entries made by Ingrid Versola were not based on her personal knowledge as she
did not attest to the fact that she personally prepared and mailed the assessment notice. Nor
was it stated in the transcript of stenographic notes 26 how and from whom she obtained the
pertinent information. Moreover, she did not attest to the fact that she acquired the reports from
persons under a legal duty to submit the same. Hence, Rule 130, Section 44 finds no application
in the present case. Thus, the evidence offered by respondent does not qualify as an exception
to the rule against hearsay evidence.

Furthermore, independent evidence, such as the registry receipt of the assessment notice, or a
certification from the Bureau of Posts, could have easily been obtained. Yet respondent failed to
present such evidence.

In the case of Nava v. Commissioner of Internal Revenue, 27 this Court stressed on the importance
of proving the release, mailing or sending of the notice.

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

In the present case, the evidence offered by the respondent fails to convince this Court that
Formal Assessment Notice No. FAN-1-87-91-000649 was released, mailed, or sent before 15 April
1991, or before the lapse of the period of limitation upon assessment and collection prescribed
by Section 203 of the NIRC. Such evidence, therefore, is insufficient to give rise to the
presumption that the assessment notice was received in the regular course of mail.

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Consequently, the right of the government to assess and collect the alleged deficiency tax is
barred by prescription.

IN VIEW OF THE FOREGOING, the instant Petition is GRANTED. The assailed Decision of the Court
of Appeals in CA-G.R. SP No. 60209 dated 11 July 2002, is hereby REVERSED and SET ASIDE, and
the Decision of the Court of Tax Appeals in C.T.A. Case No. 5662, dated 17 May 2000, cancelling
the 1988 Deficiency Tax Assessment against Barcelon, Roxas Securitites, Inc. (now known as UPB
Securities, Inc.) for being barred by prescription, is hereby REINSTATED. No costs.

SO ORDERED.

MINITA V. CHICO-NAZARIO
Associate Justice

WE CONCUR:

ARTEMIO V. PANGANIBAN

Chief Justice
Chairman

CONSUELO YNARES-SANTIAGO MA. ALICIA AUSTRIA-MARTINEZ


Associate Justice Associate Justice
ROMEO J. CALLEJO, SR.
Associate Justice

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the conclusions
in the above Decision were reached in consultation before the case was assigned to the writer of
the opinion of the Courts Division.

ARTEMIO V. PANGANIBAN
Chief Justice

Footnotes

1Penned by Associate Justice Delilah Vidallon-Magtolis with Associate Justice Candido


Rivera and Associate Justice Sergio Pestao, concurring. Rollo, pp. 12-17.

2 Id. at 18-28.

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3 Id. at 18.

4 Id. at 18-19.

5 Id. at 22-27.

6 Id. at 27.

7 Id. at 16-17.

8 Id. at 17.

9 CA rollo, p. 147.

10 Rollo, pp. 55-56.

11 Instances when the findings of fact of the trial court and/or Court of Appeals may be
reviewed by the Supreme Court are (1) when the conclusion is a finding grounded entirely
on speculation, surmises or conjectures; (2) when the inference made is manifestly
mistaken, absurd or impossible; (3) where there is a grave abuse of discretion; (4) when
the judgment is based on a misapprehension of facts; (5) when the findings of fact are
conflicting; (6) when the Court of Appeals, in making its findings, went beyond the issues
of the case and the same is contrary to the admissions of both appellant and appellee; (7)
the findings of the Court of Appeals are contrary to those of the trial court; (8) when the
findings of fact are conclusions without citation of specific evidence on which they are
based; (9) when the facts set forth in the petition as well as in the petitioners main and
reply briefs are not disputed by the respondents; and (10) the finding of fact of the Court
of Appeals is premised on the supposed absence of evidence and is contradicted by the
evidence on record. (Misa v. Court of Appeals, G.R. No. 97291, 5 August 1992, 212 SCRA
217, 221-222)

12 Metro Construction, Inc. v. Chatham Properties, Inc., 418 Phil. 176, 206 (2001).

13 Rollo, pp. 24-27.

14 G.R. No. 122605, 30 April 2001, 357 SCRA 441, 445-446.

15Commissioner of Internal Revenue v. Mitsubishi Metal Corp., G.R. Nos. 54908 and
80041, 22 January 1990, 181 SCRA 214, 220.

16 Section 203. Period of Limitation Upon Assessment and Collection. Except as provided
in the Section 222, internal revenue taxes shall be assessed within three (3) years after
the last day prescribed by law for the filing of the return, and no proceeding in court
without assessment for the collection of such taxes shall be begun after expiration of such

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period: Provided, that in a case where a return is filed beyond the period prescribed by
law, the three (3)-year period shall be counted from the day the return was filed. For
purposes of this Section, a return filed before the last day prescribed by law for the filing
thereof shall be considered as filed on such last day.

17 105 Phil. 1326, 1327 (1959).

18 Rollo, pp. 14 and 24.

19 Section 77 (B) of the NIRC states that:

(B) Time of Filing the Income Tax Return. - The corporate quarterly declaration shall be
filed within sixty (60) days following the close of each of the first three (3) quarters of the
taxable year. The final adjustment return shall be filed on or before the fifteenth (15th)
day of April, or on or before the fifteenth (15th) day of the fourth (4th) month following
the close of the fiscal year, as the case may be.

20 Rollo, pp. 53-54.

21 386 Phil. 611, 623 (2000).

22 Section 3(v), Rule 131, of the 1997 Rules of Court provides:

Sec. 3. Disputable presumptions. The following presumptions are satisfactory if


uncontradicted, but may be contradicted and overcome by other evidence:

xxxx

(v) That a letter duly directed and mailed was received in the regular course of the mail;

23 Republic v. Court of Appeals, G.R. No. L-38540, 30 April 1987, 149 SCRA 351, 355.

24 Rollo, p. 56.

25 123 Phil. 272, 277 (1966).

26Transcript of Stenographic Notes, Barcelon, Roxas Securities, Inc. v. Commissioner of


Internal Revenue, CTA Case No. 5662, 25 August 1998, pp. 1-13.

27 121 Phil. 117, 123-124 (1965).

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6. QUIRICO P. UNGAB vs HON. VICENTE N. CUSI, JR.
G.R. No. L-41919-24; May 30, 1980

Republic of the Philippines


SUPREME COURT
Manila

SECOND DIVISION

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

QUIRICO P. UNGAB, petitioner,


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

CONCEPCION JR., J:

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

It is not disputed that sometime in July, 1974, BIR Examiner Ben Garcia examined the income tax
returns filed by the herein petitioner, Quirico P. Ungab, for the calendar year ending December
31, 1973. In the course of his examination, he discovered that the petitioner failed to report his
income derived from sales of banana saplings. As a result, the BIR District Revenue Officer at
Davao City sent a "Notice of Taxpayer" to the petitioner informing him that there is due from him
(petitioner) the amount of P104,980.81, representing income, business tax and forest charges for
the year 1973 and inviting petitioner to an informal conference where the petitioner, duly
assisted by counsel, may present his objections to the findings of the BIR Examiner. 1 Upon
receipt of the notice, the petitioner wrote the BIR District Revenue Officer protesting the
assessment, claiming that he was only a dealer or agent on commission basis in the banana
sapling business and that his income, as reported in his income tax returns for the said year, was
accurately stated. BIR Examiner Ben Garcia, however, was fully convinced that the petitioner had
filed a fraudulent income tax return so that he submitted a "Fraud Referral Report," to the Tax
Fraud Unit of the Bureau of Internal Revenue. After examining the records of the case, the Special

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Investigation Division of the Bureau of Internal Revenue found sufficient proof that the herein
petitioner is guilty of tax evasion for the taxable year 1973 and recommended his
prosecution: t.hqw

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

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

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

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

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

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

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

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

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

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

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

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

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

In view of all the foregoing considerations, it is the ruling of this Court that under
Sections 1679 and 1686 of the Revised Administrative Code, in any instance where
a provincial or city fiscal fails, refuses or is unable, for any reason, to investigate

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

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

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

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

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no requirement for the precise computation and assessment of the tax before there can be a
criminal prosecution under the Code. t.hqw

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

An assessment of a deficiency is not necessary to a criminal prosecution for willful


attempt to defeat and evade the income tax. A crime is complete when the
violator has knowingly and willfuly filed a fraudulent return with intent to evade
and defeat the tax. The perpetration of the crime is grounded upon knowledge on
the part of the taxpayer that he has made an inaccurate return, and the
government's failure to discover the error and promptly to assess has no
connections with the commission of the crime. 15

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

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

SO ORDERED.

Barredo (Chairman), Aquino, Abad Santos and De Castro, JJ., concur.

Footnotes

1 Rollo, p. 134.

2 Id, pp. 136; 140.

3 Id, p. 141.

4 Id, p. 11.

5 Id, p. 13.

6 Id, p. 15.

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7 Id, p. 17.

8 Id, p. 19.

9 Id, p. 21.

10 Id, p. 23.

11 Id, p. 40.

12 G.R. No. L-19611, February 27, 1971; 37 SCRA 640.

13 Rollo, p. 35.

14 Guzik vs. U.S., 54 F2d 618.

15 Merten's Law of Federal Income Taxation, Vol. 10, Sec. 55A.05, p. 21.

16 People vs. Ching Lak alias Ang You Chu, L-10609, May 23, 1958.

* Mr. Justice Pacifico P. de Castro, a member of the First Division, was designated
to sit in the Second Division.

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7. CIR vs COURT OF APPEALS
G.R. No. 119322; June 4, 1996

Republic of the Philippines


SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 119322 June 4, 1996

COMMISSIONER ON INTERNAL REVENUE, SENIOR STATE PROSECUTOR AURORA S. LAGMAN,


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

DAGUPAN COMBINED COMMODITIES, INC., TOWNSMAN COMMERCIALS, INC., LANDMARK


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

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KAPUNAN, J.:p

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

In resolving the issue raised in the petition, the Court may be guided by its definition of what
constitutes grave abuse of discretion. By grave abuse of discretion is meant such capricious and
whimsical exercise of judgment as is equivalent to lack of jurisdiction. The abuse of discretion
must be patent and gross as to amount to an evasion of positive duty or a virtual refusal to
perform a duty enjoined by law, or to act at all in contemplation of law as where the power is
exercised in an arbitrary and despotic manner by reason of passion and hostility. 3

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

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

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

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

On September 7, 1993, the Commissioner of Internal Revenue filed a complaint with the
Department of Justice against respondent Fortune, its corporate officers, nine (9) other

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corporations and their respective corporate officers for alleged fraudulent tax evasion for
supposed non-payment by Fortune of the correct amount of income tax, ad valorem tax and
value-added tax for the year 1992. The complaint alleged, among others, that:

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

This underdeclaration which resulted in the evasion of the amount of


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

xxx xxx xxx

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

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

2nd Qtr. 2,980,335,235.00

3rd Qtr. 2,839,519,325.00

4th Qtr. 2,992,386,005.00

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

These fraudulent underdeclarations which resulted in the evasion of value-added


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

xxx xxx xxx

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

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

The fraudulent scheme allegedly adopted by private respondents consisted of making fictitious
and simulated sales of Fortune's cigarette products to non-existing individuals and to entities
incorporated and existing only for the purpose of such fictitious sales by declaring registered
wholesale prices with the BIR lower than Fortune's actual wholesale prices which are required
for determination of Fortune's correct income, ad valorem, and value-added tax liabilities. The
"ghosts wholesale buyers" then ostensibly sold the products to customers and other
wholesalers/retailers at higher wholesale prices determined by Fortune. The tax returns and
manufacturer's sworn statements filed by Fortune would then declare the fictitious sales it made
to the conduit corporators and non-existing individual buyers as its gross sales. 5

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

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

1. The complaint of petitioner Commissioner follows a pattern of prosecution


against private respondents in violation of their right to due process and equal
protection of the law.

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

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

4. The complaint of petitioner Commissioner is not supported by any evidence to


serve as adequate basis for the issuance of subpoena to private respondents and
to put them to their defense.

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

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

On October 26, 1993, private respondents moved for the inhibition of the State prosecutors
assigned to the case for alleged lack of impartiality. 10 Private respondents also sought the
production of the "Daily Manufacturer's Sworn Statements" submitted by certain cigarette
companies similarly situated as Fortune but were not proceeded against, thus, private
respondents charged that Fortune and its officers were being singled out for criminal prosecution
which is discriminatory and in violation of the equal protection clause of the Constitution.

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

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

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Fortune's motion for reconsideration/ reinvestigation of the August 13, 1993 assessment of the
taxes due. 12

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

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

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

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

b) On the other hand, it is petitioners' contention that Fortune's declaration was


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

c) At the hearing for preliminary investigation, the "Daily Manufacturer's Sworn


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

d) There is nothing on record in the preliminary investigation before the panel of


investigators which supports the allegation that Fortune made a fraudulent
declaration of its 1992 taxable sales.

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

f) There was a precipitate issuance by the panel of prosecutors of subpoenas to


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

g) Private respondents had been especially targeted by the government for


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

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

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

On January 26, 1994, private respondents filed with the trial court a Motion to Admit
Supplemental Petition and sought the issuance of a writ of preliminary injunction to enjoin the
State Prosecutors from continuing with the preliminary investigation filed by them against
private respondents with the Quezon City Prosecutor's Office, docketed as I.S. 93-17942, for
alleged fraudulent tax evasion, committed by private respondents for the taxable year 1990.
Private respondents averred in their motion that no supporting documents or copies of the
complaint were attached to the subpoena in I.S. 93-17942; that the subpoena violates private
respondents' constitutional right to due process, equal protection and presumption of
innocence; that I.S. 93-17942 is substantially the same as I.S. 93-508; that no tax assessment has
been issued by the Commission of Internal Revenue and considering that taxes paid have not

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been challenged, no tax liability exists; and that since Assistant City Prosecutor Baraquia was a
former classmate of Presidential Legal Counsel Antonio T. Carpio, the former cannot conduct the
preliminary investigation in an impartial manner.

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

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

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

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

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

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

In making such conclusion the respondent Court must have understood from
herein petitioner Commissioner's letter-complaint of 14 pages (pp. 477-
490, rollo of this case) and the joint affidavit of eight revenue officers of 17 pages
attached thereto (pp. 491-507, supra) and its annexes (pp. 508-1077, supra), that
the charge against herein respondents is for tax evasion for non-payment by
herein respondent Fortune of the correct amounts of income tax, ad valorem tax

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

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

Grave abuse of discretion as a ground for issuance of writs of certiorari and


prohibition implies capricious and whimsical exercise of judgment as is equivalent
to lack of jurisdiction, or where the power is exercised in an arbitrary or despotic
manner by reason of passion, prejudice, or personal hostility, amounting to an
evasion of positive duty or to a virtual refusal to perform the duty enjoined, or to
act at all in contemplation of law (Confederation of Citizens Labor Union vs. NLRC,
60 SCRA 84; Bustamante vs. Commission on Audit, 216 SCRA 134). For such writs
to lie, there must be capricious, arbitrary and whimsical exercise of power, the
very antithesis of the judicial prerogative in accordance with centuries of both civil
law and common law traditions (Young vs. Sulit, 162 SCRA 659, 664; FCC vs. IAC,
166 SCRA 155; Purefoods Corp. vs. NLRC, 171 SCRA 45). Certiorari and prohibition
are remedies narrow in scope and inflexible in character. They are not general
utility tools in the legal workshop (Vda. de Guia vs. Veloso, 158 SCRA 340, 344).
Their function is but limited to correction of defects of jurisdiction solely, not to
be used for any other purpose (Garcia vs. Ranada, 166 SCRA 9), such as to cure

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errors in. proceedings or to correct erroneous conclusions of law or fact (Gold City
Integrated Ports Services vs. IAC, 171 SCRA 579). Due regard for the foregoing
teachings enunciated in the decisions cited can not bring about a decision other
than what has been reached herein.

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

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

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

THE RESPONDENT COURTS COMMITTED GRAVE ABUSE OF DISCRETION


AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN HOLDING THAT:

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


OF THE PRELIMINARY INVESTIGATION.

II. PRIVATE RESPONDENTS' RIGHTS TO DUE PROCESS, EQUAL PROTECTION AND


PRESUMPTION OF INNOCENCE WERE VIOLATED; ON THE CONTRARY, THE STATE
ITSELF WAS DEPRIVED OF DUE PROCESS.

III. THE ADMISSION OF PRIVATE RESPONDENTS' SUPPLEMENTAL PETITIONS WERE


PROPER.

IV. THERE WAS SELECTIVE PROSECUTION.

V. THE FACTUAL ALLEGATIONS IN THE PETITION ARE HYPOTHETICALLY ADMITTED


IN A MOTION TO DISMISS BASED ON JURISDICTIONAL GROUNDS.

VI. THE ISSUANCE OF THE WRITS OF INJUNCTION IS NOT A DECISION ON THE


MERITS OF THE PETITION BEFORE THE LOWER COURT. 20

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The petition is bereft of merit.

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

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

Sec. 127. . . .

(b) Determination of gross selling price of goods subject to ad valorem tax. --


Unless otherwise provided, the price, excluding the value-added tax, at which the
goods are sold at wholesale in the place of production or through their sales
agents to the public shall constitute the gross selling price. If the manufacturer
also sells or allows such goods to be sold at wholesale price in another
establishment of which he is the owner or in the profits at which he has an
interest, the wholesale price in such establishment shall constitute the gross
selling price. Should such price be less than the costs of manufacture plus
expenses incurred until the goods are finally sold, then a proportionate margin of
profit, not less than 10% of such manufacturing costs and expenses, shall be added
to constitute the gross selling price.

Sec. 142. . . .

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

xxx xxx xxx

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

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

Petitioners now argue that Section 127(b) lays down the rule that in determining the gross selling
price of goods subject to ad valorem tax, it is the price, excluding the value-added tax, at which

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the goods are sold at wholesale price in the place of production or through their sales agents to
the public. The registered wholesale price shall then be used for computing the ad valorem tax
which is imposable upon removal of the taxable goods from the place of production. However,
petitioners claim that Fortune used the "manufacturer's registered wholesale price" in selling the
goods to alleged fictitious individuals and dummy corporations for the purpose of evading the
payment of the correct ad valorem tax.

There can be no question that under Section 127(b), the ad valorem tax should be based on
the correct price excluding the value-added tax, at which goods are sold at wholesale in the place
of production. It is significant to note that among the goods subject to ad valorem tax, the law --
specifically Section 142(c) -- requires that the corresponding tax on cigarettes shall be levied,
assessed and collected at the rates based on the "manufacturer's registered wholesale price."
Why does the wholesale price need to be registered and what is the purpose of the registration?
The reason is self-evident, which is to ensure the payment of the correct taxes by the
manufacturers of cigarettes through close supervision, monitoring and checking of the business
operations of the cigarette companies. As pointed out by private respondents, no industry is as
intensely supervised by the BIR and also by the National Tobacco Administration (NTA). Thus, the
purchase and use of raw materials are subject to prior authorization and approval by the NTA.
Importations of bobbins or cigarette paper, the manufacture, sale, and utilization of the same,
are subject to BIR supervision and approval. 21

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

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

Now, if every step in the production of cigarettes was closely monitored and supervised by the
BIR personnel specifically assigned to Fortune's premises, and considering that the
Manufacturer's Sworn Declarations on the data required to be submitted by the manufacturer
were scrutinized and verified by the BIR and, further, since the manufacturer's wholesale price
was duly approved by the BIR, then it is presumed that such registered wholesale price is the
same as, or approximates "the price, excluding the value-added tax, at which the goods are sold
at wholesale in the place production," otherwise, the BIR would not have approved the registered
wholesale price of the goods for purposes of imposing the ad valorem tax due. In such case, and
in the absence of contrary evidence, it was precipitate and premature to conclude that private
respondents made fraudulent returns or wilfully attempted to evade payment of taxes due.
"Wilful" means "premeditated; malicious; done with intent, or with bad motive or purpose, or
with indifference to the natural consequence . . ." 24 "Fraud" in its general sense, "is deemed to
comprise anything calculated to deceive, including all acts, omissions, and concealment involving
a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage to
another, or by which an undue and unconscionable advantage taken of another. 25

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

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

We share with the view of both the trial court and court of Appeals that before the tax liabilities
of Fortune are first finally determined, it cannot be correctly asserted that private respondents

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have wilfully attempted to evade or defeat the taxes sought to be collected from Fortune. In plain
words, before one is prosecuted for wilful attempt to evade or defeat any tax under Sections 253
and 255 of the Tax code, the fact that a tax is due must first be proved.

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

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

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

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

We disagree.

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

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

b. When necessary for the orderly administration of justice or to avoid oppression


or multiplicity of actions (Dimayuga, et al. vs. Fernandez, 43 Phil. 304; Hernandez
vs. Albano, supra; Fortun vs. Labang, et al., L-38383, May 27, 1981, 104 SCRA 607);

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

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

e. Where the prosecution is under an invalid law, ordinance or regulation (Young


vs. Rafferty, 33 Phil. 556; Yu Cong Eng vs. Trinidad, 47 Phil. 385, 389);

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

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

h. Where it is a case of persecution rather than prosecution (Rustia vs. Ocampo,


CA-G.R. No. 4760, March 25, 1960);

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

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

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

Contrary to petitioners' submission, preliminary investigation may be enjoined where


exceptional circumstances so warrant. In Hernandez v. Albano 30 and Fortun

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

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

Sec. 3. Procedure. -- Except as provided for in Section 7 hereof, no complaint or


information for an offense cognizable by the Regional Trial Court shall be filed
without a preliminary investigation having been first conducted in the following
manner:

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

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

(c) Such counter-affidavits and other supporting evidence submitted by the


respondent shall also be sworn to and certified as prescribed in paragraph (a)
hereof and copies thereof shall be furnished by him to the complainant.

(d) If the respondent cannot be subpoenaed, or if subpoenaed, does not submit


counter-affidavits within the ten (10) day period, the investigating officer shall
base his resolution on the evidence presented by the complainant.

(e) If the investigating officer believes that there are matters to be clarified, he
may set a hearing to propound clarificatory questions to the parties or their
witnesses, during which the parties shall be afforded an opportunity to be present

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but without the right to examine or cross-examine. If the parties so desire, they
may submit questions to the investigating officer which the latter may propound
to the parties or witnesses concerned.

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

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

The complaint filed by the Commissioner on Internal Revenue states itself that the primary
evidence establishing the falsity of the declared taxable sales in 1992 in the amount of
P11,736,658,580.00 were the "daily Manufacturer's Sworn Statements" submitted by the
taxpayer which would show that the total taxable sales in 1992 are in the amount of
P16,686,372,295.00. However, the Commissioner did not present the "Daily Manufacturer's
Sworn Statements" supposedly submitted to the BIR by the taxpayer, prompting private
respondents to move for their production in order to verify the basis of petitioners' computation.
Still, the Commissioner failed to produce the declarations. In Borja v. Moreno, 33 it was held that
the act of the investigator in proceeding with the hearing without first acting on respondents'
motion to dismiss is a manifest disregard of the requirement of due process. Implicit in the
opinion of the trial court and the Court of Appeals is that, if upon the examination of the
complaint, it was clear that there was no ground to continue, with the inquiry, the investigating
prosecutor was duty bound to dismiss the case. On this point, the trial court stressed that the
prosecutor conducting the preliminary investigation should have allowed the production of the
"Daily Manufacturer's Sworn Statements" submitted by Fortune without which there was no
valid basis for the allegation that private respondents wilfully attempted to evade payment of
the correct taxes. The prosecutors should also have produced the "Daily Manufacturer's Sworn
Statements" by other cigarette companies, as sought by private respondents, to show that these
companies which had paid the ad valorem taxes on the same basis and in the same manner as
Fortune were not similarly criminally charged. But the investigating prosecutors denied private
respondents' motion, thus, indicating that only Fortune was singled out for prosecution. The trial
court and the Court of Appeals maintained that at that stage of the preliminary investigation,
where the complaint and the accompanying affidavits and supporting documents did not show
any violation of the Tax Code providing penal sanctions, the prosecutors should have dismissed

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the complaint outright because of total lack of evidence, instead of requiring private respondents
to submit their counter affidavits under Section 3(b) of Rule 112.

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

WHEREFORE, the instant petition is hereby DISMISSED.

SO ORDERED.

Hermosisima, Jr., J., concurs.

Separate Opinions

BELLOSILLO, J., concurring and dissenting:

I am in full accord with the conclusion of the majority that the trial court committed no grave
abuse of discretion in issuing the assailed injunctive writs. But I am constrained to dissent insofar
as it finds that there was "selective prosecution" in charging private respondents.

Let me first touch on "selective prosecution." There is no showing that petitioner Commissioner
of Internal Revenue is not going after others who may be suspected of being big tax evaders and
that only private respondents are being prosecuted, or even merely investigated, for tax evasion.
As pointed out by the Solicitor General, assuming ex hypothesi that other corporate
manufacturers are guilty of using similar schemes for tax evasion, the proper remedy is not the

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dismissal of the complaints against private respondents, but the prosecution of other similar
evaders. In this regard, in the absence of willful or malicious prosecution, or so-called "selective
prosecution," the choice on whom to prosecute ahead of the others belongs legitimately, and
rightly so, to the public prosecutors.

But, I share the view of the majority that the trial court did not commit grave abuse of discretion
amounting to lack of jurisdiction. At once it must be pointed out that the trial court merely issued
writs of preliminary injunction. However to grant the prayer of herein petitioners would
effectively dismiss the petition for certiorari and prohibition filed by private respondents with the
trial court even before the issues in the main case could be joined, which seems to me to be a
procedural lapse since the main case is already being resolved when the only issue before the
Court is the propriety of the ancillary or provisional remedy.

The trial court granted the writs of preliminary injunction upon finding, after hearing for the
purpose, that private respondents sufficiently established that "they are entitled to certain
constitutional rights and that these rights have been violated," 1 and that they have complied
with the requirements of Sec. 3, Rule 58, Rules of Court. 2 In support of its conclusion, the trial
court enumerated its reasons: first, inspite of the motion of respondent Fortune Tobacco
Corporation, petitioner Commissioner of Internal Revenue failed to present the "daily
manufacturer's sworn statements submitted to the BIR by the taxpayer," supposedly stating that
the total taxable sales of respondent Corporation for the year 1992 is P16,686,372,295.00, which
is the basis of petitioner Commissioner's allegation that private respondents failed to pay the
correct taxes since it declared in its VAT returns that its total taxable sales in 1992 was only
P11,736,658.580.00; second, the proper application of Sec. 142, par. (c), of the National Internal
Revenue Code is a prejudicial question which must first be resolved by the Court of Tax Appeals
to determine whether a tax liability which is an essential element of tax evasion exists before
criminal proceedings may be pursued; third, from the evidence submitted, it appears that the
Bureau of Internal Revenue has not yet made a final determination of the tax liability of private
respondents with respect to its ad valorem, value added and income taxes for 1992; and, fourth,
the precipitate issuance by the prosecutors of subpoenas to private respondents one (1) day after
the filing of the complaint, consisting of about 600 pages, inclusive of the 14-page complaint, 17-
page joint affidavit of eight (8) revenue officers and the annexes attached thereto, and their hasty
denial of private respondents' 135-page motion to dismiss, after a recess of only about 20
minutes, show that private respondents' constitutional rights may have been violated.

These circumstances as well as the other traces of discrimination mentioned by the trial
court, i.e., the announcement by the PCGG that it would take over the various corporations
associated with respondent Lucio C. Tan; the creation of the Task Force on Revenue Cases among
the functions of which is to "[i]nvestigate the tax liabilities of manufacturers that engage in well-
known tax evasion schemes, such as selling products through dummy marketing companies to
evade the payment of the correct internal revenue taxes," the very charge against respondent
Tan; the reclassification of respondent corporation's best selling cigarettes as foreign brands
thereby imposing upon them a higher tax rate that would price them out of the market without
notice and hearing; the singling out of private respondents as subjects of a complaint for tax

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evasion when other cigarette manufacturers have been using the same basis private respondents
are using in paying ad valorem, value added and income taxes; and, the failure of petitioner
Commissioner to wait for the expiration of the 30-day period she herself gave to private
respondents to pay the supposed tax deficiencies before the filing of the complaint, obviously
impelled the trial court to issue the writ of preliminary injunction. Practically the same grounds
were found by the trial court when it provisionally restrained the investigation of the two (2)
other complaints, i.e., tax evasion complaints for FYs 1990 and 1991.

On the basis of the findings of the trial court, it indeed appears that private respondents'
constitutional rights to due process of law and equal protection of the laws may have been for
the moment set aside, if not outright violated. The trial court was convinced that the tell-tale
signs of malice and partiality were indications that the constitutional rights of private
respondents may not have been afforded adequate protection. Accordingly I see no manifest
abuse, much less grave, on the part of the trial court in issuing the injunctive writs. Thus it is my
opinion that the trial court did not commit grave abuse of discretion in granting the assailed writs.

Well entrenched is the rule that the issuance of the writ of preliminary injunction as an ancillary
or preventive remedy to secure the rights of a party in a pending case rests upon the sound
discretion of the court hearing it. The exercise of sound judicial discretion by the trial court in
injunctive matters should not be interfered with except in case of manifest abuse, 3 which is not
true in the case before us. Equally well settled is that under Sec. 7, Rule 58, Rules of Court, 4 a
wide latitude is given to the trial court. 5 This is because the conflicting claims in an application
for a provisional writ more often than not involves a factual determination which is not the
function of this Court, or even respondent appellate court. Thus in the case at bar the
ascertainment of the actual tax liability, if any, based on the evidence already presented and still
to be presented, is more within the competence of the trial court before which the parties have
raised the very same issue in the main case. The truth or falsity of the divergent statements that
there was deliberate haste in issuing the subpoenas and in denying private respondents' motion
to dismiss may be confirmed not by this Court but by the trial court during that hearing on the
merits.

In fine, no grave abuse of discretion can be attributed to a judge or body in the issuance of a writ
of preliminary injunction where a party was not deprived of its day in court as it was heard and
had exhaustively presented all its arguments and defenses. 6 It is undisputed that in the case
before us petitioners and private respondents were given sufficient time and opportunity to
present their respective pieces of evidence as well as arguments in support of their positions.

Consequently, I concur with the finding of the majority that the trial court committed no grave
abuse of discretion. As respondent appellate court said, "[g]rave abuse of discretion as a ground
for issuance of writs of certiorari and prohibition implies capricious and whimsical exercise of
judgment as is equivalent to lack of jurisdiction, or where the power is exercised in an arbitrary
or despotic manner by reason of passion, prejudice or personal hostility amounting to an evasion
of positive duty or to a virtual refusal to perform the duty enjoined, or to act at all in
contemplation of law. 7 For such writs to lie there must be capricious, arbitrary and whimsical

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exercise of power, the very antithesis of the judicial prerogative in accordance with centuries of
both civil and common law traditions." 8 The trial court, to my mind, is not guilty of any of these.
Thus I accord respect to the exercise of the trial court's sound judicial discretion and hold that
the same should not be interfered with.

To permanently enjoin the trial court from proceeding in any manner in Civil Case No. Q-94-
19790 and allow the preliminary investigation of the complaints docketed as I.S. Nos. 93-508, 93-
17942 and 93-584 with the Department of Justice to resume until their final conclusion and
completion would go against the prevailing rule that courts should avoid issuing a writ or
preliminary injunction which would in effect dispose of the main case without trial. 9 Due process
considerations dictate that the assailed injunctive writs are not judgments on the merits but
merely orders for the grant of a provisional and ancillary remedy to preserve the status quo until
the merits of the case can be heard. The hearing on the application for issuance of a writ of
preliminary injunction is separate and distinct from the trial on the merits of the main case. The
quantum of evidence required for one is different from that for the other, so that it does not
necessarily follow that if the court grants and issues the temporary writ applied for the same
court will now have to rule in favor of the petition for prohibition and ipso facto make the
provisional injunction permanent.

If grave abuse of discretion attended the issuance of the writ of preliminary injunction, then by
all means nullify the abusive act -- but only that. The main case should be allowed to proceed
according to due process. The trial court should receive the evidence from the contending
parties, weigh and evaluate the same and then make its findings. Clearly, the dismissal of the
main case as a result of a mere incident relative to the issuance of an ancillary writ is procedurally
awkward and violates due process, as it deprives private respondents of their right to present
their case in court and support it with its evidence.

In resolving the fundamental issue at hand, i.e., whether the trial court committed grave abuse
of discretion in issuing the subject writs of preliminary injunction, we cannot avoid balancing on
the scales the power of the State to tax and its inherent right to prosecute perceived
transgressors of the law on one side, and the constitutional rights of a citizen to due process of
law and the equal protection of the laws on the other. Obviously the scales must tilt in favor of
the individual, for a citizen's right is amply protected by the Bill of Rights of the Constitution. Thus
while "taxes are the lifeblood of the government," the power to tax has its limits, inspite of all its
plenitude. Hence in Commissioner of Internal Revenue v. Algue, Inc., 10 we said --

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

xxx xxx xxx

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It is said that taxes are what we pay for civilized society. Without taxes, the
government would be paralyzed for the lack of the motive power to activate and
operate it. Hence, despite the natural reluctance to surrender part of one's hard-
earned income to taxing authorities, every person who is able to must contribute
his share in the running of the government. The government for its part is
expected to respond in the form of tangible and intangible benefits intended to
improve the lives of the people and enhance their moral and material values. This
symbiotic relationship is the rationale of taxation and should dispel the erroneous
notion that it is an arbitrary method of exaction by those in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a


requirement in all democratic regimes that it be exercised reasonably and in
accordance with the prescribed procedure. If it is not, then the taxpayer has a right
to complain and the courts will then came to his succor. For all the awesome
power of the tax collector, he may still be stopped in his tracks if the taxpayer can
demonstrate . . . that the law has not been observed.

In the instant case, it seems that due to the overzealousness in collecting taxes from private
respondents and to some accident of immediate overwhelming interest which distressingly
impassions and distorts judgment, the State has unwittingly ignored the citizens' constitutional
rights. Thus even the rule that injunction will not lie to prevent a criminal prosecution has
admitted exceptions, which we enumerated in Brocka v. Enrile 11 and in Ocampo IV
v. Ombudsman 12 -- (a) to afford adequate protection to the constitutional rights of the accused;
(b) when necessary for the orderly administration of justice or to avoid oppression or multiplicity
of actions; (c) when there is a prejudicial question which is sub-judice; (d) when the acts of the
officer are without or in excess of authority; (e) where the prosecution is under an invalid law,
ordinance or regulation; (f) when double jeopardy is clearly apparent; (g) when the court has no
jurisdiction over the offense; (h) where it is a case of persecution rather than prosecution; (i)
where the charges are manifestly false and motivated by lust for vengeance; (j) when there is
clearly no prima facie case against the accused and a motion to quash on that ground has been
denied; and, (k) to prevent a threatened unlawful arrest.

Finally, courts indeed should not hesitate to invoke the constitutional guarantees to give
adequate protection to the citizens when faced with the enormous powers of the State, even
when what is in issue are only provisional remedies, as in the case at hand. In days of great
pressure, it is alluring to take short cuts by borrowing dictatorial techniques. But when we do,
we set in motion an arbitrary or subversive influence by our own design which destroys us from
within. Let not the present case dangerously sway towards that trend.

For all the foregoing, I vote to dismiss the instant petition for lack of merit, and to order the trial
court to proceed with Civil Case No. Q-94-19790 with reasonable dispatch.

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PADILLA, J., dissenting:

Because of what I humbly perceive to be the crippling, chilling and fatal effects of the majority
opinion on the power of the state to investigate fraudulent tax evasion in the country, I am
constrained to dissent, as vigorously as I can, from the majority opinion.

THE ISSUE

The main issue in this petition for review on certiorari is whether or not there are valid grounds
to stop or stay the preliminary investigation of complaints filed by the Bureau of Internal Revenue
(BIR) with the Department of Justice (DOJ) Revenue Cases Task Force against private respondents
for alleged fraudulent tax evasion for the years 1990, 1991 and 1992. Stated differently, the issue
is: did respondent trial court commit grave abuse of discretion amounting to lack or excess of
jurisdiction in stopping the subject preliminary investigation?

THE CASE AND THE FACTS

On 7 September 1993, petitioner Commissioner of Internal Revenue filed a complaint with the
DOJ against private respondents Fortune Tobacco Corporation (hereinafter referred to simply as
"Fortune"), its corporate officers, nine (9) other corporations, and their respective corporate
officers, for alleged fraudulent tax evasion for the year 1992.

The complaint, docketed as I.S. No. 93-508, was referred to the DOJ Task Force on Revenue Cases
which found sufficient grounds to further investigate the allegation that Fortune fraudulently
evaded payment of income, value-added and ad valorem taxes for the year 1992 thus depriving
the Government of revenue allegedly in excess of seven and one-half (7 1/2) billion pesos.

The fraudulent scheme allegedly adopted and employed by private respondents, is described by
the BIR as follows:

In order to evade payment of said taxes, [Fortune] made fictitious and simulated
sales of its cigarette products to non-existent individuals and to entities
incorporated and existing only for the purpose of such fictitious sales by declaring
registered wholesale prices with the BIR lower than [Fortune's] actual wholesale
prices which are required for determination of [Fortune's] correct ad valorem,
income and value-added tax liabilities. These "ghost wholesale buyers" then
ostensibly sold the product to consumers and other wholesalers/retailers at
higher wholesale prices determined by [Fortune]. The tax returns and
manufacturer's sworn statements filed by [Fortune] as aforesaid declare the
fictitious sales it made to the conduit corporations and non-existent individual
buyers as its gross sales. 1

Based on the initial evaluation of the DOJ Task Force, private respondents were subpoenaed and
required to submit their counter-affidavits not later than 20 September 1993. 2 Instead of filing

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counter-affidavits, private respondents filed a "Verified Motion to Dismiss; Alternatively, Motion
to Suspend." 3 Said motion was denied by the DOJ Task Force and treated as private respondents'
counter-affidavit, in an order dated 15 October 1993. 4

Private respondents sought reconsideration of the aforementioned order of denial and likewise
filed motions to require submission by the Bureau of Internal Revenue (BIR) of certain documents
to support the verified motion to dismiss or suspend the investigation, and for the inhibition of
the state prosecutors assigned to the case for alleged lack of impartiality. 5

On 20 December 1993, an omnibus order was issued by the investigating Task Force: 6

a. denying reconsideration;

b. denying suspension of investigation; and

c. denying the motion to inhibit the investigating state prosecutors.

Thereupon, or on 4 January 1994, private respondents went to court. They filed a petition
for certiorari and prohibition with prayer for preliminary injunction in the Regional Trial Court,
Branch 88, Quezon City, praying that the proceedings (investigation) before the DOJ Task Force
be stopped. The petition was docketed as Civil Case No. Q-94-19790. 7

On 17 January 1994, petitioners filed with the trial court a motion to dismiss the aforesaid
petition. 8 On 25 January 1994, the trial court issued instead an order granting the herein private
respondents' prayer for a writ of preliminary injunction, 9 to stop the preliminary investigation in
the DOJ Revenue Cases Task Force.

On 26 January 1994, private respondents filed with the trial court a Motion to Admit
Supplemental Petition seeking this time the issuance of another writ of preliminary injunction
against a second complaint of the BIR with the DOJ docketed as I.S. No. 93-17942 likewise against
herein private respondents for fraudulent tax evasion for the year 1990. Private respondents
averred in their aforesaid motion with the trail court that --

a. no supporting documents nor copies of the complaint were attached to the subpoena in I.S.
No. 93-17942;

b. the abovementioned subpoena violates private respondents' constitutional rights to due


process, equal protection and presumption of innocence;

c. I.S. No. 93-17942 is substantially the same as I.S. No. 93-508 except that it concerns the year
1990;

d. no tax assessment has been issued by the Commissioner of Internal Revenue and since taxes
already paid have not been challenged by the BIR, no tax liability exists;

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e. Assistant Quezon City Prosecutor Leopoldo E. Baraquia was a former classmate of then
Presidential Legal Counsel Antonio T. Carpio, thus, he cannot conduct the preliminary
investigation in an impartial manner.

On 28 January 1994, private respondents filed with the trial court a second supplemental
petition 10 this time seeking to stay the preliminary investigation in I.S. No. 93-548, a third BIR
complaint with the DOJ against private respondents for fraudulent tax evasion for the year 1991.

On 31 January 1994, the trial court admitted the two (2) supplemental petitions and issued a
temporary restraining order stopping the preliminary investigation of the two (2) later complaints
with the DOJ against private respondents for alleged fraudulent tax evasion for the years 1990
and 1991.

On 7 February 1994, the trial court also issued an order denying herein petitioners' motion to
dismiss private respondents' petition seeking to stay the preliminary investigation in I.S. No. 93-
508. The trial court ruled that the issue of whether Sec. 127(b) of the National Internal Revenue
(Tax) Code should be the basis of herein private respondents' tax liability, as contended by the
Bureau of Internal Revenue, or whether it is Sec. 142(c) of the same code that applies, as argued
by herein private respondents, should first be settled before any criminal complaint for
fraudulent tax evasion can be initiated or maintained.

On 14 February 1994, the trial court issued a supplemental writ of preliminary injunction this
time enjoining the preliminary investigations of the two (2) other BIR complaints with the DOJ
for fraudulent tax evasion. The trial court then denied motions to dismiss the two (2)
supplemental petitions, filed by therein respondents Commissioner of Internal Revenue and the
DOJ Revenue Cases Task Force investigators.

On 7 March 1994, herein petitioners filed with this Court a petition for certiorari and prohibition
with prayer for preliminary injunction which questioned the orders issued by the trial court
granting the private respondents' prayer for preliminary injunction to stop the preliminary
investigation in the DOJ of the BIR's complaints for fraudulent tax evasions against private
respondents and denying petitioners' motions to dismiss private respondents' various petitions
with the trial court. The petition was referred by this Court to the Court of Appeals which has
original concurrent jurisdiction over the petition.

On 19 December 1994, the Court of Appeals rendered a decision which, in part, reads:

In making such conclusion the respondent Court (the Regional Trial Court of
Quezon City, Branch 88) must have understood from herein petitioner
Commissioner's letter-complaint of 14 pages and the joint affidavit of eight
revenue officers of 17 pages attached thereto and its annexes, that the charge
against herein respondents is for tax evasion for non-payment by herein
respondent Fortune of the correct amounts of income tax, ad valorem tax and
value added tax, not necessarily "fraudulent tax evasion". Hence, the need for

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previous assessment of the correct amount by herein petitioner Commissioner
before herein respondents may be charged criminally. Certiorari will not be issued
to cure errors in proceedings or correct erroneous conclusions of law or fact. As
long as a Court acts within its jurisdiction, any alleged error committed in the
exercise of its jurisdiction, will amount to nothing more than errors of judgment
which are reviewable by timely appeal and not by a special civil action of certiorari.

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

Grave abuse of discretion as a ground for issuance of writs of certiorari and


prohibition implies capricious and whimsical exercise of judgment as is equivalent
to lack of jurisdiction, or where the power is exercised in an arbitrary or despotic
manner by reason of passion, prejudice, or personal hostility, amounting to an
evasion of positive duty or to a virtual refusal to perform the duty enjoined, or to
act at all in contemplation of law. For such writs to lie, there must be capricious,
arbitrary and whimsical exercise of power, the very antithesis of the judicial
prerogative in accordance with centuries of both civil law and common law
traditions. Certiorari and prohibition are remedies narrow in scope and inflexible
in character. They are not general utility tools in the legal workshop. Their function
is but limited to correction of defects of jurisdiction solely, not to be used for any
other purpose, such as to cure errors in proceedings or to correct erroneous
conclusions of law or fact. Due regard for the foregoing teachings enunciated in
the decision cited can not bring about a decision other than what has been
reached herein.

Needless to say, the case before the respondent Court involving those against
herein respondents for alleged non-payment of the correct amount due as income
tax, ad valorem tax and value-added tax for the years 1990, 1991, and 1992 is not
ended by this decision. The respondent Court is still to try the case and decide it
on the merits. All that is decided here is but the validity of the orders of the

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respondent Court granting herein respondents' application for preliminary
injunction and denying herein, petitioners' motion to dismiss. If upon the facts
established after trial and the applicable law, dissolution of the writ of preliminary
injunction allowed to be issued by the respondent Court is called for and a
judgment favorable to herein petitioners is demanded, the respondent Court is
duty bound to render judgment accordingly.

WHEREFORE, the instant petition for certiorari and prohibition with application
for issuance of restraining order and writ of preliminary injunction is DISMISSED.
Costs de officio. (references to annexes and citations omitted) 11

Petitioners' motion for reconsideration of the aforequoted judgment was denied by respondent
appellate court on 23 February 1995, hence, the present petition for review on certiorari based
on the following grounds:

GROUNDS FOR THE PETITION

THE RESPONDENT COURTS COMMITTED GRAVE ABUSE OF DISCRETION


AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN HOLDING THAT:

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


OF THE PRELIMINARY INVESTIGATION

II. PRIVATE RESPONDENTS' RIGHTS TO DUE PROCESS, EQUAL PROTECTION AND


PRESUMPTION OF INNOCENCE WERE VIOLATED; ON THE CONTRARY, THE STATE
ITSELF WAS DEPRIVED OF DUE PROCESS

III. THE ADMISSION OF PRIVATE RESPONDENTS' SUPPLEMENTAL PETITIONS WERE


PROPER

IV. THERE WAS SELECTIVE PROSECUTION

V THE FACTUAL ALLEGATIONS IN THE PETITION ARE HYPOTHETICALLY ADMITTED


IN A MOTION TO DISMISS BASED ON JURISDICTIONAL GROUNDS

VI. THE ISSUANCE OF THE WRITS OF INJUNCTION IS NOT A DECISION ON THE


MERITS OF THE PETITION BEFORE THE LOWER COURT 12

DISCUSSION

At the outset, it should be pointed out that respondent appellate court's observations to the
effect that herein petitioners' recourse to said court through a special civil action of certiorari and
prohibition was improper (as discussed in the aforequoted portion of the CA decision) actually
and appropriately apply to private respondents when they resorted to the remedy

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of certiorari and prohibition with application for preliminary injunction with the respondent
Regional Trial Court to stop the preliminary investigation being conducted by the DOJ Revenue
Cases Task Force of the BIR complaints for fraudulent tax evasion against private respondents. It
is to be noted that the proceedings before the investigators (preliminary investigation before the
DOJ Revenue Cases Task Force) are far from terminated. In fact, private respondents were merely
subpoenaed and asked to submit counter-affidavits. They instead resorted to the courts for
redress after denial of their motion to dismiss. The proper procedure on the part of private
respondents after their motion to dismiss was denied by the investigating panel, should have
been an appeal from such an adverse resolution to the Secretary of Justice, not a special civil
action for certiorari and prohibition with application for preliminary injunction before the
respondent trial court.

As a corollary, the respondent trial court should have desisted from entertaining private
respondents' original petition for certiorari and prohibition with prayer for preliminary injunction
because a court order to stop a preliminary investigation is an act of interference with the
investigating officers' discretion, absent any showing of grave abuse of discretion on the part of
the latter in conducting such preliminary investigation.

The rule is settled that the fiscal (prosecutor) cannot be prohibited from conducting and finishing
his preliminary investigation. 13 The private respondents' petition before the trial court in this
case was clearly premature since the case did not fall within any of the exceptions when
prohibition lies to stop a preliminary investigation. 14

The decision of the majority in this case clearly constitutes an untenable usurpation of the
primary duty and function of the prosecutors to conduct the preliminary investigation of a
criminal offense and the power of the Secretary of Justice to review the resolution of said
prosecutors.

In Guingona, supra, the Court en banc ruled thus:

"As a general rule, an injunction will not be granted to restrain a criminal


prosecution". With more reason will injunction not lie when the case is still at the
preliminary investigation stage. This Court should not usurp the primary function
of the City Fiscal to conduct the preliminary investigation of the estafa charge and
of the petitioners' countercharge for perjury, which was consolidated with the
estafa charge.

The City Fiscal's office should be allowed to finish its investigation and make its
factual findings. This Court should not conduct the preliminary investigation. It is
not a trier of facts. (Reference to footnotes omitted).

Before resolving the main issue in this petition, as earlier stated in this opinion, several
preliminary issues raised by private respondents in their "Verified Motion To Dismiss;
Alternatively, Motion To Suspend" need to be addressed, namely:

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A.) Private respondent Fortune's right to due process and equal protection of the laws have been
violated because of the subject preliminary investigation before the DOJ Revenue Cases Task
Force.

B.) Jurisdiction over Fortune's tax liability pertains to the Court of Tax Appeals and not the
Regional Trial Courts, thus, the Department of Justice, through its state prosecutors, is without
jurisdiction to conduct the subject preliminary investigation.

C.) The complaints for fraudulent tax evasion are unsupported by any evidence to serve as basis
for the issuance of a subpoena.

D.) The lack of final determination of Fortune's tax liability precludes criminal prosecution.

1. On the alleged violation of Fortune's rights to due process and equal protection of the laws, I
fail to see any violation of said rights.

Fortune, its corporate officers, nine (9) other corporations and their respective corporate officers
alleged by the BIR to be mere "dummies" or conduits of Fortune in the fraudulent tax evasion on
the Government, were given the opportunity to file their counter-affidavits to refute the
allegations in the BIR complaints, together with their supporting documents. It is only after
submission of counter-affidavits that the investigators will determine whether or not there is
enough evidence to file in court criminal charges for fraudulent tax evasion against private
respondents or to dismiss the BIR complaints. At this stage of the preliminary investigation, the
constitutional right of private respondents to due process is adequately protected because they
have been given the opportunity to be heard, i.e., to file counter-affidavits.

Nor can it be said, as respondents falsely argue, that there was no ground or basis for requiring
the private respondents to file such counter-affidavits. As respondent Court of Appeals admitted
in its here assailed decision, the BIR complaint (1st complaint) signed by the Commissioner of
Internal Revenue consisted of fourteen (14) pages supported by an annex consisting of seventeen
(17) pages in the form of a joint affidavit of eight (8) revenue officers, to which were attached
voluminous documents as annexes which, when put together, constituted a formidable network
of evidence tending to show fraudulent tax evasion on the part of private respondents. When,
on the basis of such BIR complaint and its supporting documents, the investigating Task Force
saw a need to proceed with the inquiry and, consequently, required private respondents to file
their counter-affidavits, grave abuse of discretion could hardly be imputed to said investigators.

2. On respondents' assertions that there is selective prosecution (no equal protection of the laws)
since other corporations similarly situated as they are, are not being prosecuted and/or
investigated, the argument is quite ludicrous, to say the least. As pointed out by the Solicitor
General, more than one thousand (1,000) criminal cases for tax evasion have been filed in Metro
Manila alone. This number, even if it seems to represent but a small fraction of "cases of actual
tax evasion, undoubtedly show that respondents are not being singled out. It is of note that the
memorandum issued by the President of the Philippines creating a task force to investigate tax

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evasion schemes of manufacturers was issued three (3) months before the complaints against
private respondents were filed. This makes any charge of selective prosecution baseless since it
could not then be shown, nor has it been shown by private respondents that only they
(respondents) were being investigated/prosecuted. In fact, up to this time, respondents have
failed to substantiate this allegation of selective prosecution against them.

Moreover, assuming arguendo that other corporate manufacturers are guilty of using similar
schemes for tax evasion, allegedly used by respondents, the Solicitor General correctly points out
that the remedy is not dismissal of the complaints against private respondents or stoppage of
the investigations of said complaints, but investigation and prosecution of other similar violators
(fraudulent tax evaders).

3. Private respondents' allegations that the Assistant Quezon City Prosecutor (among those
investigating the complaints against them) lacks impartiality, are so unsubstantiated, imaginary,
speculative and indeed puerile. They need not be elaborately refuted as a mere denial would
suffice under the circumstances.

4. On the issue of jurisdiction, the rule is settled that city and state prosecutors are authorized to
conduct preliminary investigations of criminal offenses under the National Internal Revenue
Code. Said criminal offenses are within the jurisdiction of the Regional Trial Court. 15

5. The issue of whether or not the evidence submitted by petitioners is sufficient to warrant the
filing of criminal informations for fraudulent tax evasion is prematurely raised. 16 To argue, as
private respondents do, that one piece of evidence, i.e. the Daily Manufacturer's Sworn
Statements, should be produced at a particular stage of the investigation, in order to determine
the probable guilt of the accused, is to dictate to the investigating officers the procedure by which
evidence should be presented and examined. Further, "a preliminary investigation is not the
occasion for the full and exhaustive display of the parties' evidence; it is for the presentation of
such evidence only as may engender a well grounded belief that an offense has been committed
and that the accused is probably guilty thereof . . ." 17

Besides, the preliminary investigation has not yet been terminated. The proper procedure then
should be to allow the investigators, who undeniably have jurisdiction, to conduct and finish the
preliminary investigation and to render a resolution. The party aggrieved by said resolution can
then appeal it to the Secretary of Justice, 18 as required by the settled doctrine of exhaustion of
administrative remedies. What special qualification or privilege, I may ask, do private
respondents have, particularly Fortune and Lucio Tan, as to exempt them from the operation of
this rooted principle and entitle them to immediate judicial relief from the respondent trial court
in this case?

6. The respondents Court of Appeals and the trial court maintain, as private respondents do, that
a previous assessment of the correct amount of taxes due is necessary before private
respondents may be charged criminally for fraudulent tax evasion. This view is decidedly not
supported by law and jurisprudence.

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The lack of a final determination of respondent Fortune's exact or correct tax liability is not a bar
to criminal prosecution for fraudulent tax evasion. While a precise computation and assessment
is required for a civil action to collect a tax deficiency, the National Internal Revenue Code does
not require such computation and assessment prior to criminal prosecution for fraudulent tax
evasion. Thus, as this Court had earlier ruled --

An assessment of a deficiency is not necessary to a criminal prosecution for willful


attempt to defeat and evade the income tax. A crime is complete when the
violator has knowingly and willfully filed a fraudulent return with intent to evade
and defeat the tax. The perpetration of the crime is grounded upon knowledge on
the part of the taxpayer that he has made an inaccurate return, and the
government's failure to discover the error and promptly to assess has no
connections with the commission of the crime. 19

It follows that, under the Ungab doctrine, the filing of a criminal complaint for fraudulent tax
evasion would be proper even without a previous assessment of the correct tax.

The argument that the Ungab doctrine will not apply to the case at bar because it involves a
factual setting different from that of the case at bar, is erroneous. The Ungab case involved the
filing of a fraudulent income tax return because the defendant failed to report his income derived
from sale of banana saplings. In the case at bar, the complaints filed before the DOJ for
investigation charge private wholesale respondents with fraudulent concealment of the actual
price of products sold through declaration of registered wholesale prices lower than the actual
wholesale prices, resulting in underpayment of income, ad valorem, and value-added taxes. Both
cases involve, therefore, fraudulent schemes to evade payment to the Government of correct
taxes.

The Court in Ungab stated further as follows:

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

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

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The contention is made, and is here rejected, that an assessment of the deficiency
tax due is necessary before the taxpayer can be prosecuted criminally for the
charges preferred. The crime is complete when the violator has, as in this case,
knowingly and wilfully filed fraudulent returns with intent to evade and defeat a
part or all of the tax. [Guzik vs. U.S., 54 F2d 618] (emphasis supplied)

The ruling in the Ungab case is undisputably on all fours with, and conclusive to the case at bar.
It should be stressed and pointed out that in Ungab the Court denied the prayer of therein
petitioner to quash informations for tax evasion that had already been filed in court. In other
words, the prosecutors in Ungab had already found probable cause to try therein petitioner for
tax evasion. Despite this fact there was no finding by the Court of violation of any of petitioner's
constitutional rights.

In the present case, private respondents were merely being required to submit counter-affidavits
to the complaints filed. If no violation of constitutional rights was committed in Ungab, upon the
filing of the criminal informations in Court, how can there now be a violation of private
respondents' constitutional rights upon a requirement by the investigators that private
respondents submit their counter-affidavits.

The Court has not been presented any compelling or persuasive argument why the Ungab
doctrine has to be abandoned. It is good law and should be the nemesis of fraudulent tax evaders.
It gives teeth to the proper enforcement of our tax laws.

7. Private respondents argue that a case earlier file before the Court of Tax Appeals (CTA) and
now before this Court 20 involves a prejudicial question justifying or requiring suspension of the
preliminary investigation of the complaints for fraudulent tax evasion against private
respondents. Said case involves the validity of BIR Revenue Memorandum Circular No. 37-93
dated 1 July 1993 which reclassified cigarettes manufactured by respondent Fortune. The circular
subjects cigarettes with brand names "Hope", "More" and "Champion" to a 10% increase in ad
valorem taxes starting 2 July 1993. Respondent Fortune has assailed the validity of said revenue
circular and the case has yet to be decided with finality.

But the foregoing issue is irrelevant to the issue of fraudulent tax evasion involved in this case. A
final decision either upholding or nullifying the aforementioned revenue circular will not affect
private respondents' criminal liability for fraudulent tax evasion, for the following reasons:

a) The revenue circular involved in the other case pertains to ad valorem taxes on sales of
Fortune's named cigarette brands after 1 July 1993 while the fraudulent tax evasion involved in
the present case pertains to years 1990, 1991 and 1992.

b) The fraudulent scheme allegedly utilized by Fortune and its dummies, as described in the BIR
complaints pending with the DOJ Revenue Cases Task Force, which resulted in the
misdeclaration/underdeclaration of Fortune's gross sales receipts resulting in turn in
underpayment of ad valorem, value-added and income taxes was actually a "built-in" tax evasion

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device already in place even before the assailed revenue circular was issued. The scheme is
particularly designed to result in the underpayment of ad valorem, value-added and income
taxes regardless of the tax rate fixed by the government on cigarette products.

8. Respondents also argue that the issue of whether Section 127(b) or Section 142(c) of the
National Internal Revenue Code is applicable to private respondents should first be settled before
any criminal cases can be filed against them. This argument is both misleading and erroneous.

The aforementioned provisions read:

Sec. 127. . . .

(b) Determination of gross selling price of goods subject to ad valorem tax. --


Unless otherwise provided, the price, excluding the value-added tax, at which the
goods are sold at wholesale in the place of production or through their sales
agents to the public shall constitute the gross selling price. If the manufacturer
also sells or allows such goods to be sold at wholesale price in another
establishment of which he is the owner or in the profits at which he has an
interest, the wholesale price in such establishment shall constitute the gross
selling price. Should such price be less than the cost of manufacture plus expenses
incurred until the goods are finally sold, then a proportionate margin of profit, not
less than 10% of such manufacturing cost and expenses, shall be added to
constitute the gross selling price.

Sec. 142 . . .

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

(1) On locally manufactured cigarettes bearing a foreign brand, fifty-five percent


(55%): Provided, That this rate shall apply regardless of whether or not the right
to use or title to the foreign brand was sold or transferred by its owner to the local
manufacturer. Whenever it has to be determined whether or not a cigarette bears
a foreign brand, the listing of brands manufactured in foreign countries appearing
in the current World Tobacco Directory shall govern.

(2) On other locally manufactured cigarettes, forty-five percent (45%).

Duly registered or existing brands of cigarettes packed in twenties shall not be


allowed to be packed in thirties.

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When the existing registered wholesale price, including tax, of cigarettes packed
in twenties does not exceed P4.00 per pack, the rate shall be twenty percent
(20%).

As the Solicitor General correctly points out, the two (2) aforequoted provisions of the Tax Code
are both applicable in determining the amount of tax due. Section 127(b) provides for the method
of determining the gross wholesale price to be registered with the BIR while Section 142(c)
provides for the rate of ad valorem tax to be paid. Said rate is expressed as a percentage of the
registered gross selling price which is determined, in turn, based on Section 127(b).

The aforementioned two (2) provisions of the Tax Code are certainly not determinative of private
respondents' criminal liability, if any. A reading of the BIR complaints pending with the DOJ
Revenue Cases Task Force shows that private respondent Fortune is being accused of using
"dummy" corporations and business conduits as well as non-existent individuals and entities to
enable the company (Fortune) to report gross receipts from sales of its cigarette
brands lower than gross receipts which are actually derived from such sales. Such lower gross
receipts of the company, as reported by respondent Fortune thus result in lower ad valorem,
value-added and income taxes paid to the government. Stated a little differently, respondent
Fortune is accused of selling at wholesale prices its cigarette brands through dummy entities in
the profits of which it has a controlling interest. Under Section 127(b), the gross selling price of
the goods should be the wholesale price of such dummy -- entities to its buyers but it is alleged
by the government that respondent Fortune has purposely made use of such entities to evade
payment of higher but legally correct taxes.

9. As to respondents' additional claim that with regard to ad valorem tax, they merely based their
liability on the wholesale price registered with the Bureau of Internal Revenue (BIR) following the
method used by all cigarette manufacturers, said claim cannot absolve Fortune and its officers
from criminal liability. 21 Payment of ad valorem and other taxes based on the wholesale price
registered with the BIR presupposes and naturally assumes that the registered wholesale price
correspond to the actual wholesale prices at which the manufacturer sells the product. If a
manufacturer makes use of a method or device to make it appear that products are sold at a
wholesale price lower than the amounts that the manufacturer actually realizes from such
wholesale of its products, as what respondent Fortune is accused of doing, through the use of
dummy entities, then there arises criminal liability under the penal provisions of the Tax Code.
This is clear from Section 127(b) aforequoted in relation to the penal provisions of the Tax Code.

10. Private respondents contend that the registration with the BIR of manufacturer's wholesale
price and the corresponding close supervision and monitoring by BIR officials of the business
operations of cigarette companies, ensure payment of correct taxes. The argument is baseless.
It does not follow that the cited procedure is a guarantee against fraudulent schemes resorted
to by tax-evading individuals or entities. It only indicates that taxpayers bent on evading payment
of taxes would explore more creative devices or mechanisms in order to defraud the government
of its sources of income even under its very nose. It is precisely to avoid and detect cases like this
that the President issued a Memorandum on 1 June 1993 creating a task force to investigate tax

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liabilities of manufacturers engaged in tax evasion schemes, such as selling products through
dummy marketing companies at underdeclared wholesale prices registered with the BIR.

Moreover, the Manufacturer's Declaration which is the basis for determining the
"Manufacturer's Registered Wholesale Price" (which in turn becomes the basis for the imposition
of ad valorem tax), even if verified by revenue officers and approved by the Commissioner of
Internal Revenue, does not necessarily reflect the actual wholesale price at which the cigarettes
are sold. This is why manufacturers are still required to file other documents, like the "daily
manufacturer's sworn statements" in order to assist in determining whether or not correct taxes
have been paid. In fine, even if BIR officials may have verified Fortunes' BIR registered wholesale
price for its products, the same does not estop or preclude the Government from filing criminal
complaints for fraudulent tax evasion based on evidence subsequently gathered to the effect
that such BIR registered wholesale prices were a misdeclaration or underdeclaration of the actual
wholesale price. It is hornbook law that the Government is not bound or estopped by the
mistakes, inadvertence, and what more, connivance of its officials and employees with
fraudulent schemes to defraud the Government. 22

Even on the assumption that official duty of BIR officials and employees has been regularly
performed, the allegations in the complaints are clear enough in that private respondents
allegedly made use of schemes to make it appear that respondent Fortune's tax liabilities are far
less than what it (Fortune) should be actually liable for under the law. The very nature of the
offense for which respondents are being investigated, certainly makes regularity/irregularity in
the performance of official duties irrelevant.

It should also be pointed out that the offense allegedly committed by private respondents'
consists in' the intentional use of "dummy" entities to make it appear that respondent Fortune
sells its products at lower wholesale prices, which prices would correspond to the wholesale
prices registered by Fortune with the BIR, but not to the prices at which its products are sold by
Fortune's dummies. The difference between Fortune's BIR-reported wholesale prices and the
prices at which its dummies sell Fortune's products thus constitutes amounts for which Fortune
should actually incur tax liabilities but for which it allegedly never paid taxes because of the
operation of the tax evasion scheme founded on a combined underdeclaration with the BIR of
Fortune's wholesale price of its products and the sale of such products to is "dummy"
corporations or to non- existing individuals or entities. This is the obvious reason why the
government has sought to investigate the alleged tax evasion scheme purportedly utilized by
respondent Fortune and its dummy corporations.

Based on the foregoing discussions, it follows that the answer to the main issue formulated
earlier in this opinion is in the negative since the private respondents have not shown that there
exist, in this case, exceptional grounds removing it from the general rule that preliminary
investigations of criminal offenses and criminal prosecutions cannot be stayed or enjoined by the
courts. 23

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11. The trial court's ruling that private respondents' constitutional rights have been violated, rests
on untenable grounds. It must be remembered, in this connection, that exceptions to a settled
rule, by their nature, must be strictly applied. And any claim to an exception must be fully
substantiated. In other words, it must have real basis for existing.

The exceptions to the general rule against restraining orders or injunctions to stop preliminary
investigations or criminal prosecutions are enumerated in Brocka vs. Enrile. 24 One specific
exception is when an injunction is needed for the adequate protection of the accused's
constitutional rights. The exception definitely does not apply in the case at bar.

Before proceeding to illustrate this point, it is important to stress that in a preliminary


investigation, the investigating officers' sole duty is to determine, before the presentation of
evidence by the prosecution and by the defense, if the latter should wish to present any, whether
or not there are reasonable grounds for proceeding formally against the accused. 25 This is in
conformity with the purpose of a preliminary investigation which is to secure the innocent against
hasty, malicious, and oppressive prosecutions, and to protect him from an open and public
accusation of crime, from the trouble, expense and anxiety of public trial, and also to protect the
state from useless and expensive trials. 26 As restated by the illustrious late Chief Justice Manuel
V. Moran --

. . . the purpose of a preliminary investigation is to afford the accused an


opportunity to show by his own evidence that there is no reasonable ground to
believe that he is guilty of the offense charged and that, therefore, there is no
good reason for further holding him to await trial in the Court of First Instance. 27

Prescinding from the tenets above-discussed, it is clear from the inception that there had been
no violation of private respondents' constitutional rights to presumption of innocence, due
process and equal protection of the laws. The preliminary investigation, I repeat, has not yet been
terminated. At this stage, only the complainant has finished presenting its affidavits and
supporting documents. Obviously then, the investigating panel found that there were grounds to
continue with the inquiry, hence, the issuance of subpoena and an order for the submission of
counter-affidavits by private respondents. Instead of filing counter-affidavits, private
respondents filed a Verified Motion to Dismiss; Alternatively, Motion to Suspend. At this point, it
may be asked, how could private respondents' constitutional right to presumption of innocence
be violated when, in all stages of the preliminary investigation, they were presumed innocent?
Declaring that there are reasonable grounds to continue with the inquiry is not the same as
pronouncing that a respondent is guilty or probably guilty of the offense charged.

12. Private respondents cannot also claim that they were not afforded due process and equal
protection of the laws. In fact, the investigating panel was concerned with just that when it
ordered the submission of private respondents' counter-affidavits. This procedure afforded
private respondents the opportunity to show by their own evidence that no reasonable grounds
exist for the filing of informations against them. Furthermore, contrary to the findings of the trial
court and the Court of Appeals, the alleged haste by which the subpoena was issued to private

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respondents (the day after the filing of the 600-page annexed complaint) does not lessen the
investigating panel's ability to study and examine the complainant's evidence. Neither does such
act merit the conclusion that the investigating panel was less than objective in conducting the
preliminary investigation. Consequently, the general and settled rule must apply that the courts
cannot interfere with the discretion of the investigating officer to determine the specificity and
adequacy of the averments in the complaint filed, except in very exceptional
circumstances, 28 which do not obtain here.

Therefore, private respondents' act of filing a petition for certiorari and prohibition before the
Regional Trial Court was rather untimely and uncalled for, not only because private respondents
failed to exhaust their administrative remedies but also because the grounds cited in their
petition before the trial court were highly speculative -- more fancied than real.

Finally, Hernandez v. Albano (19 SCRA 95), cited by the majority to support the conclusion that
preliminary investigation can be stayed by the courts, clearly states that preliminary investigation
can be stayed by court order only in extreme cases. Hernandez also states that:

By statute, the prosecuting officer of the City of Manila and his assistants are
empowered to investigate crimes committed within the city's territorial
jurisdiction. Not a mere privilege, it is the sworn duty of a Fiscal to conduct an
investigation of a criminal charge filed with his office. The power to investigate
postulates the other obligation on the part of the Fiscal to investigate promptly
and file the case of as speedily. Public interest -- the protection of society -- so
demands. Agreeably to the foregoing, a
rule -- now of long standing and frequent application -- was formulated that
ordinarily criminal prosecution may not be blocked by court prohibition or
injunction. Really, if at every turn investigation of a crime will be halted by a court
order, the administration of criminal justice will meet with an undue setback.
Indeed, the investigative power of the Fiscal may suffer such a tremendous
shrinkage that it may end up in hollow sound rather than as a part and parcel of
the machinery of criminal justice.

It should be noted that while Hernandez lays down the extreme grounds when preliminary
investigation of criminal offenses may be restrained by the courts, the dispositive portion of the
decision affirmed the decision of the trial court dismissing a petition for certiorari and prohibition
with prayer for preliminary injunction filed to stay the preliminary investigation of criminal
complaints against petitioner Hernandez.

The other case cited by the majority to support its decision in this case, Fortun
v. Labang 29 involves criminal complaints filed against a judge of the Court of First Instance by
disgruntled lawyers who had lost their cases in the judge's sala. Clearly, the basis for the Court to
stay preliminary investigation in Fortun was a finding that said complaints were filed merely as a
form of harassment against the judge and which "could have no other purpose than to place

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petitioner-judge in contempt and disrepute". The factual situation in the case at bar is poles apart
from the factual situation in Fortun.

Further, in Fortun there was an express finding by the Court that complaints against judges of the
Courts of First Instance are properly filed with the Supreme Court under Executive Order No. 264
(1970) since the Court is considered as the department head of the judiciary. In the present case
it cannot be disputed that jurisdiction to conduct preliminary investigation over fraudulent tax
evasion cases lies with the state prosecutors (fiscals).

It cannot therefore be denied that neither Hernandez nor Fortun supports with any plausibility
the majority's disposition of the issues in the present case. On the other hand, it appears to me
all too clearly that the majority opinion, in this case, has altered the entire rationale and concept
of preliminary investigation of alleged criminal offenses. That alteration has, of course, served
the purposes of distinguished private respondents. But I will have no part in the shocking process
especially in light of the fact that Government cries out that the people have
been cheated and defrauded of their taxes to the tune allegedly of P25.6 billion pesos, and yet,
it is not given by this Court even a beggar's chance to prove it!

13. There is great and vital public interest in the successful investigation and prosecution of
criminal offenses involving fraudulent tax evasion. Said public interest is much more compelling
in the present case since private respondents are not only accused of violating tax and penal laws
but are also, as a consequence of such violations, possibly depriving the government of a primary
source of revenue so essential to the life, growth and development of the nation and for the
prestation of essential services to the people.

14. It should be made clear, at this point, however, that this opinion is not a pre-judgment or pre-
determination of private respondents' guilt of the offense charged. No one, not even the
prosecutors investigating the cases for fraudulent tax evasion, is, at this stage of the proceedings,
when private respondents have yet to file their counter-affidavits, in a position to determine and
state with finality or conclusiveness whether or not private respondents are guilty of the offense
charged in the BIR complaints, now with the DOJ Revenue Cases Task Force. It is precisely through
the preliminary investigation that the DOJ Task Force on Revenue Cases can determine whether
or not there are grounds to file informations in court or to dismiss the BIR complaints.

15. I see no grave abuse of discretion committed by the state prosecutors in requiring private
respondents to submit counter-affidavits to the complaints for fraudulent tax evasion and to
determine the existence or absence of probable criminal liability.

The Rules on Criminal Procedure do not even require, as a condition sine qua non to the validity
of a preliminary investigation, the presence of the respondent as long as efforts to reach him are
made and an opportunity to controvert the complainant's evidence is accorded him. The purpose
of the rule is to check attempts of unscrupulous respondents to thwart criminal investigations by
not appearing or employing dilatory tactics. 30

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16. Since the preliminary investigation in the DOJ Revenue Cases Task Force against private
respondents for alleged fraudulent tax evasion is well within its jurisdiction and constitutes no
grave abuse of discretion, it was in fact the respondent trial court that committed grave abuse of
discretion, amounting to lack or excess of jurisdiction, when it stayed such preliminary
investigation.

17. The successful prosecution of criminal offenders is not only a right but the duty of the state.
Only when the state's acts clearly violate constitutional rights can the courts step in to interfere
with the state's exercise of such right and performance of such duty. I am indubitably impressed
that there is no violation of private respondents' constitutional rights in this case.

18. Lastly, the consolidation of the three (3) complaints in the DOJ against private respondents
should be allowed since they all involve the same scheme allegedly used by private respondents
to fraudulently evade payment of taxes. Consolidation will not only avoid multiplicity of suits but
will also enable private respondents to more conveniently prepare whatever responsive
pleadings are required or expected of them.

It is, therefore, my considered view that the decision of the Court of Appeals of 19 December
1994 in CA G.R. SP No. 33599 should be SET ASIDE. The respondent trial court should be
ENJOINED from proceeding in any manner in Civil Case No. Q-94-19790, or at least until further
orders from this Court.

The preliminary investigation of the BIR complaints docketed as I.S. Nos. 93-508, 93-17942 and
93-584 with the Department of Justice Revenue Cases Task Force, being constitutionally and
legally in order, should be allowed to resume until their final conclusion or completion, with
private respondents given a non-extendible period of ten (10) days from notice to submit to the
investigating panel their respective counter-affidavits and supporting documents, if any.

VITUG, J., dissenting:

I see in the petition the overriding issue of whether or not judicial relief could be resorted to in
order to stop state prosecutors from going through with their investigation of complaints lodged
against private respondents. Almost invariably, this Court has resolved not to unduly interfere,
let alone to peremptorily prevent, the prosecuting agencies or offices of the government in their
investigatorial work or in their own evaluation of the results of investigation. It would indeed be,
in my view, an act precipitate for the courts to take on a case even before the complaint or
information is filed by the prosecution. Of course, one cannot preclude the possibility that at
times compelling reasons may dictate otherwise; I do not think, however, that the instant case
could be the right occasion for it.

While I do understand the concern expressed by some of my colleagues, i.e., that stopping the
trial court from now proceeding with Civil Case No. Q-94-9170 would, effectively, mean a

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disposition of the main case without its merits having first been fully heard in the court below, in
this particular situation before the Court, however, the parties have since exhaustively and
adequately presented their respective cases. In the interest of good order, the practical measure
of enjoining the trial court from taking further cognizance of the case would not thus appear to
be really all that unwarranted.

A final word: The matter affecting the civil liability for the due payment of internal revenue taxes,
including the applicable remedies and proceedings in the determination thereof, must be
considered apart from and technically independent of the criminal aspect that may be brought
to bear in appropriate cases. A recourse in one is not necessarily preclusive of, nor would the
results thereof be conclusive on, the other.

Accordingly, I vote to grant the petition.

Separate Opinions

BELLOSILLO, J., concurring and dissenting:

I am in full accord with the conclusion of the majority that the trial court committed no grave
abuse of discretion in issuing the assailed injunctive writs. But I am constrained to dissent insofar
as it finds that there was "selective prosecution" in charging private respondents.

Let me first touch on "selective prosecution." There is no showing that petitioner Commissioner
of Internal Revenue is not going after others who may be suspected of being big tax evaders and
that only private respondents are being prosecuted, or even merely investigated, for tax evasion.
As pointed out by the Solicitor General, assuming ex hypothesi that other corporate
manufacturers are guilty of using similar schemes for tax evasion, the proper remedy is not the
dismissal of the complaints against private respondents, but the prosecution of other similar
evaders. In this regard, in the absence of willful or malicious prosecution, or so-called "selective
prosecution," the choice on whom to prosecute ahead of the others belongs legitimately, and
rightly so, to the public prosecutors.

But, I share the view of the majority that the trial court did not commit grave abuse of discretion
amounting to lack of jurisdiction. At once it must be pointed out that the trial court merely issued
writs of preliminary injunction. However to grant the prayer of herein petitioners would
effectively dismiss the petition for certiorari and prohibition filed by private respondents with the
trial court even before the issues in the main case could be joined, which seems to me to be a
procedural lapse since the main case is already being resolved when the only issue before the
Court is the propriety of the ancillary or provisional remedy.

The trial court granted the writs of preliminary injunction upon finding, after hearing for the
purpose, that private respondents sufficiently established that "they are entitled to certain

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constitutional rights and that these rights have been violated," 1 and that they have complied
with the requirements of Sec. 3, Rule 58, Rules of Court. 2 In support of its conclusion, the trial
court enumerated its reasons: first, inspite of the motion of respondent Fortune Tobacco
Corporation, petitioner Commissioner of Internal Revenue failed to present the "daily
manufacturer's sworn statements submitted to the BIR by the taxpayer," supposedly stating that
the total taxable sales of respondent Corporation for the year 1992 is P16,686,372,295.00, which
is the basis of petitioner Commissioner's allegation that private respondents failed to pay the
correct taxes since it declared in its VAT returns that its total taxable sales in 1992 was only
P11,736,658.580.00; second, the proper application of Sec. 142, par. (c), of the National Internal
Revenue Code is a prejudicial question which must first be resolved by the Court of Tax Appeals
to determine whether a tax liability which is an essential element of tax evasion exists before
criminal proceedings may be pursued; third, from the evidence submitted, it appears that the
Bureau of Internal Revenue has not yet made a final determination of the tax liability of private
respondents with respect to its ad valorem, value added and income taxes for 1992; and, fourth,
the precipitate issuance by the prosecutors of subpoenas to private respondents one (1) day after
the filing of the complaint, consisting of about 600 pages, inclusive of the 14-page complaint, 17-
page joint affidavit of eight (8) revenue officers and the annexes attached thereto, and their hasty
denial of private respondents' 135-page motion to dismiss, after a recess of only about 20
minutes, show that private respondents' constitutional rights may have been violated.

These circumstances as well as the other traces of discrimination mentioned by the trial
court, i.e., the announcement by the PCGG that it would take over the various corporations
associated with respondent Lucio C. Tan; the creation of the Task Force on Revenue Cases among
the functions of which is to "[i]nvestigate the tax liabilities of manufacturers that engage in well-
known tax evasion schemes, such as selling products through dummy marketing companies to
evade the payment of the correct internal revenue taxes," the very charge against respondent
Tan; the reclassification of respondent corporation's best selling cigarettes as foreign brands
thereby imposing upon them a higher tax rate that would price them out of the market without
notice and hearing; the singling out of private respondents as subjects of a complaint for tax
evasion when other cigarette manufacturers have been using the same basis private respondents
are using in paying ad valorem, value added and income taxes; and, the failure of petitioner
Commissioner to wait for the expiration of the 30-day period she herself gave to private
respondents to pay the supposed tax deficiencies before the filing of the complaint, obviously
impelled the trial court to issue the writ of preliminary injunction. Practically the same grounds
were found by the trial court when it provisionally restrained the investigation of the two (2)
other complaints, i.e., tax evasion complaints for FYs 1990 and 1991.

On the basis of the findings of the trial court, it indeed appears that private respondents'
constitutional rights to due process of law and equal protection of the laws may have been for
the moment set aside, if not outright violated. The trial court was convinced that the tell-tale
signs of malice and partiality were indications that the constitutional rights of private
respondents may not have been afforded adequate protection. Accordingly I see no manifest
abuse, much less grave, on the part of the trial court in issuing the injunctive writs. Thus it is my
opinion that the trial court did not commit grave abuse of discretion in granting the assailed writs.

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Well entrenched is the rule that the issuance of the writ of preliminary injunction as an ancillary
or preventive remedy to secure the rights of a party in a pending case rests upon the sound
discretion of the court hearing it. The exercise of sound judicial discretion by the trial court in
injunctive matters should not be interfered with except in case of manifest abuse, 3 which is not
true in the case before us. Equally well settled is that under Sec. 7, Rule 58, Rules of Court, 4 a
wide latitude is given to the trial court. 5 This is because the conflicting claims in an application
for a provisional writ more often than not involves a factual determination which is not the
function of this Court, or even respondent appellate court. Thus in the case at bar the
ascertainment of the actual tax liability, if any, based on the evidence already presented and still
to be presented, is more within the competence of the trial court before which the parties have
raised the very same issue in the main case. The truth or falsity of the divergent statements that
there was deliberate haste in issuing the subpoenas and in denying private respondents' motion
to dismiss may be confirmed not by this Court but by the trial court during that hearing on the
merits.

In fine, no grave abuse of discretion can be attributed to a judge or body in the issuance of a writ
of preliminary injunction where a party was not deprived of its day in court as it was heard and
had exhaustively presented all its arguments and defenses. 6 It is undisputed that in the case
before us petitioners and private respondents were given sufficient time and opportunity to
present their respective pieces of evidence as well as arguments in support of their positions.

Consequently, I concur with the finding of the majority that the trial court committed no grave
abuse of discretion. As respondent appellate court said, "[g]rave abuse of discretion as a ground
for issuance of writs of certiorari and prohibition implies capricious and whimsical exercise of
judgment as is equivalent to lack of jurisdiction, or where the power is exercised in an arbitrary
or despotic manner by reason of passion, prejudice or personal hostility amounting to an evasion
of positive duty or to a virtual refusal to perform the duty enjoined, or to act at all in
contemplation of law. 7 For such writs to lie there must be capricious, arbitrary and whimsical
exercise of power, the very antithesis of the judicial prerogative in accordance with centuries of
both civil and common law traditions." 8 The trial court, to my mind, is not guilty of any of these.
Thus I accord respect to the exercise of the trial court's sound judicial discretion and hold that
the same should not be interfered with.

To permanently enjoin the trial court from proceeding in any manner in Civil Case No. Q-94-
19790 and allow the preliminary investigation of the complaints docketed as I.S. Nos. 93-508, 93-
17942 and 93-584 with the Department of Justice to resume until their final conclusion and
completion would go against the prevailing rule that courts should avoid issuing a writ or
preliminary injunction which would in effect dispose of the main case without trial. 9 Due process
considerations dictate that the assailed injunctive writs are not judgments on the merits but
merely orders for the grant of a provisional and ancillary remedy to preserve the status quo until
the merits of the case can be heard. The hearing on the application for issuance of a writ of
preliminary injunction is separate and distinct from the trial on the merits of the main case. The
quantum of evidence required for one is different from that for the other, so that it does not
necessarily follow that if the court grants and issues the temporary writ applied for the same

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court will now have to rule in favor of the petition for prohibition and ipso facto make the
provisional injunction permanent.

If grave abuse of discretion attended the issuance of the writ of preliminary injunction, then by
all means nullify the abusive act -- but only that. The main case should be allowed to proceed
according to due process. The trial court should receive the evidence from the contending
parties, weigh and evaluate the same and then make its findings. Clearly, the dismissal of the
main case as a result of a mere incident relative to the issuance of an ancillary writ is procedurally
awkward and violates due process, as it deprives private respondents of their right to present
their case in court and support it with its evidence.

In resolving the fundamental issue at hand, i.e., whether the trial court committed grave abuse
of discretion in issuing the subject writs of preliminary injunction, we cannot avoid balancing on
the scales the power of the State to tax and its inherent right to prosecute perceived
transgressors of the law on one side, and the constitutional rights of a citizen to due process of
law and the equal protection of the laws on the other. Obviously the scales must tilt in favor of
the individual, for a citizen's right is amply protected by the Bill of Rights of the Constitution. Thus
while "taxes are the lifeblood of the government," the power to tax has its limits, inspite of all its
plenitude. Hence in Commissioner of Internal Revenue v. Algue, Inc., 10 we said --

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

xxx xxx xxx

It is said that taxes are what we pay for civilized society. Without taxes, the
government would be paralyzed for the lack of the motive power to activate and
operate it. Hence, despite the natural reluctance to surrender part of one's hard-
earned income to taxing authorities, every person who is able to must contribute
his share in the running of the government. The government for its part is
expected to respond in the form of tangible and intangible benefits intended to
improve the lives of the people and enhance their moral and material values. This
symbiotic relationship is the rationale of taxation and should dispel the erroneous
notion that it is an arbitrary method of exaction by those in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a


requirement in all democratic regimes that it be exercised reasonably and in
accordance with the prescribed procedure. If it is not, then the taxpayer has a right
to complain and the courts will then came to his succor. For all the awesome

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

In the instant case, it seems that due to the overzealousness in collecting taxes from private
respondents and to some accident of immediate overwhelming interest which distressingly
impassions and distorts judgment, the State has unwittingly ignored the citizens' constitutional
rights. Thus even the rule that injunction will not lie to prevent a criminal prosecution has
admitted exceptions, which we enumerated in Brocka v. Enrile 11 and in Ocampo IV
v. Ombudsman 12 -- (a) to afford adequate protection to the constitutional rights of the accused;
(b) when necessary for the orderly administration of justice or to avoid oppression or multiplicity
of actions; (c) when there is a prejudicial question which is sub-judice; (d) when the acts of the
officer are without or in excess of authority; (e) where the prosecution is under an invalid law,
ordinance or regulation; (f) when double jeopardy is clearly apparent; (g) when the court has no
jurisdiction over the offense; (h) where it is a case of persecution rather than prosecution; (i)
where the charges are manifestly false and motivated by lust for vengeance; (j) when there is
clearly no prima facie case against the accused and a motion to quash on that ground has been
denied; and, (k) to prevent a threatened unlawful arrest.

Finally, courts indeed should not hesitate to invoke the constitutional guarantees to give
adequate protection to the citizens when faced with the enormous powers of the State, even
when what is in issue are only provisional remedies, as in the case at hand. In days of great
pressure, it is alluring to take short cuts by borrowing dictatorial techniques. But when we do,
we set in motion an arbitrary or subversive influence by our own design which destroys us from
within. Let not the present case dangerously sway towards that trend.

For all the foregoing, I vote to dismiss the instant petition for lack of merit, and to order the trial
court to proceed with Civil Case No. Q-94-19790 with reasonable dispatch.

PADILLA, J., dissenting:

Because of what I humbly perceive to be the crippling, chilling and fatal effects of the majority
opinion on the power of the state to investigate fraudulent tax evasion in the country, I am
constrained to dissent, as vigorously as I can, from the majority opinion.

THE ISSUE

The main issue in this petition for review on certiorari is whether or not there are valid grounds
to stop or stay the preliminary investigation of complaints filed by the Bureau of Internal Revenue
(BIR) with the Department of Justice (DOJ) Revenue Cases Task Force against private respondents
for alleged fraudulent tax evasion for the years 1990, 1991 and 1992. Stated differently, the issue
is: did respondent trial court commit grave abuse of discretion amounting to lack or excess of
jurisdiction in stopping the subject preliminary investigation?

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THE CASE AND THE FACTS

On 7 September 1993, petitioner Commissioner of Internal Revenue filed a complaint with the
DOJ against private respondents Fortune Tobacco Corporation (hereinafter referred to simply as
"Fortune"), its corporate officers, nine (9) other corporations, and their respective corporate
officers, for alleged fraudulent tax evasion for the year 1992.

The complaint, docketed as I.S. No. 93-508, was referred to the DOJ Task Force on Revenue Cases
which found sufficient grounds to further investigate the allegation that Fortune fraudulently
evaded payment of income, value-added and ad valorem taxes for the year 1992 thus depriving
the Government of revenue allegedly in excess of seven and one-half (7 1/2) billion pesos.

The fraudulent scheme allegedly adopted and employed by private respondents, is described by
the BIR as follows:

In order to evade payment of said taxes, [Fortune] made fictitious and simulated
sales of its cigarette products to non-existent individuals and to entities
incorporated and existing only for the purpose of such fictitious sales by declaring
registered wholesale prices with the BIR lower than [Fortune's] actual wholesale
prices which are required for determination of [Fortune's] correct ad valorem,
income and value-added tax liabilities. These "ghost wholesale buyers" then
ostensibly sold the product to consumers and other wholesalers/retailers at
higher wholesale prices determined by [Fortune]. The tax returns and
manufacturer's sworn statements filed by [Fortune] as aforesaid declare the
fictitious sales it made to the conduit corporations and non-existent individual
buyers as its gross sales. 1

Based on the initial evaluation of the DOJ Task Force, private respondents were subpoenaed and
required to submit their counter-affidavits not later than 20 September 1993. 2 Instead of filing
counter-affidavits, private respondents filed a "Verified Motion to Dismiss; Alternatively, Motion
to Suspend." 3 Said motion was denied by the DOJ Task Force and treated as private respondents'
counter-affidavit, in an order dated 15 October 1993. 4

Private respondents sought reconsideration of the aforementioned order of denial and likewise
filed motions to require submission by the Bureau of Internal Revenue (BIR) of certain documents
to support the verified motion to dismiss or suspend the investigation, and for the inhibition of
the state prosecutors assigned to the case for alleged lack of impartiality. 5

On 20 December 1993, an omnibus order was issued by the investigating Task Force: 6

a. denying reconsideration;

b. denying suspension of investigation; and

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c. denying the motion to inhibit the investigating state prosecutors.

Thereupon, or on 4 January 1994, private respondents went to court. They filed a petition
for certiorari and prohibition with prayer for preliminary injunction in the Regional Trial Court,
Branch 88, Quezon City, praying that the proceedings (investigation) before the DOJ Task Force
be stopped. The petition was docketed as Civil Case No. Q-94-19790. 7

On 17 January 1994, petitioners filed with the trial court a motion to dismiss the aforesaid
petition. 8 On 25 January 1994, the trial court issued instead an order granting the herein private
respondents' prayer for a writ of preliminary injunction, 9 to stop the preliminary investigation in
the DOJ Revenue Cases Task Force.

On 26 January 1994, private respondents filed with the trial court a Motion to Admit
Supplemental Petition seeking this time the issuance of another writ of preliminary injunction
against a second complaint of the BIR with the DOJ docketed as I.S. No. 93-17942 likewise against
herein private respondents for fraudulent tax evasion for the year 1990. Private respondents
averred in their aforesaid motion with the trail court that --

a. no supporting documents nor copies of the complaint were attached to the subpoena in I.S.
No. 93-17942;

b. the abovementioned subpoena violates private respondents' constitutional rights to due


process, equal protection and presumption of innocence;

c. I.S. No. 93-17942 is substantially the same as I.S. No. 93-508 except that it concerns the year
1990;

d. no tax assessment has been issued by the Commissioner of Internal Revenue and since taxes
already paid have not been challenged by the BIR, no tax liability exists;

e. Assistant Quezon City Prosecutor Leopoldo E. Baraquia was a former classmate of then
Presidential Legal Counsel Antonio T. Carpio, thus, he cannot conduct the preliminary
investigation in an impartial manner.

On 28 January 1994, private respondents filed with the trial court a second supplemental
petition 10 this time seeking to stay the preliminary investigation in I.S. No. 93-548, a third BIR
complaint with the DOJ against private respondents for fraudulent tax evasion for the year 1991.

On 31 January 1994, the trial court admitted the two (2) supplemental petitions and issued a
temporary restraining order stopping the preliminary investigation of the two (2) later complaints
with the DOJ against private respondents for alleged fraudulent tax evasion for the years 1990
and 1991.

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On 7 February 1994, the trial court also issued an order denying herein petitioners' motion to
dismiss private respondents' petition seeking to stay the preliminary investigation in I.S. No. 93-
508. The trial court ruled that the issue of whether Sec. 127(b) of the National Internal Revenue
(Tax) Code should be the basis of herein private respondents' tax liability, as contended by the
Bureau of Internal Revenue, or whether it is Sec. 142(c) of the same code that applies, as argued
by herein private respondents, should first be settled before any criminal complaint for
fraudulent tax evasion can be initiated or maintained.

On 14 February 1994, the trial court issued a supplemental writ of preliminary injunction this
time enjoining the preliminary investigations of the two (2) other BIR complaints with the DOJ
for fraudulent tax evasion. The trial court then denied motions to dismiss the two (2)
supplemental petitions, filed by therein respondents Commissioner of Internal Revenue and the
DOJ Revenue Cases Task Force investigators.

On 7 March 1994, herein petitioners filed with this Court a petition for certiorari and prohibition
with prayer for preliminary injunction which questioned the orders issued by the trial court
granting the private respondents' prayer for preliminary injunction to stop the preliminary
investigation in the DOJ of the BIR's complaints for fraudulent tax evasions against private
respondents and denying petitioners' motions to dismiss private respondents' various petitions
with the trial court. The petition was referred by this Court to the Court of Appeals which has
original concurrent jurisdiction over the petition.

On 19 December 1994, the Court of Appeals rendered a decision which, in part, reads:

In making such conclusion the respondent Court (the Regional Trial Court of
Quezon City, Branch 88) must have understood from herein petitioner
Commissioner's letter-complaint of 14 pages and the joint affidavit of eight
revenue officers of 17 pages attached thereto and its annexes, that the charge
against herein respondents is for tax evasion for non-payment by herein
respondent Fortune of the correct amounts of income tax, ad valorem tax and
value added tax, not necessarily "fraudulent tax evasion". Hence, the need for
previous assessment of the correct amount by herein petitioner Commissioner
before herein respondents may be charged criminally. Certiorari will not be issued
to cure errors in proceedings or correct erroneous conclusions of law or fact. As
long as a Court acts within its jurisdiction, any alleged error committed in the
exercise of its jurisdiction, will amount to nothing more than errors of judgment
which are reviewable by timely appeal and not by a special civil action of certiorari.

The questioned orders issued after hearing being but interlocutory, review thereof
by this court is inappropriate until final judgment is rendered, absent a showing of
grave abuse of discretion on the part of the issuing court. The factual and legal
issues involved in the main case still before the respondent Court are best resolved
after trial. Petitioners, therefore, instead of resorting to this petition
for certiorari and prohibition should have filed an answer to the petition as

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ordained in Section 4, Rule 16, in connection with Rule 11 of the Revised Rules of
Court, interposing as defense or defenses the objection or objections raised in
their motion to dismiss, then proceed to trial in order that thereafter the case may
be decided on the merits by the respondent Court. In case of an adverse decision,
they may appeal therefrom by which the entire record of the case would be
elevated for review. Therefore, certiorari and prohibition resorted to by herein
petitioners will not lie in view of the remedy open to them. Thus, the resulting
delay in the final disposition of the case before the respondent Court would not
have been incurred.

Grave abuse of discretion as a ground for issuance of writs of certiorari and


prohibition implies capricious and whimsical exercise of judgment as is equivalent
to lack of jurisdiction, or where the power is exercised in an arbitrary or despotic
manner by reason of passion, prejudice, or personal hostility, amounting to an
evasion of positive duty or to a virtual refusal to perform the duty enjoined, or to
act at all in contemplation of law. For such writs to lie, there must be capricious,
arbitrary and whimsical exercise of power, the very antithesis of the judicial
prerogative in accordance with centuries of both civil law and common law
traditions. Certiorari and prohibition are remedies narrow in scope and inflexible
in character. They are not general utility tools in the legal workshop. Their function
is but limited to correction of defects of jurisdiction solely, not to be used for any
other purpose, such as to cure errors in proceedings or to correct erroneous
conclusions of law or fact. Due regard for the foregoing teachings enunciated in
the decision cited can not bring about a decision other than what has been
reached herein.

Needless to say, the case before the respondent Court involving those against
herein respondents for alleged non-payment of the correct amount due as income
tax, ad valorem tax and value-added tax for the years 1990, 1991, and 1992 is not
ended by this decision. The respondent Court is still to try the case and decide it
on the merits. All that is decided here is but the validity of the orders of the
respondent Court granting herein respondents' application for preliminary
injunction and denying herein, petitioners' motion to dismiss. If upon the facts
established after trial and the applicable law, dissolution of the writ of preliminary
injunction allowed to be issued by the respondent Court is called for and a
judgment favorable to herein petitioners is demanded, the respondent Court is
duty bound to render judgment accordingly.

WHEREFORE, the instant petition for certiorari and prohibition with application
for issuance of restraining order and writ of preliminary injunction is DISMISSED.
Costs de officio. (references to annexes and citations omitted) 11

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Petitioners' motion for reconsideration of the aforequoted judgment was denied by respondent
appellate court on 23 February 1995, hence, the present petition for review on certiorari based
on the following grounds:

GROUNDS FOR THE PETITION

THE RESPONDENT COURTS COMMITTED GRAVE ABUSE OF DISCRETION


AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN HOLDING THAT:

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


OF THE PRELIMINARY INVESTIGATION

II. PRIVATE RESPONDENTS' RIGHTS TO DUE PROCESS, EQUAL PROTECTION AND


PRESUMPTION OF INNOCENCE WERE VIOLATED; ON THE CONTRARY, THE STATE
ITSELF WAS DEPRIVED OF DUE PROCESS

III. THE ADMISSION OF PRIVATE RESPONDENTS' SUPPLEMENTAL PETITIONS WERE


PROPER

IV. THERE WAS SELECTIVE PROSECUTION

V THE FACTUAL ALLEGATIONS IN THE PETITION ARE HYPOTHETICALLY ADMITTED


IN A MOTION TO DISMISS BASED ON JURISDICTIONAL GROUNDS

VI. THE ISSUANCE OF THE WRITS OF INJUNCTION IS NOT A DECISION ON THE


MERITS OF THE PETITION BEFORE THE LOWER COURT 12

DISCUSSION

At the outset, it should be pointed out that respondent appellate court's observations to the
effect that herein petitioners' recourse to said court through a special civil action of certiorari and
prohibition was improper (as discussed in the aforequoted portion of the CA decision) actually
and appropriately apply to private respondents when they resorted to the remedy
of certiorari and prohibition with application for preliminary injunction with the respondent
Regional Trial Court to stop the preliminary investigation being conducted by the DOJ Revenue
Cases Task Force of the BIR complaints for fraudulent tax evasion against private respondents. It
is to be noted that the proceedings before the investigators (preliminary investigation before the
DOJ Revenue Cases Task Force) are far from terminated. In fact, private respondents were merely
subpoenaed and asked to submit counter-affidavits. They instead resorted to the courts for
redress after denial of their motion to dismiss. The proper procedure on the part of private
respondents after their motion to dismiss was denied by the investigating panel, should have
been an appeal from such an adverse resolution to the Secretary of Justice, not a special civil
action for certiorari and prohibition with application for preliminary injunction before the
respondent trial court.

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As a corollary, the respondent trial court should have desisted from entertaining private
respondents' original petition for certiorari and prohibition with prayer for preliminary injunction
because a court order to stop a preliminary investigation is an act of interference with the
investigating officers' discretion, absent any showing of grave abuse of discretion on the part of
the latter in conducting such preliminary investigation.

The rule is settled that the fiscal (prosecutor) cannot be prohibited from conducting and finishing
his preliminary investigation. 13 The private respondents' petition before the trial court in this
case was clearly premature since the case did not fall within any of the exceptions when
prohibition lies to stop a preliminary investigation. 14

The decision of the majority in this case clearly constitutes an untenable usurpation of the
primary duty and function of the prosecutors to conduct the preliminary investigation of a
criminal offense and the power of the Secretary of Justice to review the resolution of said
prosecutors.

In Guingona, supra, the Court en banc ruled thus:

"As a general rule, an injunction will not be granted to restrain a criminal


prosecution". With more reason will injunction not lie when the case is still at the
preliminary investigation stage. This Court should not usurp the primary function
of the City Fiscal to conduct the preliminary investigation of the estafa charge and
of the petitioners' countercharge for perjury, which was consolidated with the
estafa charge.

The City Fiscal's office should be allowed to finish its investigation and make its
factual findings. This Court should not conduct the preliminary investigation. It is
not a trier of facts. (Reference to footnotes omitted).

Before resolving the main issue in this petition, as earlier stated in this opinion, several
preliminary issues raised by private respondents in their "Verified Motion To Dismiss;
Alternatively, Motion To Suspend" need to be addressed, namely:

A.) Private respondent Fortune's right to due process and equal protection of the laws have been
violated because of the subject preliminary investigation before the DOJ Revenue Cases Task
Force.

B.) Jurisdiction over Fortune's tax liability pertains to the Court of Tax Appeals and not the
Regional Trial Courts, thus, the Department of Justice, through its state prosecutors, is without
jurisdiction to conduct the subject preliminary investigation.

C.) The complaints for fraudulent tax evasion are unsupported by any evidence to serve as basis
for the issuance of a subpoena.

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D.) The lack of final determination of Fortune's tax liability precludes criminal prosecution.

1. On the alleged violation of Fortune's rights to due process and equal protection of the laws, I
fail to see any violation of said rights.

Fortune, its corporate officers, nine (9) other corporations and their respective corporate officers
alleged by the BIR to be mere "dummies" or conduits of Fortune in the fraudulent tax evasion on
the Government, were given the opportunity to file their counter-affidavits to refute the
allegations in the BIR complaints, together with their supporting documents. It is only after
submission of counter-affidavits that the investigators will determine whether or not there is
enough evidence to file in court criminal charges for fraudulent tax evasion against private
respondents or to dismiss the BIR complaints. At this stage of the preliminary investigation, the
constitutional right of private respondents to due process is adequately protected because they
have been given the opportunity to be heard, i.e., to file counter-affidavits.

Nor can it be said, as respondents falsely argue, that there was no ground or basis for requiring
the private respondents to file such counter-affidavits. As respondent Court of Appeals admitted
in its here assailed decision, the BIR complaint (1st complaint) signed by the Commissioner of
Internal Revenue consisted of fourteen (14) pages supported by an annex consisting of seventeen
(17) pages in the form of a joint affidavit of eight (8) revenue officers, to which were attached
voluminous documents as annexes which, when put together, constituted a formidable network
of evidence tending to show fraudulent tax evasion on the part of private respondents. When,
on the basis of such BIR complaint and its supporting documents, the investigating Task Force
saw a need to proceed with the inquiry and, consequently, required private respondents to file
their counter-affidavits, grave abuse of discretion could hardly be imputed to said investigators.

2. On respondents' assertions that there is selective prosecution (no equal protection of the laws)
since other corporations similarly situated as they are, are not being prosecuted and/or
investigated, the argument is quite ludicrous, to say the least. As pointed out by the Solicitor
General, more than one thousand (1,000) criminal cases for tax evasion have been filed in Metro
Manila alone. This number, even if it seems to represent but a small fraction of "cases of actual
tax evasion, undoubtedly show that respondents are not being singled out. It is of note that the
memorandum issued by the President of the Philippines creating a task force to investigate tax
evasion schemes of manufacturers was issued three (3) months before the complaints against
private respondents were filed. This makes any charge of selective prosecution baseless since it
could not then be shown, nor has it been shown by private respondents that only they
(respondents) were being investigated/prosecuted. In fact, up to this time, respondents have
failed to substantiate this allegation of selective prosecution against them.

Moreover, assuming arguendo that other corporate manufacturers are guilty of using similar
schemes for tax evasion, allegedly used by respondents, the Solicitor General correctly points out
that the remedy is not dismissal of the complaints against private respondents or stoppage of
the investigations of said complaints, but investigation and prosecution of other similar violators
(fraudulent tax evaders).

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3. Private respondents' allegations that the Assistant Quezon City Prosecutor (among those
investigating the complaints against them) lacks impartiality, are so unsubstantiated, imaginary,
speculative and indeed puerile. They need not be elaborately refuted as a mere denial would
suffice under the circumstances.

4. On the issue of jurisdiction, the rule is settled that city and state prosecutors are authorized to
conduct preliminary investigations of criminal offenses under the National Internal Revenue
Code. Said criminal offenses are within the jurisdiction of the Regional Trial Court. 15

5. The issue of whether or not the evidence submitted by petitioners is sufficient to warrant the
filing of criminal informations for fraudulent tax evasion is prematurely raised. 16 To argue, as
private respondents do, that one piece of evidence, i.e. the Daily Manufacturer's Sworn
Statements, should be produced at a particular stage of the investigation, in order to determine
the probable guilt of the accused, is to dictate to the investigating officers the procedure by which
evidence should be presented and examined. Further, "a preliminary investigation is not the
occasion for the full and exhaustive display of the parties' evidence; it is for the presentation of
such evidence only as may engender a well grounded belief that an offense has been committed
and that the accused is probably guilty thereof . . ." 17

Besides, the preliminary investigation has not yet been terminated. The proper procedure then
should be to allow the investigators, who undeniably have jurisdiction, to conduct and finish the
preliminary investigation and to render a resolution. The party aggrieved by said resolution can
then appeal it to the Secretary of Justice, 18 as required by the settled doctrine of exhaustion of
administrative remedies. What special qualification or privilege, I may ask, do private
respondents have, particularly Fortune and Lucio Tan, as to exempt them from the operation of
this rooted principle and entitle them to immediate judicial relief from the respondent trial court
in this case?

6. The respondents Court of Appeals and the trial court maintain, as private respondents do, that
a previous assessment of the correct amount of taxes due is necessary before private
respondents may be charged criminally for fraudulent tax evasion. This view is decidedly not
supported by law and jurisprudence.

The lack of a final determination of respondent Fortune's exact or correct tax liability is not a bar
to criminal prosecution for fraudulent tax evasion. While a precise computation and assessment
is required for a civil action to collect a tax deficiency, the National Internal Revenue Code does
not require such computation and assessment prior to criminal prosecution for fraudulent tax
evasion. Thus, as this Court had earlier ruled --

An assessment of a deficiency is not necessary to a criminal prosecution for willful


attempt to defeat and evade the income tax. A crime is complete when the
violator has knowingly and willfully filed a fraudulent return with intent to evade
and defeat the tax. The perpetration of the crime is grounded upon knowledge on
the part of the taxpayer that he has made an inaccurate return, and the

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government's failure to discover the error and promptly to assess has no
connections with the commission of the crime. 19

It follows that, under the Ungab doctrine, the filing of a criminal complaint for fraudulent tax
evasion would be proper even without a previous assessment of the correct tax.

The argument that the Ungab doctrine will not apply to the case at bar because it involves a
factual setting different from that of the case at bar, is erroneous. The Ungab case involved the
filing of a fraudulent income tax return because the defendant failed to report his income derived
from sale of banana saplings. In the case at bar, the complaints filed before the DOJ for
investigation charge private wholesale respondents with fraudulent concealment of the actual
price of products sold through declaration of registered wholesale prices lower than the actual
wholesale prices, resulting in underpayment of income, ad valorem, and value-added taxes. Both
cases involve, therefore, fraudulent schemes to evade payment to the Government of correct
taxes.

The Court in Ungab stated further as follows:

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

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

The contention is made, and is here rejected, that an assessment of the deficiency
tax due is necessary before the taxpayer can be prosecuted criminally for the
charges preferred. The crime is complete when the violator has, as in this case,
knowingly and wilfully filed fraudulent returns with intent to evade and defeat a
part or all of the tax. [Guzik vs. U.S., 54 F2d 618] (emphasis supplied)

The ruling in the Ungab case is undisputably on all fours with, and conclusive to the case at bar.
It should be stressed and pointed out that in Ungab the Court denied the prayer of therein
petitioner to quash informations for tax evasion that had already been filed in court. In other
words, the prosecutors in Ungab had already found probable cause to try therein petitioner for
tax evasion. Despite this fact there was no finding by the Court of violation of any of petitioner's
constitutional rights.

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In the present case, private respondents were merely being required to submit counter-affidavits
to the complaints filed. If no violation of constitutional rights was committed in Ungab, upon the
filing of the criminal informations in Court, how can there now be a violation of private
respondents' constitutional rights upon a requirement by the investigators that private
respondents submit their counter-affidavits.

The Court has not been presented any compelling or persuasive argument why the Ungab
doctrine has to be abandoned. It is good law and should be the nemesis of fraudulent tax evaders.
It gives teeth to the proper enforcement of our tax laws.

7. Private respondents argue that a case earlier file before the Court of Tax Appeals (CTA) and
now before this Court 20 involves a prejudicial question justifying or requiring suspension of the
preliminary investigation of the complaints for fraudulent tax evasion against private
respondents. Said case involves the validity of BIR Revenue Memorandum Circular No. 37-93
dated 1 July 1993 which reclassified cigarettes manufactured by respondent Fortune. The circular
subjects cigarettes with brand names "Hope", "More" and "Champion" to a 10% increase in ad
valorem taxes starting 2 July 1993. Respondent Fortune has assailed the validity of said revenue
circular and the case has yet to be decided with finality.

But the foregoing issue is irrelevant to the issue of fraudulent tax evasion involved in this case. A
final decision either upholding or nullifying the aforementioned revenue circular will not affect
private respondents' criminal liability for fraudulent tax evasion, for the following reasons:

a) The revenue circular involved in the other case pertains to ad valorem taxes on sales of
Fortune's named cigarette brands after 1 July 1993 while the fraudulent tax evasion involved in
the present case pertains to years 1990, 1991 and 1992.

b) The fraudulent scheme allegedly utilized by Fortune and its dummies, as described in the BIR
complaints pending with the DOJ Revenue Cases Task Force, which resulted in the
misdeclaration/underdeclaration of Fortune's gross sales receipts resulting in turn in
underpayment of ad valorem, value-added and income taxes was actually a "built-in" tax evasion
device already in place even before the assailed revenue circular was issued. The scheme is
particularly designed to result in the underpayment of ad valorem, value-added and income
taxes regardless of the tax rate fixed by the government on cigarette products.

8. Respondents also argue that the issue of whether Section 127(b) or Section 142(c) of the
National Internal Revenue Code is applicable to private respondents should first be settled before
any criminal cases can be filed against them. This argument is both misleading and erroneous.

The aforementioned provisions read:

Sec. 127. . . .

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(b) Determination of gross selling price of goods subject to ad valorem tax. --
Unless otherwise provided, the price, excluding the value-added tax, at which the
goods are sold at wholesale in the place of production or through their sales
agents to the public shall constitute the gross selling price. If the manufacturer
also sells or allows such goods to be sold at wholesale price in another
establishment of which he is the owner or in the profits at which he has an
interest, the wholesale price in such establishment shall constitute the gross
selling price. Should such price be less than the cost of manufacture plus expenses
incurred until the goods are finally sold, then a proportionate margin of profit, not
less than 10% of such manufacturing cost and expenses, shall be added to
constitute the gross selling price.

Sec. 142 . . .

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

(1) On locally manufactured cigarettes bearing a foreign brand, fifty-five percent


(55%): Provided, That this rate shall apply regardless of whether or not the right
to use or title to the foreign brand was sold or transferred by its owner to the local
manufacturer. Whenever it has to be determined whether or not a cigarette bears
a foreign brand, the listing of brands manufactured in foreign countries appearing
in the current World Tobacco Directory shall govern.

(2) On other locally manufactured cigarettes, forty-five percent (45%).

Duly registered or existing brands of cigarettes packed in twenties shall not be


allowed to be packed in thirties.

When the existing registered wholesale price, including tax, of cigarettes packed
in twenties does not exceed P4.00 per pack, the rate shall be twenty percent
(20%).

As the Solicitor General correctly points out, the two (2) aforequoted provisions of the Tax Code
are both applicable in determining the amount of tax due. Section 127(b) provides for the method
of determining the gross wholesale price to be registered with the BIR while Section 142(c)
provides for the rate of ad valorem tax to be paid. Said rate is expressed as a percentage of the
registered gross selling price which is determined, in turn, based on Section 127(b).

The aforementioned two (2) provisions of the Tax Code are certainly not determinative of private
respondents' criminal liability, if any. A reading of the BIR complaints pending with the DOJ
Revenue Cases Task Force shows that private respondent Fortune is being accused of using
"dummy" corporations and business conduits as well as non-existent individuals and entities to

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enable the company (Fortune) to report gross receipts from sales of its cigarette
brands lower than gross receipts which are actually derived from such sales. Such lower gross
receipts of the company, as reported by respondent Fortune thus result in lower ad valorem,
value-added and income taxes paid to the government. Stated a little differently, respondent
Fortune is accused of selling at wholesale prices its cigarette brands through dummy entities in
the profits of which it has a controlling interest. Under Section 127(b), the gross selling price of
the goods should be the wholesale price of such dummy -- entities to its buyers but it is alleged
by the government that respondent Fortune has purposely made use of such entities to evade
payment of higher but legally correct taxes.

9. As to respondents' additional claim that with regard to ad valorem tax, they merely based their
liability on the wholesale price registered with the Bureau of Internal Revenue (BIR) following the
method used by all cigarette manufacturers, said claim cannot absolve Fortune and its officers
from criminal liability. 21 Payment of ad valorem and other taxes based on the wholesale price
registered with the BIR presupposes and naturally assumes that the registered wholesale price
correspond to the actual wholesale prices at which the manufacturer sells the product. If a
manufacturer makes use of a method or device to make it appear that products are sold at a
wholesale price lower than the amounts that the manufacturer actually realizes from such
wholesale of its products, as what respondent Fortune is accused of doing, through the use of
dummy entities, then there arises criminal liability under the penal provisions of the Tax Code.
This is clear from Section 127(b) aforequoted in relation to the penal provisions of the Tax Code.

10. Private respondents contend that the registration with the BIR of manufacturer's wholesale
price and the corresponding close supervision and monitoring by BIR officials of the business
operations of cigarette companies, ensure payment of correct taxes. The argument is baseless.
It does not follow that the cited procedure is a guarantee against fraudulent schemes resorted
to by tax-evading individuals or entities. It only indicates that taxpayers bent on evading payment
of taxes would explore more creative devices or mechanisms in order to defraud the government
of its sources of income even under its very nose. It is precisely to avoid and detect cases like this
that the President issued a Memorandum on 1 June 1993 creating a task force to investigate tax
liabilities of manufacturers engaged in tax evasion schemes, such as selling products through
dummy marketing companies at underdeclared wholesale prices registered with the BIR.

Moreover, the Manufacturer's Declaration which is the basis for determining the
"Manufacturer's Registered Wholesale Price" (which in turn becomes the basis for the imposition
of ad valorem tax), even if verified by revenue officers and approved by the Commissioner of
Internal Revenue, does not necessarily reflect the actual wholesale price at which the cigarettes
are sold. This is why manufacturers are still required to file other documents, like the "daily
manufacturer's sworn statements" in order to assist in determining whether or not correct taxes
have been paid. In fine, even if BIR officials may have verified Fortunes' BIR registered wholesale
price for its products, the same does not estop or preclude the Government from filing criminal
complaints for fraudulent tax evasion based on evidence subsequently gathered to the effect
that such BIR registered wholesale prices were a misdeclaration or underdeclaration of the actual
wholesale price. It is hornbook law that the Government is not bound or estopped by the

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mistakes, inadvertence, and what more, connivance of its officials and employees with
fraudulent schemes to defraud the Government. 22

Even on the assumption that official duty of BIR officials and employees has been regularly
performed, the allegations in the complaints are clear enough in that private respondents
allegedly made use of schemes to make it appear that respondent Fortune's tax liabilities are far
less than what it (Fortune) should be actually liable for under the law. The very nature of the
offense for which respondents are being investigated, certainly makes regularity/irregularity in
the performance of official duties irrelevant.

It should also be pointed out that the offense allegedly committed by private respondents'
consists in' the intentional use of "dummy" entities to make it appear that respondent Fortune
sells its products at lower wholesale prices, which prices would correspond to the wholesale
prices registered by Fortune with the BIR, but not to the prices at which its products are sold by
Fortune's dummies. The difference between Fortune's BIR-reported wholesale prices and the
prices at which its dummies sell Fortune's products thus constitutes amounts for which Fortune
should actually incur tax liabilities but for which it allegedly never paid taxes because of the
operation of the tax evasion scheme founded on a combined underdeclaration with the BIR of
Fortune's wholesale price of its products and the sale of such products to is "dummy"
corporations or to non- existing individuals or entities. This is the obvious reason why the
government has sought to investigate the alleged tax evasion scheme purportedly utilized by
respondent Fortune and its dummy corporations.

Based on the foregoing discussions, it follows that the answer to the main issue formulated
earlier in this opinion is in the negative since the private respondents have not shown that there
exist, in this case, exceptional grounds removing it from the general rule that preliminary
investigations of criminal offenses and criminal prosecutions cannot be stayed or enjoined by the
courts. 23

11. The trial court's ruling that private respondents' constitutional rights have been violated, rests
on untenable grounds. It must be remembered, in this connection, that exceptions to a settled
rule, by their nature, must be strictly applied. And any claim to an exception must be fully
substantiated. In other words, it must have real basis for existing.

The exceptions to the general rule against restraining orders or injunctions to stop preliminary
investigations or criminal prosecutions are enumerated in Brocka vs. Enrile. 24 One specific
exception is when an injunction is needed for the adequate protection of the accused's
constitutional rights. The exception definitely does not apply in the case at bar.

Before proceeding to illustrate this point, it is important to stress that in a preliminary


investigation, the investigating officers' sole duty is to determine, before the presentation of
evidence by the prosecution and by the defense, if the latter should wish to present any, whether
or not there are reasonable grounds for proceeding formally against the accused. 25 This is in
conformity with the purpose of a preliminary investigation which is to secure the innocent against

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hasty, malicious, and oppressive prosecutions, and to protect him from an open and public
accusation of crime, from the trouble, expense and anxiety of public trial, and also to protect the
state from useless and expensive trials. 26 As restated by the illustrious late Chief Justice Manuel
V. Moran --

. . . the purpose of a preliminary investigation is to afford the accused an


opportunity to show by his own evidence that there is no reasonable ground to
believe that he is guilty of the offense charged and that, therefore, there is no
good reason for further holding him to await trial in the Court of First Instance. 27

Prescinding from the tenets above-discussed, it is clear from the inception that there had been
no violation of private respondents' constitutional rights to presumption of innocence, due
process and equal protection of the laws. The preliminary investigation, I repeat, has not yet been
terminated. At this stage, only the complainant has finished presenting its affidavits and
supporting documents. Obviously then, the investigating panel found that there were grounds to
continue with the inquiry, hence, the issuance of subpoena and an order for the submission of
counter-affidavits by private respondents. Instead of filing counter-affidavits, private
respondents filed a Verified Motion to Dismiss; Alternatively, Motion to Suspend. At this point, it
may be asked, how could private respondents' constitutional right to presumption of innocence
be violated when, in all stages of the preliminary investigation, they were presumed innocent?
Declaring that there are reasonable grounds to continue with the inquiry is not the same as
pronouncing that a respondent is guilty or probably guilty of the offense charged.

12. Private respondents cannot also claim that they were not afforded due process and equal
protection of the laws. In fact, the investigating panel was concerned with just that when it
ordered the submission of private respondents' counter-affidavits. This procedure afforded
private respondents the opportunity to show by their own evidence that no reasonable grounds
exist for the filing of informations against them. Furthermore, contrary to the findings of the trial
court and the Court of Appeals, the alleged haste by which the subpoena was issued to private
respondents (the day after the filing of the 600-page annexed complaint) does not lessen the
investigating panel's ability to study and examine the complainant's evidence. Neither does such
act merit the conclusion that the investigating panel was less than objective in conducting the
preliminary investigation. Consequently, the general and settled rule must apply that the courts
cannot interfere with the discretion of the investigating officer to determine the specificity and
adequacy of the averments in the complaint filed, except in very exceptional
circumstances, 28 which do not obtain here.

Therefore, private respondents' act of filing a petition for certiorari and prohibition before the
Regional Trial Court was rather untimely and uncalled for, not only because private respondents
failed to exhaust their administrative remedies but also because the grounds cited in their
petition before the trial court were highly speculative -- more fancied than real.

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Finally, Hernandez v. Albano (19 SCRA 95), cited by the majority to support the conclusion that
preliminary investigation can be stayed by the courts, clearly states that preliminary investigation
can be stayed by court order only in extreme cases. Hernandez also states that:

By statute, the prosecuting officer of the City of Manila and his assistants are
empowered to investigate crimes committed within the city's territorial
jurisdiction. Not a mere privilege, it is the sworn duty of a Fiscal to conduct an
investigation of a criminal charge filed with his office. The power to investigate
postulates the other obligation on the part of the Fiscal to investigate promptly
and file the case of as speedily. Public interest -- the protection of society -- so
demands. Agreeably to the foregoing, a
rule -- now of long standing and frequent application -- was formulated that
ordinarily criminal prosecution may not be blocked by court prohibition or
injunction. Really, if at every turn investigation of a crime will be halted by a court
order, the administration of criminal justice will meet with an undue setback.
Indeed, the investigative power of the Fiscal may suffer such a tremendous
shrinkage that it may end up in hollow sound rather than as a part and parcel of
the machinery of criminal justice.

It should be noted that while Hernandez lays down the extreme grounds when preliminary
investigation of criminal offenses may be restrained by the courts, the dispositive portion of the
decision affirmed the decision of the trial court dismissing a petition for certiorari and prohibition
with prayer for preliminary injunction filed to stay the preliminary investigation of criminal
complaints against petitioner Hernandez.

The other case cited by the majority to support its decision in this case, Fortun
v. Labang 29 involves criminal complaints filed against a judge of the Court of First Instance by
disgruntled lawyers who had lost their cases in the judge's sala. Clearly, the basis for the Court to
stay preliminary investigation in Fortun was a finding that said complaints were filed merely as a
form of harassment against the judge and which "could have no other purpose than to place
petitioner-judge in contempt and disrepute". The factual situation in the case at bar is poles apart
from the factual situation in Fortun.

Further, in Fortun there was an express finding by the Court that complaints against judges of the
Courts of First Instance are properly filed with the Supreme Court under Executive Order No. 264
(1970) since the Court is considered as the department head of the judiciary. In the present case
it cannot be disputed that jurisdiction to conduct preliminary investigation over fraudulent tax
evasion cases lies with the state prosecutors (fiscals).

It cannot therefore be denied that neither Hernandez nor Fortun supports with any plausibility
the majority's disposition of the issues in the present case. On the other hand, it appears to me
all too clearly that the majority opinion, in this case, has altered the entire rationale and concept
of preliminary investigation of alleged criminal offenses. That alteration has, of course, served
the purposes of distinguished private respondents. But I will have no part in the shocking process

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MAS
especially in light of the fact that Government cries out that the people have
been cheated and defrauded of their taxes to the tune allegedly of P25.6 billion pesos, and yet,
it is not given by this Court even a beggar's chance to prove it!

13. There is great and vital public interest in the successful investigation and prosecution of
criminal offenses involving fraudulent tax evasion. Said public interest is much more compelling
in the present case since private respondents are not only accused of violating tax and penal laws
but are also, as a consequence of such violations, possibly depriving the government of a primary
source of revenue so essential to the life, growth and development of the nation and for the
prestation of essential services to the people.

14. It should be made clear, at this point, however, that this opinion is not a pre-judgment or pre-
determination of private respondents' guilt of the offense charged. No one, not even the
prosecutors investigating the cases for fraudulent tax evasion, is, at this stage of the proceedings,
when private respondents have yet to file their counter-affidavits, in a position to determine and
state with finality or conclusiveness whether or not private respondents are guilty of the offense
charged in the BIR complaints, now with the DOJ Revenue Cases Task Force. It is precisely through
the preliminary investigation that the DOJ Task Force on Revenue Cases can determine whether
or not there are grounds to file informations in court or to dismiss the BIR complaints.

15. I see no grave abuse of discretion committed by the state prosecutors in requiring private
respondents to submit counter-affidavits to the complaints for fraudulent tax evasion and to
determine the existence or absence of probable criminal liability.

The Rules on Criminal Procedure do not even require, as a condition sine qua non to the validity
of a preliminary investigation, the presence of the respondent as long as efforts to reach him are
made and an opportunity to controvert the complainant's evidence is accorded him. The purpose
of the rule is to check attempts of unscrupulous respondents to thwart criminal investigations by
not appearing or employing dilatory tactics. 30

16. Since the preliminary investigation in the DOJ Revenue Cases Task Force against private
respondents for alleged fraudulent tax evasion is well within its jurisdiction and constitutes no
grave abuse of discretion, it was in fact the respondent trial court that committed grave abuse of
discretion, amounting to lack or excess of jurisdiction, when it stayed such preliminary
investigation.

17. The successful prosecution of criminal offenders is not only a right but the duty of the state.
Only when the state's acts clearly violate constitutional rights can the courts step in to interfere
with the state's exercise of such right and performance of such duty. I am indubitably impressed
that there is no violation of private respondents' constitutional rights in this case.

18. Lastly, the consolidation of the three (3) complaints in the DOJ against private respondents
should be allowed since they all involve the same scheme allegedly used by private respondents
to fraudulently evade payment of taxes. Consolidation will not only avoid multiplicity of suits but

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MAS
will also enable private respondents to more conveniently prepare whatever responsive
pleadings are required or expected of them.

It is, therefore, my considered view that the decision of the Court of Appeals of 19 December
1994 in CA G.R. SP No. 33599 should be SET ASIDE. The respondent trial court should be
ENJOINED from proceeding in any manner in Civil Case No. Q-94-19790, or at least until further
orders from this Court.

The preliminary investigation of the BIR complaints docketed as I.S. Nos. 93-508, 93-17942 and
93-584 with the Department of Justice Revenue Cases Task Force, being constitutionally and
legally in order, should be allowed to resume until their final conclusion or completion, with
private respondents given a non-extendible period of ten (10) days from notice to submit to the
investigating panel their respective counter-affidavits and supporting documents, if any.

VITUG, J., dissenting:

I see in the petition the overriding issue of whether or not judicial relief could be resorted to in
order to stop state prosecutors from going through with their investigation of complaints lodged
against private respondents. Almost invariably, this Court has resolved not to unduly interfere,
let alone to peremptorily prevent, the prosecuting agencies or offices of the government in their
investigatorial work or in their own evaluation of the results of investigation. It would indeed be,
in my view, an act precipitate for the courts to take on a case even before the complaint or
information is filed by the prosecution. Of course, one cannot preclude the possibility that at
times compelling reasons may dictate otherwise; I do not think, however, that the instant case
could be the right occasion for it.

While I do understand the concern expressed by some of my colleagues, i.e., that stopping the
trial court from now proceeding with Civil Case No. Q-94-9170 would, effectively, mean a
disposition of the main case without its merits having first been fully heard in the court below, in
this particular situation before the Court, however, the parties have since exhaustively and
adequately presented their respective cases. In the interest of good order, the practical measure
of enjoining the trial court from taking further cognizance of the case would not thus appear to
be really all that unwarranted.

A final word: The matter affecting the civil liability for the due payment of internal revenue taxes,
including the applicable remedies and proceedings in the determination thereof, must be
considered apart from and technically independent of the criminal aspect that may be brought
to bear in appropriate cases. A recourse in one is not necessarily preclusive of, nor would the
results thereof be conclusive on, the other.

Accordingly, I vote to grant the petition.

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Footnotes

1 Rollo, pp. 98-129.

2 Annexes "C," "D," "E," and "F," Petition, Rollo, pp. 128-145; 149-153.

3 Philippine Airlines, Inc. v. Confessor, 231 SCRA 41 (1993), Sinon v. Civil Service
Commission, 215 SCRA 410 (1992); Producers Bank of the Philippines v. NLRC, 165 SCRA
248 (1988); Litton Mills, Inc. v. Galleon Trader, Inc., 163 SCRA 494 (1988).

4 Rollo, pp. 345-346.

5 Id., at 13.

6 Id., at 16.

7 Id., at 264-325.

8 Id., al 402-405.

9 Id., at 412-415.

10 Id., at 416-421.

11 Rollo, pp. 539-545.

12 Id., at 156-263.

13 Id., at 18.

14 Annex "C," Petition, Rollo, pp. 128-142.

15 Rollo, p. 21.

16 Annex "D," Petition, Rollo, pp. 143-145.

17 Annex "E," Petition, Rollo, pp. 140-148.

18 Annex "F," Petition, Rollo, pp. 149-153.

19 Rollo, pp. 122-129.

20 Rollo, p. 33.

21 Private respondent's "Comment on the Petition for Review," pp. 7-10.

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22 Id.

23 Rollo, pp. 135-136.

24 BLACK'S DICTIONARY, 5th Ed., p. 1434.

25 People v. Sabio, Sr., 86 SCRA 568 (1978); Philippine Legal Encyclopedia, 1986, Ed., p.
352.

26 Rule 131, section 3(m), Rules of Court.

27 97 SCRA 877 (1980).

28 54 F 2d. 618.

29 192 SCRA 183 (1990).

30 19 SCRA 95 (1967).

31 104 SCRA 607 (1981).

32 Salonga v. Cruz Pao, 134 SCRA 438 (1985).

33 11 SCRA 568 (1964).

34 New Testament of Church of God v. CA, 246 SCRA 266 (1995); Santos v. CA, 152 SCRA
378 (1987); Villalon v. IAC, 144 SCRA 443 (1986).

BELLOSILLO, J., concurring and dissenting:

1 Order of 25 January 1994, p. 11.

2 Section 3, Rule 58, Rules of Court, provides that "[a] preliminary injunction may be
granted at any time after the commencement of the action and before judgment, when
it is established: (a) That the plaintiff is entitled to the relief demanded, and the whole or
part of such relief consists in restraining the commission or continuance of the acts
complained of, or in the performance of an act or acts, either for a limited period or
perpetually; (b) That the commission or continuance of some act complained of during
the litigation or the non-performance thereof would probably work injustice to the
plaintiff; or (c) That the defendant is doing, threatens, or is about to do, or is procuring or
suffering to be done, some act probably in violation of the plaintiff's rights respecting the
subject of the action, and tending to render the judgment ineffectual."

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3 Searth Commodities Corporation v. Court of Appeals, G.R. No. 64220, 31 March 1992,
207 SCRA 622; S & A Gaisano Incorporated v. Judge Hidalgo, G.R. No. 80397, 10 December
1990, 192 SCRA 224; Government Service Insurance System v. Judge Florendo, No. L-
48603, 29 September 1989, 178 SCRA 76; Genoblazo v. Court of Appeals, G.R. No. 79303,
20 June 1989, 174 SCRA 124; Belisle Investment and Finance Co. v. State Investment
House, Inc., G.R. No. 71917, 30 June 1987, 151 SCRA 630; Yaptinchay v. Judge Torres, No.
L-26462, 9 June 1969, 28 SCRA 489; Detective & Protective Bureau, Inc. v. Judge Cloribel,
No. L-23428, 29 November 1968, 26 SCRA 255; North Negros Sugar Co. v. Hidalgo, 63 Phil.
664 (1936).

4 Section 7, Rule 58, Rules of Court, provides that "[a]fter hearing on the merits the court
may grant or refuse, continue, modify or dissolve the injunction as justice may require."

5 Detective & Protective Bureau, Inc. v. Judge Cloribel, see Note 3.

6 Santos v. Court of Appeals, G.R. No. 61218, 23 September 1992, 214 SCRA 162.

7 Decision of respondent Court of Appeals, p. 29, citing Confederation of Citizens Labor


Union v. NLRC, Nos. L-38955-56, 31 October 1974, 60 SCRA 450; Paredes v. Commission
on Audit, G.R. No. 88177, 4 December 1990, 192 SCRA 84; and Bustamante v. Commission
on Audit, G.R. No. 103309, 27 November 1992, 216 SCRA 134.

8 Ibid., citing Young v. Sulit, G.R. No. 57839, 27 June 1988, 162 SCRA 659; Filinvest Credit
Corp. v. Intermediate Appellate Court, G.R. No. 65935, 30 September 1988, 166 SCRA 155;
and Pure Foods Corp. v. NLRC, G.R. No. 78591, 21 March 1989, 171 SCRA 415.

9 Searth Commodities Corporation v. Court of Appeals, See Note 3; Rivas v. Securities and
Exchange Commission, G.R. No. 53772, 4 October 1990, 190 SCRA 295; Government
Service Insurance System v. Judge Florendo, See Note 3; Ortigas & Company Limited
Partnership v. Court of Appeals, G.R. No. 79128, 16 June 1988, 162 SCRA 165.

10 No. L-28896, 17 February 1988, 158 SCRA 9.

11 G.R. Nos. 69863-65, 10 December 1990, 192 SCRA 183.

12 G.R. Nos. 103446-47, 30 August 1993, 225 SCRA 725.

PADILLA, J., dissenting:

1 Rollo, p. 13.

2 Rollo, p. 16.

3 Rollo, pp. 264-325.

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MAS
4 Rollo, pp. 402-403.

5 Rollo, pp. 404-415.

6 Rollo, pp. 539-545.

7 Rollo, pp. 156-263.

8 Rollo, p. 18.

9 Rollo, pp. 128-142.

10 Rollo, p. 21.

11 Annex "A" of the petition.

12 Rollo, p. 33.

13 Guingona v. City Fiscal of Manila, G.R. No. L-60033, 18 July 1985, 137 SCRA 597.

14 Hernandez v. Albano, 125 Phil. 513.

15 Ungab v. Cusi, L-41919-24, 30 May 1980, 97 SCRA 877.

16 Astorga v. Puno, L-25600, 30 September 1975, 67 SCRA 182.

17 Paderanga vs. Drilon, 196 SCRA 86, 92-93.

18 Guingona, Jr. v. City Fiscal of Manila, Supra.

19 Ungab vs. Cusi, Jr., L-41919-24, 30 May 1980, 97 SCRA 877, 884.

20 Commission of Internal Revenue vs. Court of Appeals, Court of Tax Appeals and
Fortune Tobacco Corp., G.R. No. 119761.

21 Respondents' Comment, p. 20.

22 Republic v. Intermediate Appellate Court, 209 SCRA 90; Sharp International Marketing
v. Court of Appeals, 201 SCRA 299.

23 Brocka v. Enrile, 192 SCRA 183, 10 December 1990.

24 Supra.

25 Francisco, Ricardo, Criminal Procedure 80 (1994).

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MAS
26 U.S. vs. Grant, 18 Phil. 122, 147.

27 IV Moran, Comments on the Rules of Court (1963) p. 91.

28 Ocampo, IV v. Ombudsman, G.R. Nos. 103446-47, 30 August 1993, 225 SCRA 725.

29 104 SCRA 607 (1981).

30 Mercado v. The Honorable Court of Appeals, G.R. No. 109036, 5 July 1995, 245 SCRA
594.

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MAS
8. CIR vs PHIL. GLOBAL COMMUNICATION, INC.
G.R. No. 167146; October 31, 2006

Republic of the Philippines


SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 167146 October 31, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
PHILIPPINE GLOBAL COMMUNICATION, INC., respondent.

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari, under Rule 45 of the Rules of Court, seeking to set aside
the en banc Decision of the Court of Tax Appeals (CTA) in CTA EB No. 37 dated 22 February
2005,1 ordering the petitioner to withdraw and cancel Assessment Notice No. 000688-80-7333
issued against respondent Philippine Global Communication, Inc. for its 1990 income tax
deficiency. The CTA, in its assailed en banc Decision, affirmed the Decision of the First Division of
the CTA dated 9 June 20042 and its Resolution dated 22 September 2004 in C.T.A. Case No. 6568.

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

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

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

On 15 November 2002, respondent filed a Petition for Review with the CTA. After due notice and
hearing, the CTA rendered a Decision in favor of respondent on 9 June 2004. 6 The CTA ruled on
the primary issue of prescription and found it unnecessary to decide the issues on the validity
and propriety of the assessment. It decided that the protest letters filed by the respondent
cannot constitute a request for reinvestigation, hence, they cannot toll the running of the
prescriptive period to collect the assessed deficiency income tax.7 Thus, since more than three
years had lapsed from the time Assessment Notice No. 000688-80-7333 was issued in 1994, the
CIRs right to collect the same has prescribed in conformity with Section 269 of the National
Internal Revenue Code of 19778(Tax Code of 1977). The dispositive portion of this decision reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the


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

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

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

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

THE COURT OF TAX APPEALS, SITTING EN BANC, COMMITTED REVERSIBLE ERROR IN


AFFIRMING THE ASSAILED DECISION AND RESOLUTION IN CTA CASE NO. 6568 DECLARING
THAT THE RIGHT OF THE GOVERNMENT TO COLLECT THE DEFICIENCY INCOME TAX FROM
RESPONDENT FOR THE YEAR 1990 HAS PRESCRIBED

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

B. THE REQUESTS FOR REINVESTIGATION OF RESPONDENT WERE GRANTED BY


THE BUREAU OF INTERNAL REVENUE.12

This Court finds no merit in this Petition.

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

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


taxes. x x x

xxxx

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

The law prescribed a period of three years from the date the return was actually filed or from the
last date prescribed by law for the filing of such return, whichever came later, within which the
BIR may assess a national internal revenue tax.13 However, the law increased the prescriptive
period to assess or to begin a court proceeding for the collection without an assessment to ten
years when a false or fraudulent return was filed with the intent of evading the tax or when no
return was filed at all.14 In such cases, the ten-year period began to run only from the date of
discovery by the BIR of the falsity, fraud or omission.

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

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

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

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

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

Prescription in the assessment and in the collection of taxes is provided by the Legislature
for the benefit of both the Government and the taxpayer; for the Government for the
purpose of expediting the collection of taxes, so that the agency charged with the
assessment and collection may not tarry too long or indefinitely to the prejudice of the
interests of the Government, which needs taxes to run it; and for the taxpayer so that
within a reasonable time after filing his return, he may know the amount of the
assessment he is required to pay, whether or not such assessment is well founded and
reasonable so that he may either pay the amount of the assessment or contest its validity
in court x x x. It would surely be prejudicial to the interest of the taxpayer for the
Government collecting agency to unduly delay the assessment and the collection because
by the time the collecting agency finally gets around to making the assessment or making
the collection, the taxpayer may then have lost his papers and books to support his claim
and contest that of the Government, and what is more, the tax is in the meantime
accumulating interest which the taxpayer eventually has to pay .

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

The law prescribing a limitation of actions for the collection of the income tax is beneficial
both to the Government and to its citizens; to the Government because tax officers would
be obliged to act promptly in the making of assessment, and to citizens because after the
lapse of the period of prescription citizens would have a feeling of security against

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unscrupulous tax agents who will always find an excuse to inspect the books of taxpayers,
not to determine the latters real liability, but to take advantage of every opportunity to
molest, peaceful, law-abiding citizens. Without such legal defense taxpayers would
furthermore be under obligation to always keep their books and keep them open for
inspection subject to harassment by unscrupulous tax agents. The law on prescription
being a remedial measure should be interpreted in a way conducive to bringing about the
beneficient purpose of affording protection to the taxpayer within the contemplation of
the Commission which recommended the approval of the law.

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

Though the statute of limitations on assessment and collection of national internal


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

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

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

Section 224. Suspension of running of statute. The running of the statute of limitation provided
in Sections 268 and 269 on the making of assessments and the beginning of distraint or levy or a
proceeding in court for collection in respect of any deficiency, shall be suspended for the period
during which the Commissioner is prohibited from making the assessment or beginning distraint
or levy or a proceeding in court and for sixty days thereafter; when the taxpayer requests for a
reinvestigation which is granted by the Commissioner; when the taxpayer cannot be located in
the address given by him in the return filed upon which a tax is being assessed or collected x x x.
(Emphasis supplied.)

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

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

Section 6. Protest. - The taxpayer may protest administratively an assessment by filing a


written request for reconsideration or reinvestigation specifying the following particulars:

xxxx

For the purpose of protest herein

(a) Request for reconsideration-- refers to a plea for a re-evaluation of an assessment on


the basis of existing records without need of additional evidence. It may involve both a
question of fact or of law or both.

(b) Request for reinvestigationrefers to a plea for re-evaluation of an assessment on the


basis of newly-discovered evidence or additional evidence that a taxpayer intends to
present in the investigation. It may also involve a question of fact or law or both.

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

Undoubtedly, a reinvestigation, which entails the reception and evaluation of additional


evidence, will take more time than a reconsideration of a tax assessment, which will be
limited to the evidence already at hand; this justifies why the former can suspend the
running of the statute of limitations on collection of the assessed tax, while the latter
cannot.

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

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

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

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

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

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

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

It is true that the Collector revised the original assessment on February 9, 1955; and
appellant avers that this revision was invalid in that it was not made within the five-year

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prescriptive period provided by law (Collector vs. Pineda, 112 Phil. 321). But that fact is
that the revised assessment was merely a result of petitioner Querols requests for
reconsideration of the original assessment, contained in his letters of December 14, 1951
and May 25, 1953. The records of the Bureau of Internal Revenue show that after
receiving the letters, the Bureau conducted a reinvestigation of petitioners tax liabilities,
and, in fact, sent a tax examiner to San Fernando, La Union, for that purpose; that because
of the examiners report, the Bureau revised the original assessment, x x x. In other words,
the reconsideration was granted in part, and the original assessment was altered.
Consequently, the period between the petition for reconsideration and the revised
assessment should be subtracted from the total prescriptive period (Republic vs. Ablaza,
108 Phil 1105).

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

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

xxxx

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

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

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

In this case, the BIR admitted that there was no new or additional evidence presented.
Considering that the BIR issued its Preliminary Assessment Notice on 13 April 1994 and its Formal
Assessment Notice on 14 April 1994, just one day before the three-year prescription period for
issuing the assessment expired on 15 April 1994, it had ample time to make a factually and legally

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well-founded assessment. Added to the fact that the Final Decision that the CIR issued on 8
October 2002 merely affirmed its earlier findings, whatever examination that the BIR may have
conducted cannot possibly outlast the entire three-year prescriptive period provided by law to
collect the assessed tax, not to mention the eight years it actually took the BIR to decide the
respondents protest. The factual and legal issues involved in the assessment are relatively
simple, that is, whether certain income tax deductions should be disallowed, mostly for failure
to pay withholding taxes. Thus, there is no reason to suspend the running of the statute of
limitations in this case.

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

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

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

xxxx

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

This rationale is not applicable to the present case where the respondent did nothing to prevent
the BIR from collecting the tax. It did not present to the BIR any new evidence for its re-
evaluation. At the earliest opportunity, respondent insisted that the assessment was invalid and

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made clear to the BIR its refusal to produce documents that the BIR requested. On the other
hand, the BIR also communicated to the respondent its unwavering stance that its assessment is
correct. Given that both parties were at a deadlock, the next logical step would have been for the
BIR to issue a Decision denying the respondents protest and to initiate proceedings for the
collection of the assessed tax and, thus, allow the respondent, should it so choose, to contest the
assessment before the CTA. Postponing the collection for eight long years could not possibly
make the taxpayer feel that the demand was not unreasonable or that no harassment or injustice
is meant by the Government. There was no legal, or even a moral, obligation preventing the CIR
from collecting the assessed tax. In a similar case, Cordero v. Conda,31 the Court did not suspend
the running of the prescription period where the acts of the taxpayer did not prevent the
government from collecting the tax.

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

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

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

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

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

SO ORDERED.

Panganiban, C.J. (Chairperson), Ynares-Santiago, Austria-Martinez, and Callejo, Sr., JJ., concur.

Footnotes

1Penned by Associate Justice Juanito C. Castaeda, Jr. with Presiding Justice Ernesto D.
Acosta, Associate Justice Erlinda P. Uy, Associate Justice Lovell R. Baustista, Associate
Justice Olga Palanca-Enriquez and Associate Justice Caesar A. Casanova, concurring. Rollo,
pp. 29-36.

2 Id. at 37-45.

3 Id. at 37-38.

4 Id. at 38.

5 Id. at 38.

6 Id. at 37-45.

7 Id. at 44.

8The CTA inadvertently referred to this provision as Section 223, which is the section
where this provision falls under the present tax code, the National Internal Revenue Code
of 1997. However, in the Tax Code of 1977, as amended, which was the law applicable to
this case, this provision was under Section 269, which reads:

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


taxes. x x x

xxxx

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.

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9 Rollo, p. 45.

10 Id. at 47-53.

11 Id. at 35.

12 Id. at 15.

13 Section 268. Period of limitation upon assessment and collection. Except as provided
in the succeeding section, internal revenue taxes shall be assessed within three years after
the last day prescribed by law for the filing of the return, and no proceeding in court
without assessment for the collection of such taxes shall be begun after the expiration of
such period: Provided, That in a case where a return is filed beyond the period prescribed
by law, the three-year period shall be counted from the day the return was filed. For the
purposes of this section, a return filed before the last day prescribed by law for the filing
thereof shall be considered as filed on such last day.

14 Section 269. Exceptions as to period of limitations of assessment and collection of


taxes.(a) In the case of a false or fraudulent return with intent to evade or of 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 years after the discovery of
the falsity, fraud or omission x x x.

15Section 269. Exceptions as to the period of limitation of assessment and collection of


taxes. x x x

xxxx

(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.

16Bank of the Philippine Islands v. Commissioner of Internal Revenue, G.R. No. 139736,
17 October 2005, 473 SCRA 205, 223.

17 Republic of the Philippines v. Ablaza, 108 Phil. 1105, 1107-1108 (1960).

18 104 Phil. 819, 833-834 (1958).

19 108 Phil. 1105, 1108 (1960).

20 G.R. No. 139736, 17 October 2005, 473 SCRA 205, 225.

21 363 Phil. 169, 178 (1999).

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22 G.R. No. 139736, 17 October 2005, 473 SCRA 205, 230-231.

23 Rollo, p. 104

24 104 Phil. 819, 822-823 (1958).

25 116 Phil. 615, 618-619 (1962).

26 117 Phil. 575, 578 (1963).

27 117 Phil. 892, 895 (1963).

28 119 Phil. 604, 610 (1964).

29 Revenue Regulations No. 12-85 provides that :

Section 7. When to File Protest A protest must be filed within thirty (30) days from
receipt of the assessment.

Section 9. Finality of Assessments If a taxpayer who receives an assessment from the


Bureau of Internal Revenue fails to file a protest within the period prescribed in Section 7
of these regulations, the said assessment shall become final and unappealable and the
taxpayer is thereby precluded from disputing the assessment.

30Collector of Internal Revenue v. Suyoc Consolidated Mining Company, 104 Phil. 819,
823 (1958).

31 124 Phil. 927, 932 (1966).

32 G.R. No. L-18896, 17 February 1988, 158 SCRA 9, 11.

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9. ANGELES CITY vs ANGELES CITY ELECTRIC CORPORATION
G.R. No. 166134; June 29, 2010

Republic of the Philippines


SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 166134 June 29, 2010

ANGELES CITY, Petitioner,


vs.
ANGELES CITY ELECTRIC CORPORATION and REGIONAL TRIAL COURT BRANCH 57, ANGELES
CITY, Respondents.

DECISION

DEL CASTILLO, J.:

The prohibition on the issuance of a writ of injunction to enjoin the collection of taxes applies
only to national internal revenue taxes, and not to local taxes.

This Petition1 for Certiorari under Rule 65 of the Rules of Court seeks to set aside the Writ of
Preliminary Injunction issued by the Regional Trial Court (RTC) of Angeles City, Branch 57, in Civil
Case No. 11401, enjoining Angeles City and its City Treasurer from levying, seizing, disposing and
selling at public auction the properties owned by Angeles Electric Corporation (AEC).

Factual Antecedents

On June 18, 1964, AEC was granted a legislative franchise under Republic Act No. (RA) 4079 2 to
construct, maintain and operate an electric light, heat, and power system for the purpose of
generating and distributing electric light, heat and power for sale in Angeles City, Pampanga.
Pursuant to Section 3-A thereof,3 AECs payment of franchise tax for gross earnings from electric
current sold was in lieu of all taxes, fees and assessments.

On September 11, 1974, Presidential Decree No. (PD) 551 reduced the franchise tax of electric
franchise holders. Section 1 of PD 551 provided that:

SECTION 1. Any provision of law or local ordinance to the contrary notwithstanding, the franchise
tax payable by all grantees of franchises to generate, distribute and sell electric current for light,

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heat and power shall be two percent (2%) of their gross receipts received from the sale of electric
current and from transactions incident to the generation, distribution and sale of electric current.

Such franchise tax shall be payable to the Commissioner of Internal Revenue or his duly
authorized representative on or before the twentieth day of the month following the end of each
calendar quarter or month as may be provided in the respective franchise or pertinent municipal
regulation and shall, any provision of the Local Tax Code or any other law to the contrary
notwithstanding, be in lieu of all taxes and assessments of whatever nature imposed by any
national or local authority on earnings, receipts, income and privilege of generation, distribution
and sale of electric current.

On January 1, 1992, RA 7160 or the Local Government Code (LGC) of 1991 was passed into law,
conferring upon provinces and cities the power, among others, to impose tax on businesses
enjoying franchise.4 In accordance with the LGC, the Sangguniang Panlungsod of Angeles City
enacted on December 23, 1993 Tax Ordinance No. 33, S-93, otherwise known as the Revised
Revenue Code of Angeles City (RRCAC).

On February 7, 1994, a petition seeking the reduction of the tax rates and a review of the
provisions of the RRCAC was filed with the Sangguniang Panlungsod by Metro Angeles Chamber
of Commerce and Industry Inc. (MACCI) of which AEC is a member. There being no action taken
by the Sangguniang Panlungsod on the matter, MACCI elevated the petition5 to the Department
of Finance, which referred the same to the Bureau of Local Government Finance (BLGF). In the
petition, MACCI alleged that the RRCAC is oppressive, excessive, unjust and confiscatory; that it
was published only once, simultaneously on January 22, 1994; and that no public hearings were
conducted prior to its enactment. Acting on the petition, the BLGF issued a First Indorsement 6 to
the City Treasurer of Angeles City, instructing the latter to make representations with
the Sangguniang Panlungsod for the appropriate amendment of the RRCAC in order to ensure
compliance with the provisions of the LGC, and to make a report on the action taken within five
days.

Thereafter, starting July 1995, AEC has been paying the local franchise tax to the Office of the
City Treasurer on a quarterly basis, in addition to the national franchise tax it pays every quarter
to the Bureau of Internal Revenue (BIR).

Proceedings before the City Treasurer

On January 22, 2004, the City Treasurer issued a Notice of Assessment 7 to AEC for payment of
business tax, license fee and other charges for the period 1993 to 2004 in the total amount
of P94,861,194.10. Within the period prescribed by law, AEC protested the assessment claiming
that:

(a) pursuant to RA 4079, it is exempt from paying local business tax;

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(b) since it is already paying franchise tax on business, the payment of business tax would
result in double taxation;

(c) the period to assess had prescribed because under the LGC, taxes and fees can only be
assessed and collected within five (5) years from the date they become due; and

(d) the assessment and collection of taxes under the RRCAC cannot be made retroactive
to 1993 or prior to its effectivity.8

On February 17, 2004, the City Treasurer denied the protest for lack of merit and requested AEC
to settle its tax liabilities.9

Proceedings before the RTC

Aggrieved, AEC appealed the denial of its protest to the RTC of Angeles City via a Petition for
Declaratory Relief,10 docketed as Civil Case No. 11401.

On April 5, 2004, the City Treasurer levied on the real properties of AEC.11 A Notice of Auction
Sale12 was published and posted announcing that a public auction of the levied properties of AEC
would be held on May 7, 2004.

This prompted AEC to file with the RTC, where the petition for declaratory relief was pending, an
Urgent Motion for Issuance of Temporary Restraining Order and/or Writ of Preliminary
Injunction13 to enjoin Angeles City and its City Treasurer from levying, annotating the levy,
seizing, confiscating, garnishing, selling and disposing at public auction the properties of AEC.

Meanwhile, in response to the petition for declaratory relief filed by AEC, Angeles City and its
City Treasurer filed an Answer with Counterclaim14 to which AEC filed a Reply.15

After due notice and hearing, the RTC issued a Temporary Restraining Order (TRO)16 on May 4,
2004, followed by an Order17 dated May 24, 2004 granting the issuance of a Writ of Preliminary
Injunction, conditioned upon the filing of a bond in the amount of P10,000,000.00. Upon AECs
posting of the required bond, the RTC issued a Writ of Preliminary Injunction on May 28,
2004,18 which was amended on May 31, 2004 due to some clerical errors.19

On August 5, 2004, Angeles City and its City Treasurer filed a "Motion for Dissolution of
Preliminary Injunction and Motion for Reconsideration of the Order dated May 24,
2004,"20 which was opposed by AEC.21

Finding no compelling reason to disturb and reconsider its previous findings, the RTC denied the
joint motion on October 14, 2004.22

Issue

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Being a special civil action for certiorari, the issue in the instant case is limited to the
determination of whether the RTC gravely abused its discretion in issuing the writ of preliminary
injunction enjoining Angeles City and its City Treasurer from levying, selling, and disposing the
properties of AEC. All other matters pertaining to the validity of the tax assessment and AECs tax
exemption must therefore be left for the determination of the RTC where the main case is
pending decision.

Petitioners Arguments

Petitioners main argument is that the collection of taxes cannot be enjoined by the RTC,
citing Valley Trading Co., Inc. v. Court of First Instance of Isabela, Branch II,23 wherein the lower
courts denial of a motion for the issuance of a writ of preliminary injunction to enjoin the
collection of a local tax was upheld. Petitioner further reasons that since the levy and auction of
the properties of a delinquent taxpayer are proper and lawful acts specifically allowed by the
LGC, these cannot be the subject of an injunctive writ. Petitioner likewise insists that AEC must
first pay the tax before it can protest the assessment. Finally, petitioner contends that the tax
exemption claimed by AEC has no legal basis because RA 4079 has been expressly repealed by
the LGC.

Private respondents Arguments

Private respondent AEC on the other hand asserts that there was no grave abuse of discretion on
the part of the RTC in issuing the writ of preliminary injunction because it was issued after due
notice and hearing, and was necessary to prevent the petition from becoming moot. In addition,
AEC claims that the issuance of the writ of injunction was proper since the tax assessment issued
by the City Treasurer is not yet final, having been seasonably appealed pursuant to Section
19524 of the LGC. AEC likewise points out that following the case of Pantoja v.
David,25 proceedings to invalidate a warrant of distraint and levy to restrain the collection of
taxes do not violate the prohibition against injunction to restrain the collection of taxes because
the proceedings are directed at the right of the City Treasurer to collect the tax by distraint or
levy. As to its tax liability, AEC maintains that it is exempt from paying local business tax. In any
case, AEC counters that the issue of whether it is liable to pay the assessed local business tax is a
factual issue that should be determined by the RTC and not by the Supreme Court via a petition
for certiorari under Rule 65 of the Rules of Court.

Our Ruling

We find the petition bereft of merit.

The LGC does not specifically prohibit an injunction enjoining the collection of taxes

A principle deeply embedded in our jurisprudence is that taxes being the lifeblood of the
government should be collected promptly,26 without unnecessary hindrance27 or delay.28 In line
with this principle, the National Internal Revenue Code of 1997 (NIRC) expressly provides that no

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court shall have the authority to grant an injunction to restrain the collection of any national
internal revenue tax, fee or charge imposed by the code.29 An exception to this rule obtains only
when in the opinion of the Court of Tax Appeals (CTA) the collection thereof may jeopardize the
interest of the government and/or the taxpayer.30

The situation, however, is different in the case of the collection of local taxes as there is no
express provision in the LGC prohibiting courts from issuing an injunction to restrain local
governments from collecting taxes. Thus, in the case of Valley Trading Co., Inc. v. Court of First
Instance of Isabela, Branch II, cited by the petitioner, we ruled that:

Unlike the National Internal Revenue Code, the Local Tax Code31 does not contain any specific
provision prohibiting courts from enjoining the collection of local taxes. Such statutory lapse or
intent, however it may be viewed, may have allowed preliminary injunction where local taxes are
involved but cannot negate the procedural rules and requirements under Rule 58. 32

In light of the foregoing, petitioners reliance on the above-cited case to support its view that the
collection of taxes cannot be enjoined is misplaced. The lower courts denial of the motion for
the issuance of a writ of preliminary injunction to enjoin the collection of the local tax was upheld
in that case, not because courts are prohibited from granting such injunction, but because the
circumstances required for the issuance of writ of injunction were not present.

Nevertheless, it must be emphasized that although there is no express prohibition in the LGC,
injunctions enjoining the collection of local taxes are frowned upon. Courts therefore should
exercise extreme caution in issuing such injunctions.

No grave abuse of discretion was committed by the RTC

Section 3, Rule 58, of the Rules of Court lays down the requirements for the issuance of a writ of
preliminary injunction, viz:

(a) That the applicant is entitled to the relief demanded, and the whole or part of such
relief consists in restraining the commission or continuance of the acts complained of, or
in the performance of an act or acts, either for a limited period or perpetually;

(b) That the commission, continuance or non-performance of the act or acts complained
of during the litigation would probably work injustice to the applicant; or

(c) That a party, court, or agency or a person is doing, threatening, or attempting to do,
or is procuring or suffering to be done, some act or acts probably in violation of the rights
of the applicant respecting the subject of the action or proceeding, and tending to render
the judgment ineffectual.

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Two requisites must exist to warrant the issuance of a writ of preliminary injunction, namely: (1)
the existence of a clear and unmistakable right that must be protected; and (2) an urgent and
paramount necessity for the writ to prevent serious damage.33

In issuing the injunction, the RTC ratiocinated that:

It is very evident on record that petitioner34 resorted and filed an urgent motion for issuance of
a temporary restraining order and preliminary injunction to stop the scheduled auction sale only
when a warrant of levy was issued and published in the newspaper setting the auction sale of
petitioners property by the City Treasurer, merely few weeks after the petition for declaratory
relief has been filed, because if the respondent will not be restrained, it will render this petition
moot and academic. To the mind of the Court, since there is no other plain, speedy and adequate
remedy available to the petitioner in the ordinary course of law except this application for a
temporary restraining order and/or writ of preliminary injunction to stop the auction sale and/or
to enjoin and/or restrain respondents from levying, annotating the levy, seizing, confiscating,
garnishing, selling and disposing at public auction the properties of petitioner, or otherwise
exercising other administrative remedies against the petitioner and its properties, this alone
justifies the move of the petitioner in seeking the injunctive reliefs sought for.

Petitioner in its petition is questioning the assessment or the ruling of the City Treasurer on the
business tax and fees, and not the local ordinance concerned. This being the case, the Court
opines that notice is not required to the Solicitor General since what is involved is just a violation
of a private right involving the right of ownership and possession of petitioners properties.
Petitioner, therefore, need not comply with Section 4, Rule 63 requiring such notice to the Office
of the Solicitor General.

The Court is fully aware of the Supreme Court pronouncement that injunction is not proper to
restrain the collection of taxes. The issue here as of the moment is the restraining of the
respondent from pursuing its auction sale of the petitioners properties. The right of ownership
and possession of the petitioner over the properties subject of the auction sale is at stake.

Respondents assert that not one of the witnesses presented by the petitioner have proven what
kind of right has been violated by the respondent, but merely mentioned of an injury which is
only a scenario based on speculation because of petitioners claim that electric power may be
disrupted.

Engr. Abordos testimony reveals and even his Affidavit Exhibit "S" showed that if the auction
sale will push thru, petitioner will not only lose control and operation of its facility, but its
employees will also be denied access to equipments vital to petitioners operations, and since
only the petitioner has the capability to operate Petersville sub station, there will be a massive
power failure or blackout which will adversely affect business and economy, if not lives and
properties in Angeles City and surrounding communities.

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Petitioner, thru its witnesses, in the hearing of the temporary restraining order, presented
sufficient and convincing evidence proving irreparable damages and injury which were already
elaborated in the temporary restraining order although the same may be realized only if the
auction sale will proceed. And unless prevented, restrained, and enjoined, grave and irreparable
damage will be suffered not only by the petitioner but all its electric consumers in Angeles, Clark,
Dau and Bacolor, Pampanga.

The purpose of injunction is to prevent injury and damage from being incurred, otherwise, it will
render any judgment in this case ineffectual.

"As an extraordinary remedy, injunction is calculated to preserve or maintain the status quo of
things and is generally availed of to prevent actual or threatened acts, until the merits of the case
can be heard" (Cagayan de Oro City Landless Res. Assn. Inc. vs. CA, 254 SCRA 220)

It appearing that the two essential requisites of an injunction have been satisfied, as there exists
a right on the part of the petitioner to be protected, its right[s] of ownership and possession of
the properties subject of the auction sale, and that the acts (conducting an auction sale) against
which the injunction is to be directed, are violative of the said rights of the petitioner, the Court
has no other recourse but to grant the prayer for the issuance of a writ of preliminary injunction
considering that if the respondent will not be restrained from doing the acts complained of, it
will preempt the Court from properly adjudicating on the merits the various issues between the
parties, and will render moot and academic the proceedings before this court.35

As a rule, the issuance of a preliminary injunction rests entirely within the discretion of the court
taking cognizance of the case and will not be interfered with, except where there is grave abuse
of discretion committed by the court.36 For grave abuse of discretion to prosper as a ground
for certiorari, it must be demonstrated that the lower court or tribunal has exercised its power
in an arbitrary and despotic manner, by reason of passion or personal hostility, and it must be
patent and gross as would amount to an evasion or to a unilateral refusal to perform the duty
enjoined or to act in contemplation of law.37 In other words, mere abuse of discretion is not
enough.381avvph!1

Guided by the foregoing, we find no grave abuse of discretion on the part of the RTC in issuing
the writ of injunction. Petitioner, who has the burden to prove grave abuse of discretion,39 failed
to show that the RTC acted arbitrarily and capriciously in granting the injunction. Neither was
petitioner able to prove that the injunction was issued without any factual or legal justification.
In assailing the injunction, petitioner primarily relied on the prohibition on the issuance of a writ
of injunction to restrain the collection of taxes. But as we have already said, there is no such
prohibition in the case of local taxes. Records also show that before issuing the injunction, the
RTC conducted a hearing where both parties were given the opportunity to present their
arguments. During the hearing, AEC was able to show that it had a clear and unmistakable legal
right over the properties to be levied and that it would sustain serious damage if these properties,
which are vital to its operations, would be sold at public auction. As we see it then, the writ of
injunction was properly issued.

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A final note. While we are mindful that the damage to a taxpayers property rights generally takes
a back seat to the paramount need of the State for funds to sustain governmental
functions,40 this rule finds no application in the instant case where the disputed tax assessment
is not yet due and demandable. Considering that AEC was able to appeal the denial of its protest
within the period prescribed under Section 195 of the LGC, the collection of business
taxes41 through levy at this time is, to our mind, hasty, if not premature.42 The issues of tax
exemption, double taxation, prescription and the alleged retroactive application of the RRCAC,
raised in the protest of AEC now pending with the RTC, must first be resolved before the
properties of AEC can be levied. In the meantime, AECs rights of ownership and possession must
be respected.

WHEREFORE, the petition is hereby DISMISSED.

SO ORDERED.

MARIANO C. DEL CASTILLO


Associate Justice

WE CONCUR:

RENATO C. CORONA
Chief Justice
Chairperson

PRESBITERO J. VELASCO, JR. TERESITA J. LEONARDO-DE CASTRO


Associate Justice Associate Justice

JOSE PORTUGAL PEREZ


Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions
in the above Decision had been reached in consultation before the case was assigned to the
writer of the opinion of the Courts Division.

RENATO C. CORONA
Chief Justice

Footnotes

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1 Rollo, pp. 3-17.

2 Amended by Republic Act No. 9381, which lapsed into law on March 9, 2010.

3 Sec. 3-A. The franchise tax paid for the gross earnings from electric current sold under
this franchise shall be in lieu of all taxes, fees and assessments of whatever authority now
and in the future upon privileges, capital stock, income, franchise, right of way, machinery
and equipment, poles, wires, transformers, watt-hour meters, insulators of the grantee
and all other property owned or operated by the grantee under this concession or
franchise, from which taxes and assessments the grantee is hereby expressly exempted.

4SECTION 137. Franchise Tax. Notwithstanding any exemption granted by any law or
other special law, the province may impose a tax on businesses enjoying a franchise, at
the rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts
for the preceding calendar year based on the incoming receipt, or realized, within its
territorial jurisdiction.

In the case of a newly started business, the tax shall not exceed one-twentieth
(1/20) of one percent (1%) of the capital investment. In the succeeding calendar
year, regardless of when the business started to operate, the tax shall be based
on the gross receipts for the preceding calendar year, or any fraction thereon, as
provided herein.

5 Rollo, pp. 63-73.

6 Id. at 74.

7 Id. at 81-91.

8 Id. at 92-96.

9 Id. at 103.

10Id. at 18-37; The Petition for Declaratory Relief filed by AEC should be considered as an
appeal under Section 195 of the LGC. In the case of CJH Development Corporation v.
Bureau of Internal Revenue, G.R. No. 172457, December 24, 2008, 575 SCRA 467, it was
ruled that courts do not have jurisdiction over petitions for declaratory relief involving tax
assessments.

11 Id. at 113-114.

12 Id. at 157-158.

13 Id. at 104-112.

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MAS
14 Id. at 124-131.

15 Records, pp. 120-124.

16 Rollo, pp. 132-137.

17 Id. at 138-143.

18 Records, pp. 154-155.

19 Id. at 157-158.

20 Rollo, pp. 144-150.

21 Records, pp. 190-194.

22 Rollo, pp. 151-154.

23 253 Phil. 494 (1989).

24 SECTION 195. Protest of Assessment. When the local treasurer or his duly authorized
representative finds that the correct taxes, fees, or charges have not been paid, he shall
issue a notice of assessment stating the nature of the tax, fee, or charge, the amount of
deficiency, the surcharges, interests and penalties. Within sixty (60) days from the receipt
of the notice of assessment, the taxpayer may file a written protest with the local
treasurer contesting the assessment; otherwise, the assessment shall become final and
executory. The local treasurer shall decide the protest within sixty (60) days from the time
of its filing. If the local treasurer finds the protest to be wholly or partly meritorious, he
shall issue a notice cancelling wholly or partially the assessment. However, if the local
treasurer finds the assessment to be wholly or partly correct, he shall deny the protest
wholly or partly with notice to the taxpayer. The taxpayer shall have thirty (30) days from
the receipt of the denial of the protest or from the lapse of the sixty-day (60) period
prescribed herein within which to appeal with the court of competent jurisdiction
otherwise the assessment becomes conclusive and unappealable.

25 111 Phil. 197, 199-200 (1961).

26Filipino Metals Corp. v. Secretary of the Dept. of Trade and Industry, 502 Phil. 191, 198
(2005).

27 Republic v. Caguioa, G.R. No. 168584, October 15, 2007, 536 SCRA 193, 223-224.

28Valley Trading Co., Inc. v. Court of First Instance of Isabela, Branch II, supra note 23 at
500.

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29 National Internal Revenue Code of 1997, Section 218.

30 Section 11 of RA 1125, as amended by Section 9 of RA 9282.

31 Now Local Government Code.

32Valley Trading Co., Inc. v. Court of First Instance of Isabela, Branch II, supra note 23 at
499.

33 Talento v. Escalada, Jr., G.R. No. 180884, June 27, 2008, 556 SCRA 491, 500.

34 Herein Private Respondent AEC.

35 Rollo, pp. 142-unpaged.

36 City of Naga v. Asuncion, G.R. No. 174042, July 9, 2008, 557 SCRA 528, 545.

37Levi Strauss (Phils.), Inc. v. Lim, G.R. No. 162311, December 4, 2008, 573 SCRA 25, 42-
43.

38Basmala v. Commission on Elections, G.R. No. 176724, October 6, 2008, 567 SCRA 664,
668.

39Office of the Ombudsman v. Magno, G.R. No. 178923, November 27, 2008, 572 SCRA
272, 286-287.

40Valley Trading Co., Inc. v. Court of First Instance of Isabela, Branch II, supra note 23 at
499-500.

41This should be distinguished from real property taxes. Section 231 of the LGC provides
that an appeal on assessments of real property made under the provision of the Code
shall, in no case, suspend the collection of the corresponding realty taxes on the property
involved.

42 Vitug, Jose C. and Acosta, Ernesto D., Tax Law and Jurisprudence,

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10. SECURITY BANK CORPORATION vs CIR
G.R. No. 130838; August 22, 2006

Republic of the Philippines


SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 130838 August 22, 2006

SECURITY BANK CORPORATION


(formerly SECURITY BANK AND TRUST COMPANY), Petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

GARCIA, J.:

Before us is this petition for review on certiorari to reverse, annul and/or nullify the
Decision 1 dated August 29, 1997 of the Court of Appeals (CA) which affirmed the January 12,
1996 Decision 2 and May 21, 1996 Resolution 3of the Court of Tax Appeals (CTA) in CTA Case No.
4784 adjudging herein petitioner Security Bank Corporation (SBC) liable for deficiency
documentary stamp tax (DST) on its 1983 sales of securities under repurchase agreements.

The facts are undisputed:

Sometime before March 19, 1987, SBC, a registered commercial bank and a member of the
Bankers Association of the Philippines (BAP), received a Pre-Assessment Notice dated March 6,
1987 from the Bureau of Internal Revenue (BIR) for deficiency DST containing the following
details:

1983 Deficiency Documentary Stamp Tax 4

A. On Promissory Notes Issued

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Promissory notes issued during the year P926,385,255.00

Documentary stamp tax due thereon:

P926,385,255.00 P 0.65 P 3,010,752.08

P200.00

B. On Sale of Securities under Repurchase Agreement

Securities sold during the year P3,022,803,857.63

Documentary stamp tax due thereon:

P3,022,803,857.63 P 0.25 P 3,778,504.82

P200.00

______________

T o t a l P6,789,256.90

Add: Compromise penalty 600.00

______________

TOTAL AMOUNT DUE AND COLLECTIBLE P6,789,856.90.

In its letter dated March 19, 1987, SBC protested the above-quoted pre-assessment notice on
the following grounds:

(1) promissory notes issued by SBC prior to October 15, 1984 or specifically in 1983, were non-
negotiable and, therefore, not subject to documentary stamp tax; and

(2) sale of securities under Repurchase Agreement is not subject to DST.

Instead of answering the letter-protest, the BIR sent SBC an assessment letter 5 dated May 29,
1987. The letter was a reiteration of the pre-assessment notice previously received, but SBC
nevertheless sent a written reply to the assessment notice, clarifying that its answer thereto was
already contained in its previous letter-protest of March 19, 1987.

On April 8, 1988, the BIR, through former Commissioner Bienvenido A. Tan, Jr., entered into a
general compromise agreement 6 with the BAP concerning the DST assessment of the various
member banks relating to non-negotiable promissory notes, whereby the BAP members agreed

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MAS
to pay THREE AND ONE-FOURTH CENTAVOS (P0.0325) per P200 of the total issuances of non-
negotiable promissory notes issued prior to October 15, 1984.

Pursuant to said compromise agreement, SBC signed its own compromise agreement 7 with the
BIR on August 15, 1988 by paying the amount of P641,743.23 as full settlement of its 1983
deficiency DST, computed as follows:

Promissory notes issued during the year 1983 P 926,385,255.00

Add: Securities sold under Repurchase Agreement 3,022,803,857.63

_________________

P3,949,189,112.63

Compromise Base P 0.0325

200

= P 3,949,189,112.63 P 0.0325

200

= P641,743.23 compromised amount paid under P.O.

========= No. C3252171 and C.R. No. 814457384 both dated March 31, 1988.

Despite its availment of the compromise agreement, SBC still received a letter from the BIR
demanding payment of the amount of P3,287,399.20 as DST on securities sold under repurchase
agreements in 1983, to wit:

1983

Deficiency Documentary Stamp Tax

On Sale of Securities Under Repurchase Agreement 8

Securities Sold During the Year P3,022,803,857.63

Documentary Stamp Tax Due Thereon

P3,022,803,857.63 P 0.25 = P 3,778,604. 82

P200.00

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Less: Partial Payment

P3,022,803,857.63 P 0.0325 = P 491,205.62

P200.00 _______________

TOTAL AMOUNT STILL DUE AND COLLECTIBLE P3,287,399.20.

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

Through a letter dated August 23, 1989, SBC informed the BIR that the assessment sought to be
collected was already the subject of a compromise agreement.

On June 17, 1991, SBC filed a protest with the BIRs Appellate Division disputing the reassessment
of the DST on sale of securities with repurchase agreements. The BIR Commissioner denied said
protest in a letter 9 dated January 29, 1992, copy of which was received by SBC on March 11,
1992.

On March 17, 1992, SBC filed a request for reconsideration, which remained unresolved despite
BIRs receipt thereof. Eventually, SBC filed a petition for review 10 with the CTA questioning the
reassessment.

On June 19, 1992, the BIR filed its answer alleging the following special and affirmative defenses:

1. The 1988 BIR-BAP DST Compromise Agreement covers only tax assessments involving
documentary stamp tax on all types of promissory notes issued prior to October 15, 1984;

2. SBCs sale of securities under a Repurchase Agreement is not included or placed within the
scope of the Compromise Agreement. The law is specific that the subject of a compromise
comprises only those matters which are definitely stated therein (Article 2036, New Civil Code);

3. SBC, knowing fully well that documentary stamp taxes on sales of securities under Repurchase
Agreement were not within the scope of the BIR-BAP DST Compromise Agreement, induced the
BIR to enter into a compromise settlement thereof. A compromise in which there is a mistake,
fraud, violence, intimidation, undue influence or falsity of documents may be rescinded or
invalidated (Article 2038 in relation to Article 1330 of the New Civil Code); and

4. The assessment is in accordance with law and regulation.

Issues having been joined, SBC presented documentary and testimonial evidence supportive of
its cause. After SBC rested its case, the BIR presented and offered only documentary evidence
consisting of BIR records. No further testimonial evidence was presented by it.

On January 12, 1996, the CTA rendered its decision, the decretal portion of which reads:

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WHEREFORE, in view of all the foregoing, instant petition for review is found to be without merit
and the same is hereby DISMISSED. ACCORDINGLY, petitioner is hereby ORDERED to PAY to
respondent the amount of P3,287,399.82, without any surcharge and interest thereon, as
deficiency documentary stamp tax due on petitioners sale of securities under repurchase
agreement for the year 1983.

SO ORDERED.

In time, SBC filed a motion for reconsideration, which the CTA denied in its Resolution of May 21,
1996.

Therefrom, SBC went to the CA on a petition for review. In the herein assailed Decision 11 dated
August 29, 1997, the CA dismissed SBCs petition, thus:

WHEREFORE, the instant petition for review is hereby DISMISSED by this Court for lack of merit.
The appealed decision of the Court of Tax Appeals in C.T.A. Case No. 4784 is Affirmed. Costs
against petitioner.

SO ORDERED.

Hence, SBCs present recourse on the following assigned errors:

I.

THE HONORABLE COURT OF APPEALS ERRED IN FINDING THAT THERE ARE FACTUAL AND LEGAL
BASES FOR THE HONORABLE COURT OF TAX APPEALS TO HAVE FOUND PETITIONER LIABLE TO
PAY RESPONDENT COMMISSIONER OF INTERNAL REVENUE THE AMOUNT OF P3,287,399.82,
WITHOUT ANY SURCHARGE AND INTEREST THEREON, AS DEFICIENCY DOCUMENTARY STAMP
TAX DUE ON PETITIONERS SALE OF SECURITIES UNDER REPURCHASE AGREEMENT FOR THE YEAR
1983.

II.

THERE WAS ERROR IN FINDING THAT THE TERMS AND CONDITIONS OF THE COMPROMISE
AGREEMENT (BETWEEN PETITIONER AND FORMER COMMISSIONER BIENVENIDO TAN), DID NOT
INCLUDE/COVER THE WHOLE DST ASSESSMENT ON THE DOCUMENTS OF SALES OF SECURITIES
IN 1983 OR THAT MISTAKE WAS COMMITTED BY THE BUREAU OF INTERNAL REVENUE WITH
REGARD TO THE OFFER AND ACCEPTANCE OF THE TAX BASE OF THE COMPROMISE SETTLEMENT.

The recourse has no merit.

Relative to the first issue, SBC claims that the BIRs DST assessment on its sales of securities with
repurchase agreements lacks factual and legal bases. While it never disputed the amount
of P3,022,803,857.63 used by the BIR as tax base for its assessment, which constitutes as the

216
MAS
factual basis for the DST assessment on sales of securities under repurchase agreements, SBC
claimed that these conveyances are instruments covered under Section 229 (now Section 180)
of the National Internal Revenue Code (NIRC) that are not subject to DST imposed by Section 225
(now 176) of the NIRC.

We do not agree.

The NIRC levies DST upon documents, instruments and papers as follows:

SEC. 173. 12 Stamp taxes upon documents, instruments, and papers Upon documents,
instruments, and papers, and upon acceptances, assignments, sales, and transfers of the
obligation, right, or property incident thereto, there shall be levied, collected and paid for, and
in respect of the transaction so had or accomplished, the corresponding documentary stamp
taxes prescribed in the following sections of this Title, by the person making, signing, issuing,
accepting, or transferring the same, and at the same time such act is done or transaction had:
Provided, That whenever one party to the taxable document enjoys exemption from the tax
herein imposed, the other party to thereto who is not exempt shall be the one directly liable for
the tax. (Emphasis supplied.)

Particularly covering sales of securities, which SBC has been assessed by the BIR in this case, and
the corresponding DST rates due thereon at the time the said tax accrued, the former Section
225 (now Section 176) of the NIRC provides:

SEC. 225. Stamp tax on sales, agreements to sell, memorandum of sales, deliveries or transfer of
bonds, due-bills, certificates of obligations, or shares or certificates of stocks On all sales, or
agreements to sell or memorandum of sales, or deliveries, or transfer of bonds, due-bills,
certificates of obligation, or shares or certificates of stock in any association, company or
corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper
or agreement, or memorandum or other evidences of transfer or sale whether entitling the
holder in any manner to the benefit of such bond, due-bills, certificates of obligation or stock, or
to secure the future payment of money, or for the future transfer of any bond, due-bill,
certificates of obligation or stock, there shall be collected a documentary stamp tax of twenty-
five centavos on each two hundred pesos, or fractional part thereof, of the par value of such
bond, due-bill, certificates of obligation or stock; Provided, That only one tax shall be collected of
each sale or transfer of stock or securities from one person to another, regardless of whether or
not a certificate of stock or obligation is issued, indorsed, or delivered in pursuance of such sale
or transfer; and provided, further, That in case of stock without par value the amount of the
documentary stamp tax herein prescribed shall be equivalent to twenty-five percentum of the
documentary stamp tax paid upon the original issue of said stock.

It is clear from the plain language of the law that all sales of securities, without making any
distinction as to the nature or type of the sale, i.e., whether it be with a repurchase agreement
or not, are taxable. On the other hand, all securities consisting of bonds, due-bills, certificates of

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MAS
obligation, or shares or certificates of stock in any association, company or corporation, of
whatever type or nature are within the scope of this section.

SBC contends, however, that the sales of securities being levied upon are not covered by Section
225 (now Section 176), but instead fall under Section 229 (now Section 180) of the Tax Code. In
this respect, SBC invokes Revenue Memorandum Circulars No. 13-87 13 and No. 33-86 14 and BIR
Ruling No. 119-91. 15

We are not persuaded for the simple reason that the BIR circulars and ruling relied upon were all
issued after 1983, the tax period involved in this case. Those circulars and ruling cannot prevail
over the clear and plain language of the Tax Code. 16

Moreover, the Court has no basis to rule in the present petition for review on certiorari, which
by its very nature is limited to questions of law and not of facts, whether the securities subject
of the tax assessment in this case in fact fall within the ambit of said revenue memorandum
circulars. This Court is bound by the factual findings by the CTA, which did not rule that the
subject securities, because of what type these were, fall under Section 229 (now Section 180)
instead of 225 (now Section 176) of the NIRC. In Commissioner of Internal Revenue v. Court of
Appeals, 17 the Court ruled:

x x x the Court of Tax Appeals is a highly specialized body specifically created for the purpose of
reviewing tax cases. Through its expertise, it is undeniably competent to determine the issue of
whether. x x x Consequently, as a matter of principle, this Court will not set aside the conclusion
reached by the Court of Tax Appeals which is, by the very nature of its function, 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 authority.
This point becomes more evident in the case before us where the unanimous findings and
conclusions of both the Court of Tax Appeals and the Court of Appeals appear untainted by any
abuse of authority, much less grave abuse of discretion.

On this point, the Court finds the decision of the CA affirming that of the CTA free from any
palpable or reversible error.

Relative to the second issue, SBC claims that based on the terms and conditions of the
compromise agreement between it and then BIR Commissioner Tan, the whole DST assessment
for 1983, including that on sales of securities, is deemed included thereunder. SBC further claims
that the contemporaneous and subsequent acts of revenue officials in accepting its offer of
payment, using the entire 1983 DST deficiency assessment, clearly including the sales of
securities with repurchase agreement for the year 1983 in the amount of P3,022,803,857.63 as
the tax base, were indicative of the fact that the DST due on said sales of securities for the year
1983 has been duly settled pursuant to the said compromise agreement of August 15, 1988.

Again, we disagree.

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There is nothing clearer from the plain reading of the first paragraph of the subject compromise
agreement than the fact that the only subject matter thereof is the "assessment relating to Non-
negotiable Promissory Notes issued prior to October 15, 1984." 18 To emphasize the limited scope
thereof, the same compromise agreement expressly reiterated, in its Section VI, the exclusions
thereto as follows:

VI. EXCLUSIONS:

Other issues raised in the tax assessments or which may be raised for open and assessed/pre-
assessed years respectively, not involving documentary stamp tax on all types of promissory
notes issued prior to Oct. 15, 1984 are not included in, nor affected by this
compromise, 19 (Emphasis supplied).

The issue of DST assessment on sales of securities with repurchase agreement, which was the
subject of the reassessment being questioned in this case, is definitely not within the scope of
the compromise agreement, being limited as it is to DST on promissory notes issued prior to
October 15, 1984. The DST assessed on the former arises from the act of "selling" securities
(presently taxed under Section 176), while the DST assessed in the latter is on the act of "issuing"
promissory notes (taxed under Section 180). It is evident from the separate provisions governing
the two that the law treats these two instruments differently. This Court simply cannot agree
with SBC that securities and promissory notes for purposes of the subject Compromise
Agreement are one and the same thing. Besides, even assuming, in gratia argumenti, that
promissory notes may be included under the generic term "securities," securities cannot be
included under the specific term "promissory notes" so as to be deemed within the scope of the
same compromise agreement. To be sure, the term "promissory note" has a definite meaning
under the negotiable instruments law, which does not include "securities," and this definite
meaning is what is deemed incorporated in the compromise agreement entered into by and
between SBC and the BIR, unless a different definition is therein expressly agreed upon, which is
not the case.

Finally, as regards SBCs contention that the BIR, through its various officials, accepted its offer
to settle its entire DST deficiency assessment for 1983 which included the DST assessment for
securities with repurchase agreement in the tax base for purposes of the computation of the DST
due and collectible, suffice it to say that such acceptance and approval were not made by the BIR
Commissioner himself, who, under Section 204 of the NIRC, has the sole power and authority to
compromise taxes. Neither was there any showing that the BIR Commissioner specifically
authorized those revenue officials, who purportedly accepted and approved SBCs offer of
payment, to compromise the DST on sale of securities, which, to stress, were not included in the
Compromise Agreement of August 15, 1988 by delegating his power to compromise said DST
assessment on securities. This ultra vires act of those revenue officials cannot have any valid and
binding legal effect upon the BIR, so as to proscribe the latter from issuing the assailed
reassessment of unpaid DST on the sales of securities under repurchase agreements for the year
1983.

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WHEREFORE, the petition is DENIED and the assailed CA Decision dated August 29, 1997 is
AFFIRMED in toto.

Costs against petitioner.

SO ORDERED.

CANCIO C. GARCIA
Associate Justice

WE CONCUR:

REYNATO S. PUNO
Associate Justice
Chairperson

ANGELINA SANDOVAL-GUTIERREZ RENATO C. CORONA


Associate Justice Associate Justice

ADOLFO S. AZCUNA
Associate Justice

ATTESTATION

I attest that the conclusions in the above decision were reached in consultation before the case
was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO
Associate Justice
Chairperson, Second Division

CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation,
it is hereby certified that the conclusions in the above decision were reached in consultation
before the case was assigned to the writer of the opinion of the Court.

ARTEMIO V. PANGANIBAN
Chief Justice

Footnotes

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1Penned by Associate Justice Lourdes Tayag-Jaguros, with then Associate Justice Antonio
M. Martinez (who became a member of this Court) and Associate Justice Salvador J.
Valdez, Jr., concurring; Rollo, pp. 38-50.

2 Id. at 148-149.

3 Id. at 117-132.

4 Id. at 55.

5 Id. at 56.

6 Id. at 59-66.

7 Id. at 67-69.

8 Id. at 75.

9 Id. at 81-84.

10 Id. at 111-116.

11 Supra note 1.

12 Formerly Section 222 of the Tax Code.

13 Id. at 201-202.

14 Id. at 205-206.

15 Id. at 207-208.

16See: Republic v. Sunlife Assurance Company of Canada, G.R. No.158085, October 14,
2005, 473 SCRA 129, per then Associate Justice, now Chief Justice Artemio V. Panganiban.

17 G.R. No. 115349, April 18, 1997, 271 SCRA 605.

18 Annex F-1, Rollo, p. 67.

19 Id. at 67.

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11. CIR vs FIRST EXPRESS PAWNSHOP COMPANY, INC.
G.R. Nos. 172045-46; June 16, 2009

Republic of the Philippines


SUPREME COURT
Manila

FIRST DIVISION

G.R. Nos. 172045-46 June 16, 2009

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


vs.
FIRST EXPRESS PAWNSHOP COMPANY, INC., Respondent.

DECISION

CARPIO, J.:

The Case

The Commissioner of Internal Revenue (petitioner) filed this Petition for Review1 to reverse the
Court of Tax Appeals Decision2 dated 24 March 2006 in the consolidated cases of C.T.A. EB Nos.
60 and 62. In the assailed decision, the Court of Tax Appeals (CTA) En Banc partially reconsidered
the CTA First Divisions Decision3 dated 24 September 2004.

The Facts

On 28 December 2001, petitioner, through Acting Regional Director Ruperto P. Somera of


Revenue Region 6 Manila, issued the following assessment notices against First Express
Pawnshop Company, Inc. (respondent):

a. Assessment No. 31-1-984 for deficiency income tax of P20,712.58 with compromise
penalty of P3,000;

b. Assessment No. 31-14-000053-985 for deficiency value-added tax (VAT) of P601,220.18


with compromise penalty of P16,000;

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c. Assessment No. 31-14-000053-986 for deficiency documentary stamp tax (DST)
of P12,328.45 on deposit on subscription with compromise penalty of P2,000; and

d. Assessment No. 31-1-000053-987 for deficiency DST of P62,128.87 on pawn tickets with
compromise penalty of P8,500.

Respondent received the assessment notices on 3 January 2002. On 1 February 2002, respondent
filed its written protest on the above assessments. Since petitioner did not act on the protest
during the 180-day period,8respondent filed a petition before the CTA on 28 August 2002.9

Respondent contended that petitioner did not consider the supporting documents on the
interest expenses and donations which resulted in the deficiency income tax.10 Respondent
maintained that pawnshops are not lending investors whose services are subject to VAT, hence
it was not liable for deficiency VAT.11 Respondent also alleged that no deficiency DST was due
because Section 18012 of the National Internal Revenue Code (Tax Code) does not cover any
document or transaction which relates to respondent. Respondent also argued that the issuance
of a pawn ticket did not constitute a pledge under Section 19513 of the Tax Code.14

In its Answer filed before the CTA, petitioner alleged that the assessment was valid and correct
and the taxpayer had the burden of proof to impugn its validity or correctness. Petitioner
maintained that respondent is subject to 10% VAT based on its gross receipts pursuant to
Republic Act No. 7716, or the Expanded Value-Added Tax Law (EVAT). Petitioner also cited BIR
Ruling No. 221-91 which provides that pawnshop tickets are subject to DST. 15

On 1 July 2003, respondent paid P27,744.88 as deficiency income tax inclusive of interest.16

After trial on the merits, the CTA First Division ruled, thus:

IN VIEW OF ALL THE FOREGOING, the instant petition is hereby PARTIALLY GRANTED.
Assessment No. 31-1-000053-98 for deficiency documentary stamp tax in the amount of Sixty-
Two Thousand One Hundred Twenty-Eight Pesos and 87/100 (P62,128.87) and Assessment No.
31-14-000053-98 for deficiency documentary stamp tax on deposits on subscription in the
amount of Twelve Thousand Three Hundred Twenty-Eight Pesos and 45/100 (P12,328.45)
are CANCELLED and SET ASIDE. However, Assessment No. 31-14-000053-98 is
hereby AFFIRMED except the imposition of compromise penalty in the absence of showing that
petitioner consented thereto (UST vs. Collector, 104 SCRA 1062; Exquisite Pawnshop Jewelry, Inc.
vs. Jaime B. Santiago, et al., supra).

Accordingly petitioner is ORDERED to PAY the deficiency value added tax in the amount of Six
Hundred One Thousand Two Hundred Twenty Pesos and 18/100 (P601,220.18) inclusive of
deficiency interest for the year 1998. In addition, petitioner is ORDERED to PAY 25% surcharge
and 20% delinquency interest per annum from February 12, 2002 until fully paid pursuant to
Sections 248 and 249 of the 1997 Tax Code.

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SO ORDERED.17 (Boldfacing in the original)

Both parties filed their Motions for Reconsideration which were denied by the CTA First Division
for lack of merit. Thereafter, both parties filed their respective Petitions for Review under Section
11 of Republic Act No. 9282 (RA 9282) with the CTA En Banc.18

On 24 March 2006, the CTA En Banc promulgated a Decision affirming respondents liability to
pay the VAT and ordering it to pay DST on its pawnshop tickets. However, the CTA En Banc found
that respondents deposit on subscription was not subject to DST. 19

Aggrieved by the CTA En Bancs Decision which ruled that respondents deposit on subscription
was not subject to DST, petitioner elevated the case before this Court.

The Ruling of the Court of Tax Appeals

On the taxability of deposit on subscription, the CTA, citing First Southern Philippines Enterprises,
Inc. v. Commissioner of Internal Revenue,20 pointed out that deposit on subscription is not subject
to DST in the absence of proof that an equivalent amount of shares was subscribed or issued in
consideration for the deposit. Expressed otherwise, deposit on stock subscription is not subject
to DST if: (1) there is no agreement to subscribe; (2) there are no shares issued or any additional
subscription in the restructuring plan; and (3) there is no proof that the issued shares can be
considered as issued certificates of stock.21

The CTA ruled that Section 17522 of the Tax Code contemplates a subscription agreement. The
CTA explained that there can be subscription only with reference to shares of stock which have
been unissued, in the following cases: (a) the original issuance from authorized capital stock at
the time of incorporation; (b) the opening, during the life of the corporation, of the portion of
the original authorized capital stock previously unissued; or (c) the increase of authorized capital
stock achieved through a formal amendment of the articles of incorporation and registration of
the articles of incorporation with the Securities and Exchange Commission.23

The CTA held that in this case, there was no subscription or any contract for the acquisition of
unissued stock for P800,000 in the taxable year assessed. The General Information Sheet (GIS) of
respondent showed only a capital structure of P500,000 as Subscribed Capital Stock
and P250,000 as Paid-up Capital Stock and did not include the assessed amount. Mere reliance
on the presumption that the assessment was correct and done in good faith was unavailing vis-
-vis the evidence presented by respondent. Thus, the CTA ruled that the assessment for
deficiency DST on deposit on subscription has not become final.24

The Issue

Petitioner submits this sole issue for our consideration: whether the CTA erred on a question of
law in disregarding the rule on finality of assessments prescribed under Section 228 of the Tax

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Code. Corollarily, petitioner raises the issue on whether respondent is liable to pay P12,328.45
as DST on deposit on subscription of capital stock.

The Ruling of the Court

Petitioner contends that the CTA erred in disregarding the rule on the finality of assessments
prescribed under Section 228 of the Tax Code.25 Petitioner asserts that even if respondent filed
a protest, it did not offer evidence to prove its claim that the deposit on subscription was an
"advance" made by respondents stockholders.26Petitioner alleges that respondents failure to
submit supporting documents within 60 days from the filing of its protest as required under
Section 228 of the Tax Code caused the assessment of P12,328.45 for deposit on subscription to
become final and unassailable.27

Petitioner alleges that revenue officers are afforded the presumption of regularity in the
performance of their official functions, since they have the distinct opportunity, aside from
competence, to peruse records of the assessments. Petitioner invokes the principle that by
reason of the expertise of administrative agencies over matters falling under their jurisdiction,
they are in a better position to pass judgment thereon; thus, their findings of fact are generally
accorded great respect, if not finality, by the courts. Hence, without the supporting documents
to establish the non-inclusion from DST of the deposit on subscription, petitioners assessment
pursuant to Section 228 of the Tax Code had become final and unassailable.28

Respondent, citing Standard Chartered Bank-Philippine Branches v. Commissioner of Internal


Revenue,29 asserts that the submission of all the relevant supporting documents within the 60-
day period from filing of the protest is directory.

Respondent claims that petitioner requested for additional documents in petitioners letter
dated 12 March 2002, to wit: (1) loan agreement from lender banks; (2) official receipts of
interest payments issued to respondent; (3) documentary evidence to substantiate donations
claimed; and (4) proof of payment of DST on subscription.30 It must be noted that the only
document requested in connection with respondents DST assessment on deposit on subscription
is proof of DST payment. However, respondent could not produce any proof of DST payment
because it was not required to pay the same under the law considering that the deposit on
subscription was an advance made by its stockholders for future subscription, and no stock
certificates were issued.31 Respondent insists that petitioner could have issued a subpoena
requiring respondent to submit other documents to determine if the latter is liable for DST on
deposit on subscription pursuant to Section 5(c) of the Tax Code.32

Respondent argues that deposit on future subscription is not subject to DST under Section 175
of the Tax Code. Respondent explains:

It must be noted that deposits on subscription represent advances made by the stockholders and
are in the nature of liabilities for which stocks may be issued in the future. Absent any express
agreement between the stockholders and petitioner to convert said advances/deposits to capital

225
MAS
stock, either through a subscription agreement or any other document, these deposits remain as
liabilities owed by respondent to its stockholders. For these deposits to be subject to DST, it is
necessary that a conversion/subscription agreement be made by First Express and its
stockholders. Absent such conversion, no DST can be imposed on said deposits under Section 175
of the Tax Code.33 (Underscoring in the original)

Respondent contends that by presenting its GIS and financial statements, it had already
sufficiently proved that the amount sought to be taxed is deposit on future subscription, which
is not subject to DST.34 Respondent claims that it cannot be required to submit proof of DST
payment on subscription because such payment is non-existent. Thus, the burden of proving that
there was an agreement to subscribe and that certificates of stock were issued for the deposit
on subscription rests on petitioner and his examiners. Respondent states that absent any proof,
the deficiency assessment has no basis and should be cancelled.35

On the Taxability of Deposit on Stock Subscription

DST is a tax on documents, instruments, loan agreements, and papers evidencing the acceptance,
assignment, sale or transfer of an obligation, right or property incident thereto. DST is actually
an excise tax because it is imposed on the transaction rather than on the document.36 DST is also
levied on the exercise by persons of certain privileges conferred by law for the creation, revision,
or termination of specific legal relationships through the execution of specific instruments. 37 The
Tax Code provisions on DST relating to shares or certificates of stock state:

Section 175. Stamp Tax on Original Issue of Shares of Stock. - On every original issue, whether on
organization, reorganization or for any lawful purpose, of shares of stock by any association,
company or corporation, there shall be collected a documentary stamp tax of Two pesos (P2.00)
on each Two hundred pesos (P200), or fractional part thereof, of the par value, of such shares of
stock: Provided, That in the case of the original issue of shares of stock without par value the
amount of the documentary stamp tax herein prescribed shall be based upon the actual
consideration for the issuance of such shares of stock: Provided, further, That in the case of stock
dividends, on the actual value represented by each share.38

Section 176. Stamp Tax on Sales, Agreements to Sell, Memoranda of Sales, Deliveries or Transfer
of Due-bills, Certificates of Obligation, or Shares or Certificates of Stock. - On all sales, or
agreements to sell, or memoranda of sales, or deliveries, or transfer of due-bills, certificates of
obligation, or shares or certificates of stock in any association, company or corporation, or
transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement,
or memorandum or other evidences of transfer or sale whether entitling the holder in any
manner to the benefit of such due-bills, certificates of obligation or stock, or to secure the future
payment of money, or for the future transfer of any due-bill, certificate of obligation or stock,
there shall be collected a documentary stamp tax of One peso and fifty centavos (P1.50) on each
Two hundred pesos (P200), or fractional part thereof, of the par value of such due-bill, certificate
of obligation or stock: Provided, That only one tax shall be collected on each sale or transfer of
stock or securities from one person to another, regardless of whether or not a certificate of stock

226
MAS
or obligation is issued, indorsed, or delivered in pursuance of such sale or transfer: And provided,
further, That in the case of stock without par value the amount of the documentary stamp tax
herein prescribed shall be equivalent to twenty-five percent (25%) of the documentary stamp tax
paid upon the original issue of said stock.39

In Section 175 of the Tax Code, DST is imposed on the original issue of shares of stock. The DST,
as an excise tax, is levied upon the privilege, the opportunity and the facility of issuing shares of
stock. In Commissioner of Internal Revenue v. Construction Resources of Asia, Inc.,40 this Court
explained that the DST attaches upon acceptance of the stockholders subscription in the
corporations capital stock regardless of actual or constructive delivery of the certificates of stock.
Citing Philippine Consolidated Coconut Ind., Inc. v. Collector of Internal Revenue,41 the Court held:

The documentary stamp tax under this provision of the law may be levied only once, that is upon
the original issue of the certificate. The crucial point therefore, in the case before Us is the proper
interpretation of the word issue. In other words, when is the certificate of stock deemed issued
for the purpose of imposing the documentary stamp tax? Is it at the time the certificates of stock
are printed, at the time they are filled up (in whose name the stocks represented in the certificate
appear as certified by the proper officials of the corporation), at the time they are released by
the corporation, or at the time they are in the possession (actual or constructive) of the
stockholders owning them?

xxx

Ordinarily, when a corporation issues a certificate of stock (representing the ownership of stocks
in the corporation to fully paid subscription) the certificate of stock can be utilized for the exercise
of the attributes of ownership over the stocks mentioned on its face. The stocks can be alienated;
the dividends or fruits derived therefrom can be enjoyed, and they can be conveyed, pledged or
encumbered. The certificate as issued by the corporation, irrespective of whether or not it is in
the actual or constructive possession of the stockholder, is considered issued because it is with
value and hence the documentary stamp tax must be paid as imposed by Section 212 of the
National Internal Revenue Code, as amended.

In Section 176 of the Tax Code, DST is imposed on the sales, agreements to sell, memoranda of
sales, deliveries or transfer of shares or certificates of stock in any association, company, or
corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper
or agreement, or memorandum or other evidences of transfer or sale whether entitling the
holder in any manner to the benefit of such certificates of stock, or to secure the future payment
of money, or for the future transfer of certificates of stock. In Compagnie Financiere Sucres et
Denrees v. Commissioner of Internal Revenue, this Court held that under Section 176 of the Tax
Code, sales to secure the future transfer of due-bills, certificates of obligation or certificates of
stock are subject to documentary stamp tax.42

Revenue Memorandum Order No. 08-98 (RMO 08-98) provides the guidelines on the corporate
stock documentary stamp tax program. RMO 08-98 states that:

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1. All existing corporations shall file the Corporation Stock DST Declaration, and the DST
Return, if applicable when DST is still due on the subscribed share issued by the
corporation, on or before the tenth day of the month following publication of this Order.

xxx

3. All existing corporations with authorization for increased capital stock shall file their
Corporate Stock DST Declaration, together with the DST Return, if applicable when DST is
due on subscriptions made after the authorization, on or before the tenth day of the
month following the date of authorization. (Boldfacing supplied)

RMO 08-98, reiterating Revenue Memorandum Circular No. 47-97 (RMC 47-97), also states that
what is being taxed is the privilege of issuing shares of stock, and, therefore, the taxes accrue at
the time the shares are issued. RMC 47-97 also defines issuance as the point in which the
stockholder acquires and may exercise attributes of ownership over the stocks.

As pointed out by the CTA, Sections 175 and 176 of the Tax Code contemplate a subscription
agreement in order for a taxpayer to be liable to pay the DST. A subscription contract is defined
as any contract for the acquisition of unissued stocks in an existing corporation or a corporation
still to be formed.43 A stock subscription is a contract by which the subscriber agrees to take a
certain number of shares of the capital stock of a corporation, paying for the same or expressly
or impliedly promising to pay for the same.44

In this case, respondents Stockholders Equity section of its Balance Sheet as of 31 December
199845 shows:

Stockholders Equity 1998 1997


Authorized Capital Stock P 2,000,000.00 P 2,000,000.00
Paid-up Capital Stock 250,000.00 250,000.00
Deposit on Subscription 800,000.00
Retained Earnings 62,820.34 209,607.20
Net Income (858,498.38) (146,786.86)
Total P 254,321.96 P 312,820.34

The GIS submitted to the Securities and Exchange Commission on 31 March 1999 shows the
following Capital Structure:46

B. Financial Profile

1. Capital Structure :

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AUTHORIZED - P2,000,000.00
SUBSCRIBED - 500,000.00
PAID-UP - 250,000.00

These entries were explained by Miguel Rosario, Jr. (Rosario), respondents external auditor,
during the hearing before the CTA on 11 June 2003. Rosario testified in this wise:

Atty. Napiza

Q. Mr. Rosario, I refer you to the balance sheet of First Express for the year 1998
particularly the entry of deposit on subscription in the amount of P800 thousand, will you
please tell us what is (sic) this entry represents?

Mr. Rosario Jr.

A. This amount of P800 thousand represents the case given by the stockholders to the
company but does not necessarily made (sic) payment to subscribed portion.

Atty. Napiza

Q. What is (sic) that payment stands for?

Mr. Rosario Jr.

A. This payment stands as (sic) for the deposit for future subscription.

Atty. Napiza

Q. Would you know if First Express issued corresponding shares pertinent to the amount
being deposited?

Mr. Rosario Jr.

A. No.

Atty. Napiza

Q. What do you mean by no? Did they or they did not?

Mr. Rosario Jr.

A. They did not issue any shares because that is not the payment of subscription. That
is just a mere deposit.

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Atty. Napiza

Q. Would you know, Mr. Rosario, how much is the Subscribed Capital of First Express
Pawnshop?

Mr. Rosario Jr.

A. The Subscribed Capital of First Express Pawnshop Company, Inc. for the year 1998
is P500 thousand.

Atty. Napiza

Q. How about the Paid Up Capital?

Mr. Rosario Jr.

A. The Paid Up Capital is P250 thousand.

Atty. Napiza

Q. Are (sic) all those figures appear in the balance sheet?

Mr. Rosario Jr.

A. The Paid Up Capital appeared here but the Subscribed Portion was not stated.
(Boldfacing supplied)

Based on Rosarios testimony and respondents financial statements as of 1998, there was no
agreement to subscribe to the unissued shares. Here, the deposit on stock subscription refers to
an amount of money received by the corporation as a deposit with the possibility of applying the
same as payment for the future issuance of capital stock.47 In Commissioner of Internal Revenue
v. Construction Resources of Asia, Inc.,48 we held:

We are firmly convinced that the Government stands to lose nothing in imposing the
documentary stamp tax only on those stock certificates duly issued, or wherein the stockholders
can freely exercise the attributes of ownership and with value at the time they are originally
issued. As regards those certificates of stocks temporarily subject to suspensive conditions they
shall be liable for said tax only when released from said conditions, for then and only then shall
they truly acquire any practical value for their owners.lavvphil (Boldfacing supplied)

Clearly, the deposit on stock subscription as reflected in respondents Balance Sheet as of 1998
is not a subscription agreement subject to the payment of DST. There is no P800,000 worth of
subscribed capital stock that is reflected in respondents GIS. The deposit on stock subscription
is merely an amount of money received by a corporation with a view of applying the same as

230
MAS
payment for additional issuance of shares in the future, an event which may or may not happen.
The person making a deposit on stock subscription does not have the standing of a stockholder
and he is not entitled to dividends, voting rights or other prerogatives and attributes of a
stockholder. Hence, respondent is not liable for the payment of DST on its deposit on subscription
for the reason that there is yet no subscription that creates rights and obligations between the
subscriber and the corporation.

On the Finality of Assessment as Prescribed


under Section 228 of the Tax Code

Section 228 of the Tax Code provides:

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

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

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

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

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

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

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

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

Such assessment may be protested administratively by filing a request for reconsideration or


reinvestigation within thirty (30) days from receipt of the assessment in such form and manner
as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing

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

If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180)
days from submission of documents, the taxpayer adversely affected by the decision or inaction
may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision,
or from the lapse of the one hundred eighty (180)-day period; otherwise, the decision shall
become final, executory and demandable. (Boldfacing supplied)

Section 228 of the Tax Code49 provides the remedy to dispute a tax assessment within a certain
period of time. It states that an assessment may be protested by filing a request for
reconsideration or reinvestigation within 30 days from receipt of the assessment by the taxpayer.
Within 60 days from filing of the protest, all relevant supporting documents shall have been
submitted; otherwise, the assessment shall become final.

In this case, respondent received the tax assessment on 3 January 2002 and it had until 2 February
2002 to submit its protest. On 1 February 2002, respondent submitted its protest and attached
the GIS and Balance Sheet as of 31 December 1998. Respondent explained that it
received P800,000 as a deposit with the possibility of applying the same as payment for the
future issuance of capital stock.

Within 60 days from the filing of protest or until 2 April 2002, respondent should submit relevant
supporting documents. Respondent, having submitted the supporting documents together with
its protest, did not present additional documents anymore.

In a letter dated 12 March 2002, petitioner requested respondent to present proof of payment
of DST on subscription. In a letter-reply, respondent stated that it could not produce any proof
of DST payment because it was not required to pay DST under the law considering that the
deposit on subscription was an advance made by its stockholders for future subscription, and no
stock certificates were issued.

Since respondent has not allegedly submitted any relevant supporting documents, petitioner
now claims that the assessment has become final, executory and demandable, hence,
unappealable.

We reject petitioners view that the assessment has become final and unappealable. It cannot be
said that respondent failed to submit relevant supporting documents that would render the
assessment final because when respondent submitted its protest, respondent attached the GIS
and Balance Sheet. Further, petitioner cannot insist on the submission of proof of DST payment
because such document does not exist as respondent claims that it is not liable to pay, and has
not paid, the DST on the deposit on subscription.

The term "relevant supporting documents" should be understood as those documents necessary
to support the legal basis in disputing a tax assessment as determined by the taxpayer. The BIR

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can only inform the taxpayer to submit additional documents. The BIR cannot demand what type
of supporting documents should be submitted. Otherwise, a taxpayer will be at the mercy of the
BIR, which may require the production of documents that a taxpayer cannot submit.1awphi1

After respondent submitted its letter-reply stating that it could not comply with the presentation
of the proof of DST payment, no reply was received from petitioner.

Section 228 states that if the protest is not acted upon within 180 days from submission of
documents, the taxpayer adversely affected by the inaction may appeal to the CTA within 30 days
from the lapse of the 180-day period. Respondent, having submitted its supporting documents
on the same day the protest was filed, had until 31 July 2002 to wait for petitioners reply to its
protest. On 28 August 2002 or within 30 days after the lapse of the 180-day period counted from
the filing of the protest as the supporting documents were simultaneously filed, respondent filed
a petition before the CTA.

Respondent has complied with the requisites in disputing an assessment pursuant to Section 228
of the Tax Code. Hence, the tax assessment cannot be considered as final, executory and
demandable. Further, respondents deposit on subscription is not subject to the payment of DST.
Consequently, respondent is not liable to pay the deficiency DST of P12,328.45.

Wherefore, we DENY the petition. We AFFIRM the Court of Tax Appeals Decision dated 24
March 2006 in the consolidated cases of C.T.A. EB Nos. 60 and 62.

SO ORDERED.

ANTONIO T. CARPIO
Associate Justice

WE CONCUR:

REYNATO S. PUNO
Chief Justice
Chairperson

RENATO C. CORONA TERESITA J. LEONARDO-DE CASTRO


Associate Justice Associate Justice

LUCAS P. BERSAMIN
Associate Justice

CERTIFICATION

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Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above
Decision had been reached in consultation before the case was assigned to the writer of the
opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice

Footnotes

1 Under Rule 45 of the Rules of Court.

2Penned by Associate Justice Caesar A. Casanova with Associate Justices Juanito C.


Castaeda, Jr., Lovell R. Bautista, Erlinda P. Uy, and Olga Palanca-Enriquez, concurring and
Presiding Justice Ernesto D. Acosta, concurring and dissenting.

3Penned by Associate Justice Lovell R. Bautista with Presiding Justice Ernesto D. Acosta,
concurring and Associate Justice Juanito C. Castaeda, Jr., concurring and dissenting.

4 BIR Records, pp. 147-149.

5 Id. at 144-146.

6 Id. at 141-143.

7 Id. at 138-140.

8 Section 228, Republic Act No. 8424.

Section 228. Protesting of Assessment. - x x x

xxx

If the protest is denied in whole or in part, or is not acted upon within one hundred
eighty (180) days from submission of documents, the taxpayer adversely affected
by the decision or inaction may appeal to the Court of Tax Appeals within thirty
(30) days from receipt of the said decision, or from the lapse of one hundred eighty
(180)-day period; otherwise, the decision shall become final, executory and
demandable.

9 CTA rollo, pp. 1 and 3.

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10 Id. at 4.

11 Id. at 5-6.

12 Section 180 of the Tax Code states:

SEC. 180. Stamp Tax on All Bonds, Loan Agreements, Promissory Notes, Bills of
Exchange, Drafts, Instruments and Securities Issued by the Government or Any of
its Instrumentalities, Deposit Substitute Debt Instruments, Certificates of Deposits
Bearing Interest and Others Not Payable on Sight or Demand. On all bonds, loan
agreements, including those signed abroad, wherein the object of the contract is
located or used in the Philippines, bills of exchange (between points within the
Philippines), drafts, instruments and securities issued by the Government or any
of its instrumentalities, deposit substitute debt instruments, certificates of
deposits drawing interest, orders for the payment of any sum of money otherwise
than at sight or on demand, on all promissory notes, whether negotiable or non-
negotiable, except bank notes issued for circulation, and on each renewal of any
such note, there shall be collected a documentary stamp tax of Thirty centavos
(P0.30) on each Two hundred pesos (P200), or fractional part thereof, of the face
value of any such agreement, bill of exchange, draft, certificate of deposit, or note;
Provided, That only one documentary stamp tax shall be imposed on either loan
agreement, or promissory notes issued to secure such loan, whichever will yield a
higher tax: Provided, however, That loan agreements or promissory notes the
aggregate of which does not exceed Two hundred fifty thousand pesos (P250,000)
executed by an individual for his purchase on installment for his personal use or
that of his family and not for business, resale, barter or hire of a house, lot, motor
vehicle, appliance or furniture shall be exempt from the payment of the
documentary stamp tax provided under this Section.

13 Section 195 of the Tax Code provides:

SEC. 195. Stamp Tax on Mortgages, Pledges and Deeds of Trust. - On every
mortgage or pledge of lands, estate, or property, real or personal, heritable or
movable, whatsoever, where the same shall be made as a security for the payment
of any definite and certain sum of money lent at the time or previously due and
owing of forborne to be paid, being payable and on any conveyance of land,
estate, or property whatsoever, in trust or to be sold, or otherwise converted into
money which shall be and intended only as security, either by express stipulation
or otherwise, there shall be collected a documentary stamp tax at the following
rates:

(a) When the amount secured does not exceed Five thousand pesos
(P5,000), Twenty pesos (P20.00).

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(b) On each Five thousand pesos (P5,000), or fractional part thereof in
excess of Five thousand pesos (P5,000), an additional tax of Ten pesos
(P10.00).

On any mortgage, pledge, or deed of trust, where the same shall be made as a
security for the payment of a fluctuating account or future advances without fixed
limit, the documentary stamp tax on such mortgage, pledge or deed of trust shall
be computed on the amount actually loaned or given at the time of the execution
of the mortgage, pledge or deed of trust. However, if subsequent advances are
made on such mortgage, pledge or deed of trust, additional documentary stamp
tax shall be paid which shall be computed on the basis of the amount advanced or
loaned at the rates specified above: Provided, however, That if the full amount of
the loan or credit, granted under the mortgage, pledge or deed of trust is specified
in such mortgage, pledge or deed of trust, the documentary stamp tax prescribed
in this Section shall be paid and computed on the full amount of the loan or credit
granted.

14 CTA rollo, pp. 6-7.

15 Rollo, pp. 10-11.

16 Id. at 12.

17 Id. at 66-67.

18 Id. at 14.

19 Id. at 23-44.

20 CTA Case No. 5988, 17 January 2002.

21 Rollo, pp. 34-35.

22 Section 175 of the Tax Code provides:

Section 175. Stamp Tax on Original Issue of Shares of Stock. - On every original
issue, whether on organization or reorganization or for any lawful purpose, of
shares of stock by any association, company or corporation, there shall be
collected a documentary stamp tax of Two pesos (P2.00) on each Two hundred
pesos (P200.00) or fractional part thereof, of the par value, of such shares of
stock: Provided, That in the case of original issue of shares of stock without par
value the amount of the documentary stamp tax herein prescribed shall be based
upon the actual consideration for the issuance of such shares of stock: Provided,

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further, That in the case of stock dividends, on the actual value represented by
each share.

23 Rollo, p. 35.

24 Id. at 34-35.

25 Id. at 138.

26 Id.

27 Id. at 140.

28 Id.

29 CTA Case No. 5696, 16 August 2001.

30 Rollo, p. 155.

31 Id. at 156.

32 Id.

33 Id. at 158.

34 Id. at 159.

35 Id. at 160.

36Section 173, 1997 Tax Code; De Leon and De Leon, The National Internal Revenue Code
Annotated, 8th ed., Volume 2 (2003). See also Michel J. Lhuillier Pawnshop, Inc. v.
Commissioner of Internal Revenue, G.R. No. 166786, 3 May 2006, 489 SCRA 147, 152-153.

37Philippine Home Assurance Corporation v. Court of Appeals, 361 Phil. 368, 372-373
(1999).

38 As amended by Republic Act Nos. 7660 and 8424.

39 As amended by Republic Act No. 7660.

40 230 Phil. 76, 80-81 (1986).

41 162 Phil. 32 (1976).

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42G.R. No. 133834, 28 August 2006, 499 SCRA 664, 669. The Court ruled in this case that
the transfer or assignment of deposits on stock subscription is subject to DST.

43Section 60, The Corporation Code of the Philippines, Batas Pambansa Blg. 68, 1 May
1980.

44Lopez, Rosario N., The Corporation Code of the Philippines, Annotated, Volume Two,
1994, p. 750.

45 CTA First Division rollo, p. 89.

46 Id. at 92.

47BIR Ruling No. 015-2003. EBC Strategic Holdings Corporation, 17 November 2003. The
BIR ruled that the One Billion Pesos deposited by Equitable PCI Bank to its subsidiary
company Equitable Strategic Holdings Corporation (ESHC) to be applied for future
subscription to an increase in capital is not subject to documentary stamp tax under
Section 175 of the Tax Code of 1997. The BIR, quoting the CTA Case entitled First Southern
Philippines Enterprises, Inc. v. Commissioner of Internal Revenue promulgated on 17
January 2002, ruled that deposit on stock subscription is not subject to the payment of
documentary stamp tax. The BIR explained that there was no agreement to subscribe to
the issuance of stock of ESHC. The BIR further explained in this wise:

Capital stock issued connotes permanence of funds flowing into a corporation


which cannot be withdrawn. The phrase issuance of shares of stock upon which
the documentary stamp tax is to be computed must likewise be viewed as
permanent in character. It is considered as a trust fund for the payment of the
debts of the corporation, to which the creditors may look for satisfaction.
Consequently, to be so categorized, all conditions and requirements, such as the
execution of the subscription agreements, and approval by regulatory authorities
must be secured to facilitate the issuance of the shares of stock.

xxx

Viewed from the foregoing, it can be inferred that future subscription to an


increase in capital stock is not an original issue of shares of stock nor is it a sale or
transfer of shares of stock contemplated under Sections 175 and 176 of the Tax
Code of 1997, but it is a standard accounting term which refers to an amount of
money transmitted by a stockholder to a corporation on deposit with the
possibility of the same being later subscribed in the companys capital.

48 Supra note 40.

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49Revenue Regulations No. 12-99, Implementing the Provisions of the National Internal
Revenue Code of 1997 Governing the Rules on Assessment of National Internal Revenue
Taxes, Civil Penalties and Interest and the Extra-judicial Settlement of a Taxpayer's
Criminal Violation of the Code Through Payment of a Suggested Compromise Penalty, 6
September 1999.

Sec. 3.1.5 Disputed Assessment. The taxpayer or his duly authorized


representative may protest administratively against the aforesaid formal letter of
demand and assessment notice within thirty (30) days from date of receipt
thereof. If there are several issues involved in the formal letter of demand and
assessment notice but the taxpayer only disputes or protests against the validity
of some of the issues raised, the taxpayer shall be required to pay the deficiency
tax or taxes attributable to the undisputed issues, in which case, a collection letter
shall be issued to the taxpayer calling for payment of the said deficiency tax,
inclusive of the applicable surcharge and/or interest. No action shall be taken on
the taxpayer's disputed issues until the taxpayer has paid the deficiency tax or
taxes attributable to the said undisputed issues. The prescriptive period for
assessment or collection of the tax or taxes attributable to the disputed issues
shall be suspended.

The taxpayer shall state the facts, the applicable law, rules and regulations, or
jurisprudence on which his protest is based, otherwise, his protest shall be
considered void and without force and effect. If there are several issues involved
in the disputed assessment and the taxpayer fails to state the facts, the applicable
law, rules and regulations, or jurisprudence in support of his protest against some
of the several issues on which the assessment is based, the same shall be
considered undisputed issue or issues, in which case, the taxpayer shall be
required to pay the corresponding deficiency tax or taxes attributable thereto.

The taxpayer shall submit the required documents in support of his protest
within sixty (60) days from date of filing of his letter of protest, otherwise, the
assessment shall become final, executory and demandable. The phrase "submit
the required documents" includes submission or presentation of the pertinent
documents for scrutiny and evaluation by the Revenue Officer conducting the
audit. The said Revenue Officer shall state this fact in his report of investigation.

If the taxpayer fails to file a valid protest against the formal letter of demand and
assessment notice within thirty (30) days from date of receipt thereof, the
assessment shall become final, executory and demandable.

If the protest is denied, in whole or in part, by the Commissioner, the taxpayer


may appeal to the Court of Tax Appeals within thirty (30) days from date of receipt
of the said decision, otherwise, the assessment shall become final, executory and
demandable.

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In general, if the protest is denied, in whole or in part, by the Commissioner or his
duly authorized representative, the taxpayer may appeal to the Court of Tax
Appeals within thirty (30) days from date of receipt of the said decision, otherwise,
the assessment shall become final, executory and demandable: Provided,
however, that if the taxpayer elevates his protest to the Commissioner within
thirty (30) days from date of receipt of the final decision of the Commissioner's
duly authorized representative, the latter's decision shall not be considered final,
executory and demandable, in which case, the protest shall be decided by the
Commissioner.

If the Commissioner or his duly authorized representative fails to act on the


taxpayer's protest within one hundred eighty (180) days from date of submission,
by the taxpayer, of the required documents in support of his protest, the taxpayer
may appeal to the Court of Tax Appeals within thirty (30) days from the lapse of
the said 180-day period, otherwise, the assessment shall become final, executory
and demandable. (Boldfacing supplied)

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12. MICHEL J. LHUILLER Pawnshop, Inc. vs CIR
G.R. No. 166786; May 3, 2006

Republic of the Philippines


SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 166786 May 3, 2006

MICHEL J. LHUILLER Pawnshop, Inc. Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

YNARES-SANTIAGO, J.:

Assailed in this petition for review on certiorari is the June 29, 2004 Decision 1 of the Court of
Appeals in CA-G.R. SP No. 67667, which reversed the October 24, 2001 Decision2 of the Court Tax
Appeals and ordered petitioner Michel J. Lhuillier Pawnshop, Inc., to pay (1) P19,961,636.09 as
deficiency Value Added Tax (VAT); and (2) P3,142,986.02 as deficiency Documentary Stamp Tax
(DST), for the year 1997.

The facts show that petitioner, a corporation engaged in the pawnshop business, received
Assessment Notice Nos. 81-VAT-13-97-99-12-118 and 81-DST-13-97-99-12-119, issued by the
Chief Assessment Division, Revenue Region No. 13, Cebu City, for deficiency VAT in the amount
of P19,961,636.09 and deficiency DST in the amount of P13,142,986.02, for the year 1997.
Petitioner filed a motion for reconsideration of said assessment notices but was denied by
respondent Commissioner of Internal Revenue (CIR).

On petition for review with the Court of Tax Appeals, the latter rendered decision in favor of
petitioner setting aside the assessment notices issued by the CIR. It ruled, inter alia, that the
subject of a DST under Section 195 of the National Internal Revenue Code (NIRC) is the document
evidencing the covered transaction. Holding that a pawn ticket is neither a security nor a printed
evidence of indebtedness, the tax court concluded that such pawn ticket cannot be the subject
of a DST. The dispositive portion thereof, states:

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WHEREFORE, in view of all the foregoing, the instant Petition for Review is hereby GRANTED.
Accordingly, Assessment Notices Nos. 81-VAT-13-97-99-12-118 and 81-DST-13-97-99-11-119 are
hereby CANCELLED and SET ASIDE.

SO ORDERED.3

Respondent filed a petition for review with the Court of Appeals which reversed the CTA decision
and sustained the assessments against petitioner. It ratiocinated, among others, that a pawn
ticket, per se, is not subject to DST; rather, it is the transaction involved, which in this case is
pledge, that is being taxed. Hence, petitioner was properly assessed to pay DST. The decretal
portion thereof, provides:

WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court of Tax Appeals
dated October 24, 2001 is REVERSED and SET ASIDE. In lieu thereof, respondent Michel J. Lhuillier
Pawnshop, Inc., is ORDERED TO PAY: (1) P19,961636.09, as deficiency Value-Added Tax, inclusive
of surcharge and interest; and (2) P3,142,986.02, as deficiency Documentary Stamp Tax, inclusive
of surcharge and interest, for the year 1997. No pronouncement as to cost.

SO ORDERED.4

Respondent filed a motion for partial reconsideration praying that petitioner be ordered to pay
deficiency interest of 20% per annum for failure to pay the same on January 2, 2000, as indicated
in the notices. On December 29, 2004, the Court of Appeals granted the motion and modified the
June 29, 2004 decision as follows:

WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court of Tax Appeals
dated October 24, 2001 is REVERSED and SET ASIDE. In lieu thereof, respondent Michel J. Lhuillier
Pawnshop, Inc., is ORDERED TO PAY: (1) 19,961,636.09, as deficiency Value-Added Tax, inclusive
of surcharge and interest; (2) P3,142,986.02, as deficiency Documentary Stamp Tax, inclusive of
surcharge and interest, for the year 1997; and (3) Delinquency Interest at the rate of 20% per
annum from January 2, 2000, until the deficiency assessment are fully paid, pursuant to Section
249 of the National Internal Revenue Code. No pronouncement as to costs.

SO ORDERED.5

On January 25, 2005, petitioner elevated the case to this Court. Subsequently, it filed a motion
to withdraw the petition with respect to the issue of VAT.6 Petitioner manifested that the
Chamber of Pawnbrokers of the Philippines, where it is a member, entered into a Memorandum
of Agreement7 with the Bureau of Internal Revenue (BIR) allowing the pawnshop industry to
compromise the issue of VAT on pawnshops. Considering that petitioner already paid the agreed
amount of settlement, it prayed that the case be decided solely on the issue of DST.

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On September 28, 2005, the Court granted petitioners partial withdrawal of the petition. 8 Hence,
the lone question to be resolved in the present petition is whether petitioners pawnshop
transactions are subject to DST.

The Court rules in the affirmative.

Sections 173 and 195 of the NIRC, state:

SEC. 173. Stamp Taxes Upon Documents, Loan Agreements, Instruments, and Papers. Upon
documents, instruments, loan agreements and papers, and upon acceptances, assignments,
sales and transfers of the obligation, right or property incident thereto, there shall be levied,
collected and paid for, and in respect of the transaction so had or accomplished, the
corresponding documentary stamp taxes x x x. (Emphasis supplied)

SEC. 195. Stamp Tax on Mortgages, Pledges, and Deeds of Trust. On every mortgage
or pledge of lands, estate, or property, real or personal, heritable or movable, whatsoever, where
the same shall be made as security for the payment of any definite and certain sum of money
lent at the time or previously due and owing or forborne to be paid, being payable and on any
conveyance of land, estate, or property whatsoever, in trust or to be sold, or otherwise converted
into money which shall be and intended only as security, either by express stipulation or
otherwise, there shall be collected a documentary stamp tax at the following rates:

"(a) When the amount secured does not exceed Five thousand pesos (P5,000), Twenty pesos
(P20).1avvphil.net

(b) On each Five thousand pesos (P5,000), or fractional part thereof in excess of Five thousand
pesos (P5,000), an additional tax of Ten pesos (10.00).

x x x x. (Emphasis supplied)

It is clear from the foregoing provisions that the subject of a DST is not limited to the document
embodying the enumerated transactions. A DST is an excise tax on the exercise of a right or
privilege to transfer obligations, rights or properties incident thereto. In Philippine Home
Assurance Corporation v. Court of Appeals,9 it was held that:

In general, documentary stamp taxes are levied on the exercise by persons of certain privileges
conferred by law for the creation, revision, or termination of specific legal relationships through
the execution of specific instruments. Examples of such privileges, the exercise of which, as
effected through the issuance of particular documents, are subject to the payment of
documentary stamp taxes are leases of lands, mortgages, pledges and trusts, and conveyances
of real property. (Emphasis added)

Pledge is among the privileges, the exercise of which is subject to DST. A pledge may be defined
as an accessory, real and unilateral contract by virtue of which the debtor or a third person

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delivers to the creditor or to a third person movable property as security for the performance of
the principal obligation, upon the fulfillment of which the thing pledged, with all its accessions
and accessories, shall be returned to the debtor or to the third person. 10 This is essentially the
business of pawnshops which are defined under Section 3 of Presidential Decree No. 114, or the
Pawnshop Regulation Act, as persons or entities engaged in lending money on personal property
delivered as security for loans.

Section 12 of the Pawnshop Regulation Act and Section 21 of the Rules and Regulations For
Pawnshops11issued by the Central Bank12 to implement the Act, require every pawnshop or
pawnbroker to issue, at the time of every such loan or pledge, a memorandum or ticket signed
by the pawnbroker and containing the following details: (1) name and residence of the pawner;
(2) date the loan is granted; (3) amount of principal loan; (4) interest rate in percent; (5) period
of maturity; (6) description of pawn; (7) signature of pawnbroker or his authorized agent; (8)
signature or thumb mark of pawner or his authorized agent; and (9) such other terms and
conditions as may be agreed upon between the pawnbroker and the pawner. In addition, Central
Bank Circular No. 445,13 prescribed a standard form of pawn tickets with entries for the required
details on its face and the mandated terms and conditions of the pledge at the dorsal portion
thereof.

Section 3 of the Pawnshop Regulation Act defines a pawn ticket as follows:

"Pawn ticket" is the pawnbrokers receipt for a pawn. It is neither a security nor a printed
evidence of indebtedness."

True, the law does not consider said ticket as an evidence of security or indebtedness. However,
for purposes of taxation, the same pawn ticket is proof of an exercise of a taxable privilege of
concluding a contract of pledge. At any rate, it is not said ticket that creates the pawnshops
obligation to pay DST but the exercise of the privilege to enter into a contract of pledge. There is
therefore no basis in petitioners assertion that a DST is literally a tax on a document and that no
tax may be imposed on a pawn ticket.

The settled rule is that tax laws must be construed in favor of the taxpayer and strictly against
the government; and that a tax cannot be imposed without clear and express words for that
purpose.14 Taking our bearing from the foregoing doctrines, we scrutinized Section 195 of the
NIRC, but there is no way that said provision may be interpreted in favor of petitioner. Section
195 unqualifiedly subjects all pledges to DST. It states that "[o]n every x x x pledge x x x there
shall be collected a documentary stamp tax x x x." It is clear, categorical, and needs no further
interpretation or construction. The explicit tenor thereof requires hardly anything than a simple
application.15

The onus of proving that pawnshops are not subject to DST is thus shifted to petitioner. In
establishing tax exemptions, it should be borne in mind that taxation is the rule, exemption is the
exception. Accordingly, statutes granting tax exemptions must be construed in strictissimi
juris against the taxpayer and liberally in favor of the taxing authority. One who claims an

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exemption from tax payments rests the burden of justifying the exemption by words too plain to
be mistaken and too categorical to be misinterpreted.16

In the instant case, there is no law specifically and expressly exempting pledges entered into by
pawnshops from the payment of DST. Section 19917 of the NIRC enumerated certain documents
which are not subject to stamp tax; but a pawnshop ticket is not one of them. Hence, petitioners
nebulous claim that it is not subject to DST is without merit. It cannot be over-emphasized that
tax exemption represents a loss of revenue to the government and must, therefore, not rest on
vague inference.18 Exemption from taxation is never presumed. For tax exemption to be
recognized, the grant must be clear and express; it cannot be made to rest on doubtful
implications.19

The Court notes that BIR Ruling No. 305-87,20 and BIR Ruling No. 018-88,21 which held that a pawn
ticket is subject to DST because it is an evidence of a pledge transaction, had been revoked by
BIR Ruling No. 325-88.22In the latter ruling, the BIR held that DST is a tax on the document; and
since a pawn ticket is not an evidence of indebtedness, it cannot be subject to DST. Nevertheless,
this interpretation is not consistent with the provisions of Section 195 of the NIRC which
categorically taxes the privilege to enter into a contract of pledge. Indeed, administrative
issuances must not override, supplant or modify the law but must be consistent with the law they
intend to carry out.23

Finally, petitioner invokes the declaration of nullity of Revenue Memorandum Circular (RMC) No.
43-91 in Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.24 Said case,
however, is not applicable to the present controversy. RMC No. 43-91 is actually a clarification of
Revenue Memorandum Order No. 15-91 which classified pawnshops as "lending investors" and
imposed upon them a 5% lending investors tax. While RMC No. 43-91 declared in addition that
pawnshops are subject to DST, such was never an issue in Commissioner of Internal Revenue v.
Michel J. Lhuillier Pawnshop, Inc., because nowhere was it mentioned therein that the pawnshop
involved was directed to pay DST. Otherwise stated, the declaration of nullity of RMC No. 43-91
was the Courts finding, among others, that pawnshops cannot be classified as lending investors;
and certainly not because pawnshops are not subject to DST. The invocation of said ruling is
therefore misplaced.

WHEREFORE, the petition is DENIED and the June 29, 2004 Decision of the Court of Appeals, as
modified on December 29, 2004, in CA-G.R. SP No. 67667, is AFFIRMED.

SO ORDERED.

CONSUELO YNARES-SANTIAGO
Associate Justice

WE CONCUR:

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MAS
ARTEMIO V. PANGANIBAN
Chief Justice
Chairperson

MA. ALICIA AUSTRIA-MARTINEZ ROMEO J. CALLEJO, SR.


Associate Justice Asscociate Justice

MINITA V. CHICO-NAZARIO
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions
in the above Decision were reached in consultation before the case was assigned to the writer of
the opinion of the Courts Division.

ARTEMIO V. PANGANIBAN
Chief Justice

Footnotes

1Rollo, pp. 56-62. Penned by Associate Justice Hakim S. Abdulwahid and concurred in by
Associate Justices Elvi John S. Asuncion and Mariano C. Del Castillo.

2 Id. at 65-74.

3 Id. at 73.

4 Id. at 61.

5 Id. at 112.

6 Id. at 172-175.

7 Id. at 176-183.

8 Id. at 186.

9 361 Phil. 368, 372-373 (1999).

10 See Articles 2085, 2087 and 2093 of the Civil Code.

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MAS
11 Central Bank Circular No. 374, dated July 13, 1973.

12 Section 17 of the Pawnshop Regulation Act vests on the Central Bank the authority to
issue rules regulating the business of pawnshops, to exercise visitorial powers and impose
administrative sanctions whenever necessary.

13 Dated January 20, 1975.

14 Commissioner of Internal Revenue v. Court of Appeals, 338 Phil. 322, 330 (1997).

15 Commissioner of Internal Revenue v. Court of Appeals, 310 Phil. 392, 397 (1995).

16Commissioner of Internal Revenue v. Philippine Long Distance Company, G.R. No.


140230, December 15, 2005; Commissioner of Internal Revenue v. Mitsubishi Metal
Corporation, G.R. Nos. 54908 & 80041, January 22, 1990, 181 SCRA 214, 223-224.

17Section 199. Documents and Papers not Subject to Stamp Tax. The provisions of
Section 173 to the contrary notwithstanding, the following instruments, documents, and
papers shall be exempt from the documentary stamp tax:

(a) Policies of insurance or annuities made or granted by a fraternal or beneficiary


society, order, association, or cooperative company, operated on the lodge
system or local cooperation plan and organized and conducted solely by the
members thereof for the exclusive benefit of each member and not for profit.

(b) Certificates of oaths administered to any government official in his official


capacity or of acknowledgment by any government official in the performance of
his official duties, written appearance in any court by any government official, in
his official capacity; certificates of the administration of oaths to any person as to
the authenticity of any paper required to be filed in court by any person or party
thereto, whether the proceedings be civil or criminal; papers and documents filed
in courts by or for the national, provincial, city or municipal governments;
affidavits of poor persons for the purpose of proving poverty; statements and
other compulsory information required of persons or corporations by the rules
and regulations of the national, provincial, city or municipal governments
exclusively for statistical purposes and which are wholly for the use of the bureau
or office in which they are filed, and not at the instance or for the use or benefit
of the person filing them; certified copies and other certificates placed upon
documents, instruments, and papers for the national, provincial, city or municipal
governments, made at the instance and for the sole use of some other branch of
the national, provincial, city or municipal governments; and certificates of the
assessed value of lands, not exceeding Two hundred pesos (P200) in value
assessed, furnished by the provincial, city or municipal Treasurer to applicants for
registration of title to land.

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(c) Borrowing and lending of securities executed under the Securities Borrowing
and Lending Program of a registered exchange, or in accordance with regulations
prescribed by the appropriate regulatory authority: Provided, however, That any
borrowing or lending of securities agreement as contemplated hereof shall be duly
covered by a master securities borrowing and lending agreement acceptable to
the appropriate regulatory authority, and which agreement is duly registered and
approved by the Bureau of Internal Revenue (BIR).

(d) Loan agreements or promissory notes, the aggregate of which does not exceed
Two hundred fifty thousand pesos (P250,000), or any such amount as may be
determined by the Secretary of Finance, executed by an individual for his purchase
on installment for his personal use or that of his family and not for business or
resale, barter or hire of a house, lot, motor vehicle, appliance or furniture:
Provided, however, That the amount to be set by Secretary of Finance shall be in
accordance with a relevant price index but not to exceed ten percent (10%) of the
current amount and shall remain in force at least for three (3) years.

(e) Sale, barter or exchange of shares of stock listed and traded through the local
stock exchange for a period of five (5) years from the effectivity of this act.

(f) Assignment or transfer of any mortgage, lease or policy of insurance, or the


renewal or continuance of any agreement, contract, charter, or any evidence of
obligation or indebtedness, if there is no change in the maturity date or remaining
period of coverage from that of the original instrument.

(g) Fixed income and other securities traded in the secondary market or through
an exchange.

(h) Derivatives: Provided, That for purpose of this exemption, repurchases


agreements and reverse repurchase agreements shall be treated similarity as
derivatives.

(i) Interbranch or interdepartmental advances within the same legal entity.

(j) All forbearances arising from sales or service contracts including credit card and
trade receivables: Provided, That the exemption be limited to those executed by
the seller or service provider itself.

(k) Bank deposit accounts without a fixed term or maturity.

(l) All contracts, deeds, documents and transactions related to the conduct of
business of the Bangko Sentral ng Pilipinas.

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(m) Transfer of property pursuant to Section 40(c)(2) of the National Internal
Revenue Code of 1997, as amended.

(n) Interbank call loans with maturity of not more than seven (7) days to cover
deficiency in reserves against deposit liabilities, including those between or
among banks and quasi-banks.

(As amended by Republic Act No. 9243)

18 Commissioner of Internal Revenue v. Philippine Long Distance Company, supra note 16.

19 Insular Lumber Company v. Court of Tax Appeals, 192 Phil. 221, 231 (1981).

20 Dated September 24, 1987.

21 Dated February 1, 1988.

22 Dated July 13, 1988.

23 Commissioner of Internal Revenue v. Court of Appeals, supra note 15.

24 453 Phil. 1043 (2003).

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13. CIR vs SONY PHILIPPINES, INC.
G.R. No. 178697; November 17, 2010

Republic of the Philippines


SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 178697 November 17, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


vs.
SONY PHILIPPINES, INC., Respondent.

DECISION

MENDOZA, J.:

This petition for review on certiorari seeks to set aside the May 17, 2007 Decision and the July 5,
2007 Resolution of the Court of Tax Appeals En Banc1 (CTA-EB), in C.T.A. EB No. 90, affirming
the October 26, 2004 Decision of the CTA-First Division2 which, in turn, partially granted the
petition for review of respondent Sony Philippines, Inc. (Sony). The CTA-First Division decision
cancelled the deficiency assessment issued by petitioner Commissioner of Internal
Revenue (CIR) against Sony for Value Added Tax (VAT) but upheld the deficiency assessment for
expanded withholding tax (EWT) in the amount of P1,035,879.70 and the penalties for late
remittance of internal revenue taxes in the amount of P1,269, 593.90.3

THE FACTS:

On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA
19734) authorizing certain revenue officers to examine Sonys books of accounts and other
accounting records regarding revenue taxes for "the period 1997 and unverified prior years." On
December 6, 1999, a preliminary assessment for 1997 deficiency taxes and penalties was issued
by the CIR which Sony protested. Thereafter, acting on the protest, the CIR issued final
assessment notices, the formal letter of demand and the details of discrepancies.4 Said details of
the deficiency taxes and penalties for late remittance of internal revenue taxes are as follows:

DEFICIENCY VALUE -ADDED TAX (VAT)


(Assessment No. ST-VAT-97-0124-2000)

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Basic Tax Due P 7,958,700.00
Add: Penalties
Interest up to 3-31-2000 P 3,157,314.41
Compromise 25,000.00 3,182,314.41
Deficiency VAT Due P 11,141,014.41

DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)


(Assessment No. ST-EWT-97-0125-2000)
Basic Tax Due P 1,416,976.90
Add: Penalties
Interest up to 3-31-2000 P 550,485.82
Compromise 25,000.00 575,485.82
Deficiency EWT Due P 1,992,462.72

DEFICIENCY OF VAT ON ROYALTY PAYMENTS


(Assessment No. ST-LR1-97-0126-2000)
Basic Tax Due P
Add: Penalties
Surcharge P 359,177.80
Interest up to 3-31-2000 87,580.34
Compromise 16,000.00 462,758.14
Penalties Due P 462,758.14

LATE REMITTANCE OF FINAL WITHHOLDING TAX


(Assessment No. ST-LR2-97-0127-2000)
Basic Tax Due P
Add: Penalties
Surcharge P 1,729,690.71
Interest up to 3-31-2000 508,783.07

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Compromise 50,000.00 2,288,473.78
Penalties Due P 2,288,473.78

LATE REMITTANCE OF INCOME PAYMENTS


(Assessment No. ST-LR3-97-0128-2000)
Basic Tax Due P
Add: Penalties
25 % Surcharge P 8,865.34
Interest up to 3-31-2000 58.29
Compromise 2,000.00 10,923.60
Penalties Due P 10,923.60

GRAND TOTAL P 15,895,632.655

Sony sought re-evaluation of the aforementioned assessment by filing a protest on February 2,


2000. Sony submitted relevant documents in support of its protest on the 16th of that same
month.6

On October 24, 2000, within 30 days after the lapse of 180 days from submission of the said
supporting documents to the CIR, Sony filed a petition for review before the CTA.7

After trial, the CTA-First Division disallowed the deficiency VAT assessment because the
subsidized advertising expense paid by Sony which was duly covered by a VAT invoice resulted in
an input VAT credit. As regards the EWT, the CTA-First Division maintained the deficiency EWT
assessment on Sonys motor vehicles and on professional fees paid to general professional
partnerships. It also assessed the amounts paid to sales agents as commissions with five percent
(5%) EWT pursuant to Section 1(g) of Revenue Regulations No. 6-85. The CTA-First Division,
however, disallowed the EWT assessment on rental expense since it found that the total rental
deposit of P10,523,821.99 was incurred from January to March 1998 which was again beyond
the coverage of LOA 19734. Except for the compromise penalties, the CTA-First Division also
upheld the penalties for the late payment of VAT on royalties, for late remittance of final
withholding tax on royalty as of December 1997 and for the late remittance of EWT by some of
Sonys branches.8 In sum, the CTA-First Division partly granted Sonys petition by cancelling the

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deficiency VAT assessment but upheld a modified deficiency EWT assessment as well as the
penalties. Thus, the dispositive portion reads:

WHEREFORE, the petition for review is hereby PARTIALLY GRANTED. Respondent is ORDERED to
CANCEL and WITHDRAW the deficiency assessment for value-added tax for 1997 for lack of merit.
However, the deficiency assessments for expanded withholding tax and penalties for late
remittance of internal revenue taxes are UPHELD.

Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency expanded withholding
tax in the amount of P1,035,879.70 and the following penalties for late remittance of internal
revenue taxes in the sum of P1,269,593.90:

1. VAT on Royalty P 429,242.07


2. Withholding Tax on Royalty 831,428.20
3. EWT of Petitioner's Branches 8,923.63
Total P 1,269,593.90

Plus 20% delinquency interest from January 17, 2000 until fully paid pursuant to Section 249(C)(3)
of the 1997 Tax Code.

SO ORDERED.9

The CIR sought a reconsideration of the above decision and submitted the following grounds in
support thereof:

A. The Honorable Court committed reversible error in holding that petitioner is not liable
for the deficiency VAT in the amount of P11,141,014.41;

B. The Honorable court committed reversible error in holding that the commission
expense in the amount of P2,894,797.00 should be subjected to 5% withholding tax
instead of the 10% tax rate;

C. The Honorable Court committed a reversible error in holding that the withholding tax
assessment with respect to the 5% withholding tax on rental deposit in the amount
of P10,523,821.99 should be cancelled; and

D. The Honorable Court committed reversible error in holding that the remittance of final
withholding tax on royalties covering the period January to March 1998 was filed on
time.10

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On April 28, 2005, the CTA-First Division denied the motion for
reconsideration.1avvphi1 Unfazed, the CIR filed a petition for review with the CTA-EB raising
identical issues:

1. Whether or not respondent (Sony) is liable for the deficiency VAT in the amount of
P11,141,014.41;

2. Whether or not the commission expense in the amount of P2,894,797.00 should be


subjected to 10% withholding tax instead of the 5% tax rate;

3. Whether or not the withholding assessment with respect to the 5% withholding tax on
rental deposit in the amount of P10,523,821.99 is proper; and

4. Whether or not the remittance of final withholding tax on royalties covering the period
January to March 1998 was filed outside of time.11

Finding no cogent reason to reverse the decision of the CTA-First Division, the CTA-EB dismissed
CIRs petition on May 17, 2007. CIRs motion for reconsideration was denied by the CTA-EB on
July 5, 2007.

The CIR is now before this Court via this petition for review relying on the very same grounds it
raised before the CTA-First Division and the CTA-EB. The said grounds are reproduced below:

GROUNDS FOR THE ALLOWANCE OF THE PETITION

THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT LIABLE FOR DEFICIENCY VAT IN
THE AMOUNT OF PHP11,141,014.41.

II

AS TO RESPONDENTS DEFICIENCY EXPANDED WITHHOLDING TAX IN THE AMOUNT OF


PHP1,992,462.72:

A. THE CTA EN BANC ERRED IN RULING THAT THE COMMISSION EXPENSE IN THE
AMOUNT OF PHP2,894,797.00 SHOULD BE SUBJECTED TO A WITHHOLDING TAX
OF 5% INSTEAD OF THE 10% TAX RATE.

B. THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT WITH RESPECT
TO THE 5% WITHHOLDING TAX ON RENTAL DEPOSIT IN THE AMOUNT OF
PHP10,523,821.99 IS NOT PROPER.

III

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THE CTA EN BANC ERRED IN RULING THAT THE FINAL WITHHOLDING TAX ON ROYALTIES
COVERING THE PERIOD JANUARY TO MARCH 1998 WAS FILED ON TIME.12

Upon filing of Sonys comment, the Court ordered the CIR to file its reply thereto. The CIR
subsequently filed a manifestation informing the Court that it would no longer file a reply. Thus,
on December 3, 2008, the Court resolved to give due course to the petition and to decide the
case on the basis of the pleadings filed.13

The Court finds no merit in the petition.

The CIR insists that LOA 19734, although it states "the period 1997 and unverified prior years,"
should be understood to mean the fiscal year ending in March 31, 1998. 14 The Court cannot
agree.

Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority given to the
appropriate revenue officer assigned to perform assessment functions. It empowers or enables
said revenue officer to examine the books of account and other accounting records of a taxpayer
for the purpose of collecting the correct amount of tax.15 The very provision of the Tax Code that
the CIR relies on is unequivocal with regard to its power to grant authority to examine and assess
a taxpayer.

SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements
for Tax Administration and Enforcement.

(A)Examination of Returns and Determination of tax Due. After a return has been filed as
required under the provisions of this Code, the Commissioner or his duly authorized
representative may authorize the examination of any taxpayer and the assessment of the correct
amount of tax: Provided, however, That failure to file a return shall not prevent the
Commissioner from authorizing the examination of any taxpayer. x x x [Emphases supplied]

Clearly, there must be a grant of authority before any revenue officer can conduct an examination
or assessment. Equally important is that the revenue officer so authorized must not go beyond
the authority given. In the absence of such an authority, the assessment or examination is a
nullity.

As earlier stated, LOA 19734 covered "the period 1997 and unverified prior years." For said
reason, the CIR acting through its revenue officers went beyond the scope of their authority
because the deficiency VAT assessment they arrived at was based on records from January to
March 1998 or using the fiscal year which ended in March 31, 1998. As pointed out by the CTA-
First Division in its April 28, 2005 Resolution, the CIR knew which period should be covered by
the investigation. Thus, if CIR wanted or intended the investigation to include the year 1998, it
should have done so by including it in the LOA or issuing another LOA.

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MAS
Upon review, the CTA-EB even added that the coverage of LOA 19734, particularly the phrase
"and unverified prior years," violated Section C of Revenue Memorandum Order No. 43-90 dated
September 20, 1990, the pertinent portion of which reads:

3. A Letter of Authority should cover a taxable period not exceeding one taxable year. The
practice of issuing L/As covering audit of "unverified prior years is hereby prohibited. If the audit
of a taxpayer shall include more than one taxable period, the other periods or years shall be
specifically indicated in the L/A.16 [Emphasis supplied]

On this point alone, the deficiency VAT assessment should have been disallowed. Be that as it
may, the CIRs argument, that Sonys advertising expense could not be considered as an input
VAT credit because the same was eventually reimbursed by Sony International Singapore (SIS), is
also erroneous.

The CIR contends that since Sonys advertising expense was reimbursed by SIS, the former never
incurred any advertising expense. As a result, Sony is not entitled to a tax credit. At most, the CIR
continues, the said advertising expense should be for the account of SIS, and not Sony.17

The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the
CTA-EB, Sonys deficiency VAT assessment stemmed from the CIRs disallowance of the input VAT
credits that should have been realized from the advertising expense of the latter.18 It is evident
under Section 11019 of the 1997 Tax Code that an advertising expense duly covered by a VAT
invoice is a legitimate business expense. This is confirmed by no less than CIRs own witness,
Revenue Officer Antonio Aluquin.20 There is also no denying that Sony incurred advertising
expense. Aluquin testified that advertising companies issued invoices in the name of Sony and
the latter paid for the same.21 Indubitably, Sony incurred and paid for advertising expense/
services. Where the money came from is another matter all together but will definitely not
change said fact.

The CIR further argues that Sony itself admitted that the reimbursement from SIS was income
and, thus, taxable. In support of this, the CIR cited a portion of Sonys protest filed before it:

The fact that due to adverse economic conditions, Sony-Singapore has granted to our client a
subsidy equivalent to the latters advertising expenses will not affect the validity of the input
taxes from such expenses. Thus, at the most, this is an additional income of our client subject to
income tax. We submit further that our client is not subject to VAT on the subsidy income as this
was not derived from the sale of goods or services.22

Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to
income tax, the Court agrees. However, the Court does not agree that the same subsidy should
be subject to the 10% VAT. To begin with, the said subsidy termed by the CIR as reimbursement
was not even exclusively earmarked for Sonys advertising expense for it was but an assistance
or aid in view of Sonys dire or adverse economic conditions, and was only "equivalent to the
latters (Sonys) advertising expenses."

256
MAS
Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:

SEC. 106. Value-added Tax on Sale of Goods or Properties.

(A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or
exchange of goods or properties, value-added tax equivalent to ten percent (10%) of the gross
selling price or gross value in money of the goods or properties sold, bartered or exchanged, such
tax to be paid by the seller or transferor.

Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be
levied. Certainly, there was no such sale, barter or exchange in the subsidy given by SIS to Sony.
It was but a dole out by SIS and not in payment for goods or properties sold, bartered or
exchanged by Sony.

In the case of CIR v. Court of Appeals (CA),23 the Court had the occasion to rule that services
rendered for a fee even on reimbursement-on-cost basis only and without realizing profit are
also subject to VAT. The case, however, is not applicable to the present case. In that case,
COMASERCO rendered service to its affiliates and, in turn, the affiliates paid the former
reimbursement-on-cost which means that it was paid the cost or expense that it incurred
although without profit. This is not true in the present case. Sony did not render any service to
SIS at all. The services rendered by the advertising companies, paid for by Sony using SIS dole-
out, were for Sony and not SIS. SIS just gave assistance to Sony in the amount equivalent to the
latters advertising expense but never received any goods, properties or service from Sony.

Regarding the deficiency EWT assessment, more particularly Sonys commission expense, the CIR
insists that said deficiency EWT assessment is subject to the ten percent (10%) rate instead of the
five percent (5%) citing Revenue Regulation No. 2-98 dated April 17, 1998.24 The said revenue
regulation provides that the 10% rate is applied when the recipient of the commission income is
a natural person. According to the CIR, Sonys schedule of Selling, General and Administrative
expenses shows the commission expense as "commission/dealer salesman incentive,"
emphasizing the word salesman.

On the other hand, the application of the five percent (5%) rate by the CTA-First Division is based
on Section 1(g) of Revenue Regulations No. 6-85 which provides:

(g) Amounts paid to certain Brokers and Agents. On gross payments to customs, insurance, real
estate and commercial brokers and agents of professional entertainers five per centum (5%).25

In denying the very same argument of the CIR in its motion for reconsideration, the CTA-First
Division, held:

x x x, commission expense is indeed subject to 10% withholding tax but payments made to broker
is subject to 5% withholding tax pursuant to Section 1(g) of Revenue Regulations No. 6-85. While
the commission expense in the schedule of Selling, General and Administrative expenses

257
MAS
submitted by petitioner (SPI) to the BIR is captioned as "commission/dealer salesman incentive"
the same does not justify the automatic imposition of flat 10% rate. As itemized by petitioner,
such expense is composed of "Commission Expense" in the amount of P10,200.00 and Broker
Dealer of P2,894,797.00.26

The Court agrees with the CTA-EB when it affirmed the CTA-First Division decision. Indeed, the
applicable rule is Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94,
which was the applicable rule during the subject period of examination and assessment as
specified in the LOA. Revenue Regulations No. 2-98, cited by the CIR, was only adopted in April
1998 and, therefore, cannot be applied in the present case. Besides, the withholding tax on
brokers and agents was only increased to 10% much later or by the end of July 2001 under
Revenue Regulations No. 6-2001.27 Until then, the rate was only 5%.

The Court also affirms the findings of both the CTA-First Division and the CTA-EB on the deficiency
EWT assessment on the rental deposit. According to their findings, Sony incurred the subject
rental deposit in the amount of P10,523,821.99 only from January to March 1998. As stated
earlier, in the absence of the appropriate LOA specifying the coverage, the CIRs deficiency EWT
assessment from January to March 1998, is not valid and must be disallowed.

Finally, the Court now proceeds to the third ground relied upon by the CIR.

The CIR initially assessed Sony to be liable for penalties for belated remittance of its FWT on
royalties (i) as of December 1997; and (ii) for the period from January to March 1998. Again, the
Court agrees with the CTA-First Division when it upheld the CIR with respect to the royalties for
December 1997 but cancelled that from January to March 1998.

The CIR insists that under Section 328 of Revenue Regulations No. 5-82 and Sections 2.57.4 and
2.58(A)(2)(a)29of Revenue Regulations No. 2-98, Sony should also be made liable for the FWT on
royalties from January to March of 1998. At the same time, it downplays the relevance of the
Manufacturing License Agreement (MLA) between Sony and Sony-Japan, particularly in the
payment of royalties.

The above revenue regulations provide the manner of withholding remittance as well as the
payment of final tax on royalty. Based on the same, Sony is required to deduct and withhold final
taxes on royalty payments when the royalty is paid or is payable. After which, the corresponding
return and remittance must be made within 10 days after the end of each month. The question
now is when does the royalty become payable?

Under Article X(5) of the MLA between Sony and Sony-Japan, the following terms of royalty
payments were agreed upon:

(5)Within two (2) months following each semi-annual period ending June 30 and December 31,
the LICENSEE shall furnish to the LICENSOR a statement, certified by an officer of the LICENSEE,
showing quantities of the MODELS sold, leased or otherwise disposed of by the LICENSEE during

258
MAS
such respective semi-annual period and amount of royalty due pursuant this ARTICLE X therefore,
and the LICENSEE shall pay the royalty hereunder to the LICENSOR concurrently with the
furnishing of the above statement.30

Withal, Sony was to pay Sony-Japan royalty within two (2) months after every semi-annual period
which ends in June 30 and December 31. However, the CTA-First Division found that there was
accrual of royalty by the end of December 1997 as well as by the end of June 1998. Given this,
the FWTs should have been paid or remitted by Sony to the CIR on January 10, 1998 and July 10,
1998. Thus, it was correct for the CTA-First Division and the CTA-EB in ruling that the FWT for the
royalty from January to March 1998 was seasonably filed. Although the royalty from January to
March 1998 was well within the semi-annual period ending June 30, which meant that the royalty
may be payable until August 1998 pursuant to the MLA, the FWT for said royalty had to be paid
on or before July 10, 1998 or 10 days from its accrual at the end of June 1998. Thus, when Sony
remitted the same on July 8, 1998, it was not yet late.

In view of the foregoing, the Court finds no reason to disturb the findings of the CTA-EB.

WHEREFORE, the petition is DENIED.

SO ORDERED.

JOSE CATRAL MENDOZA


Associate Justice

WE CONCUR:

ANTONIO T. CARPIO
Associate Justice
Chairperson

TERESITA J. LEONARDO-DE CASTRO* DIOSDADO M. PERALTA


Associate Justice Associate Justice

ROBERTO A. ABAD
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the
case was assigned to the writer of the opinion of the Courts Division.

ANTONIO T. CARPIO
Associate Justice
Chairperson, Second Division

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CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairpersons Attestation,
I certify that the conclusions in the above Decision had been reached in consultation before the
case was assigned to the writer of the opinion of the Courts Division.

RENATO C. CORONA
Chief Justice

Footnotes

*Designated as additional member in lieu of Justice Antonio Eduardo B. Nachura per raffle
dated April 14, 2010.

1Penned by Associate Justice Lovell R. Bautista with Presiding Justice Ernesto D. Acosta
and Associate Justices Juanito C. Castaeda, Erlinda P. Uy, Caesar A. Casanova and Olga
Palanca-Enriquez, concurring.

2Penned by Presiding Justice Ernesto D. Acosta with Associate Lovell R. Bautista,


concurring.

3 Rollo, pp. 9-10.

4 Id. at 60-61.

5 Id.

6 Id. at 62.

7 Id.

8 Id. at 42.

9 Id. at 83-84.

10 Id. at 86.

11 Id. at 43.

12 Id. at 16-17.

13 Id. at 253.

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MAS
14 Id. at 17-18.

15 National Internal Revenue Code;

SEC. 13. Authority of a Revenue Officer. Subject to the rules and regulations to
be prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, a Revenue Officer assigned to perform assessment functions in any
district may, pursuant to a Letter of Authority issued by the Revenue Regional
Director, examine taxpayers within the jurisdiction of the district in order to collect
the correct amount of tax, or to recommend the assessment of any deficiency tax
due in the same manner that the said acts could have been performed by the
Revenue Regional Director himself. (emphasis supplied)

16Revenue Memorandum Order No. 43-90 dated September 20, 1990, amending
Revenue Memorandum Order No. 37-90 prescribing revised guidelines for Examination
of Returns and Issuance of Letters of Authority to Audit, rollo, p. 46.

17 Id. at 21.

18 Id. at 64.

19 National Internal Revenue Code;

SEC. 110. Tax Credits.

A. Creditable Input Tax.

(1) Any input tax evidenced by a VAT invoice or official receipt issued in
accordance with Section 113 hereof on the following transactions shall be
creditable against the output tax:

(a) Purchase or importation of goods:

x x x.

(b) Purchase of services on which a value-added tax has been actually paid.

x x x.

The term input tax means the value-added tax due from or paid by a VAT-
registered person in the course of his trade or business on importation of goods
or local purchase of goods or services, including lease or use of property, from a
VAT-registered person. It shall also include the transitional input tax determined
in accordance with Section 111 of this Code.

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x x x. (emphasis supplied)

20 Rollo, p. 66; TSN, February 27, 2003, pp. 33-34 and 36.

21 Id. at 68; TSN, February 27, 2003, pp. 55-58.

22 Id. at 22.

23 CIR v. CA, 385 Phil. 875 (2000).

24 Rollo, p. 24.

25 Id. at 75.

26 Id. at 88.

27 Id. at 52.

28 Revenue Regulations No. 5-82

Section 3. Time of Withholding. The obligations of the payor to deduct and


withhold under these regulations arises at time income which subject to
withholding under Section 1 hereof is payable or paid.

29 Revenue Regulations No. 2-98

Section 2.57.4. Time of Withholding. The obligation of the payor to deduct and
withhold the tax under Section 2.57 of these regulations arises at the time an
income is paid or payable, whichever comes first. The term "payable" refers to the
date of the obligation become due, demandable or legally enforceable.

Section 2.58 Returns and Payment of Taxes Withheld at Source.

(A) Monthly return and payment of taxes withheld at source.

xxx

(2) When to File

30 Rollo, p. 81.

262
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