G.R. No.

175707 November 19, 2014

FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE and REVENUE DISTRICT OFFICER, REVENUE DISTRICT NO. 44,
TAGUIG and PATEROS, BUREAU OF INTERNAL REVENUE, Respondents.

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

G.R. No. 180035

FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE and REVENUE DISTRICT OFFICER, REVENUE DISTRICT NO. 44,
TAGUIG and PATEROS, BUREAU OF INTERNAL REVENUE, Respondents.

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

G.R. No. 181092

FORT BONIFACIO DEVELOPMENT CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE and REVENUE DISTRICT OFFICER, REVENUE DISTRICT NO. 44,
TAGUIG and PATEROS, BUREAU OF INTERNAL REVENUE, Respondents.

DECISION

LEONARDO-DE CASTRO, J.:

The Court has consolidated these three petitions as they involve the same parties, similar facts and common
questions of law. This is not the first time that Fort Bonifacio Development Corporation (FBDC) has come to this
Court about these issues against the very same respondents, and the Court En Banc has resolved them in two
separate, recent cases1 that are applicable here for reasons to be discussed below.

G.R. No. 175707 is an appeal by certiorari pursuant to Rule 45 of the 1997 Rules of Civil Procedure from (a) the
Decision2 dated April 22, 2003 of the Court of Appeals in CA-G.R. SP No. 61516 dismissing FBDC's Petition for
Review with regard to the Decision of the Court of Ta:x Appeals (CTA) dated October 13, 2000 in CTA Case No.
5885, and from (b) the Court of Appeals Resolution3 dated November 30, 2006 denying its Motion for
Reconsideration.

G.R. No. 180035 is likewise an appeal by certiorari pursuant to Rule 45 from (a) the Court of Appeals
Decision4dated April 30, 2007 in CAG.R. SP No. 76540 denying FBDC’s Petition for Review with respect to the CTA
Resolution5 dated March 28, 2003 in CTA Case No. 6021, and from (b) the Court of Appeals Resolution6 dated
October 8, 2007 denying its Motion for Reconsideration.

The CTA Resolution reconsidered and reversed its earlier Decision7 dated January 30, 2002 ordering respondents
in CTA Case No. 6021 to refund or issue a tax credit certificate infavor of petitioner in the amount of
₱77,151,020.46, representing "VAT erroneously paid by or illegally collected from petitioner for the first quarter of
1998, and instead denied petitioner’s Claim for Refund therefor."8

G.R. No. 181092 is also an appeal by certiorari pursuant to Rule 45 from the Court of Appeals Decision9 dated
December 28, 2007 in CA-G.R. SP No. 61158 dismissing FBDC’s petition for review with respect to the CTA
Decision10 dated September 29, 2000 in CTA Case No. 5694. The aforesaid CTA Decision, which the Court of
Appeals affirmed, denied petitioner’s Claim for Refund in the amount of ₱269,340,469.45, representing "VAT
erroneously paid by or illegally collected from petitioner for the fourth quarter of 1996."11

The facts are not in dispute.

Petitioner FBDC (petitioner) is a domestic corporation duly registered and existing under Philippine laws. Its issued
and outstanding capital stock is owned in part by the Bases Conversion Development Authority, a wholly owned
government corporation created by Republic Act No. 7227 for the purpose of "accelerating the conversion of military
reservations into alternative productive uses and raising funds through the sale of portions of said military
reservationsin order to promote the economic and social development of the country in general."12 The remaining
fifty-five per cent (55%) is owned by Bonifacio Land Corporation, a consortium of private domestic corporations.13

Respondent Commissioner of Internal Revenue is the head of the Bureau of Internal Revenue (BIR). Respondent
Revenue District Officer, Revenue District No. 44, Taguig and Pateros, BIR, is the chief of the aforesaid District
Office.

The parties entered into a Stipulation of Facts, Documents, and Issue14 before the CTA for each case. It was
established before the CTA that petitioner is engaged in the development and sale of real property. It is the owner
of, and is developing and selling, parcels of land within a "newtown" development area known as the Fort Bonifacio
Global City (the Global City), located within the former military camp known as Fort Bonifacio, Taguig, Metro
Manila.15 The National Government, by virtue of Republic Act No. 722716 and Executive Order No. 40,17 was the one
that conveyed to petitioner these parcels of land on February 8, 1995.

In May 1996, petitioner commenced developing the Global City, and since October 1996, had been selling lots to
interested buyers.18 At the time of acquisition, value-added tax (VAT) was not yet imposed on the sale of real
properties. Republic Act No. 7716(the Expanded Value-Added Tax [E-VAT] Law),19 which took effect on January 1,
1996, restructured the VAT system by further amending pertinent provisions of the National Internal Revenue Code
(NIRC). Section 100 of the old NIRC was so amended by including "real properties" in the definition of the term
"goods or properties," thereby subjecting the sale of "real properties" to VAT. The provision, as amended, reads:

SEC. 100. 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, 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.

(1) The term "goods or properties" shall mean all tangible and intangible objects which are capable of pecuniary
estimation and shall include:

(A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business[.]

While prior to Republic Act No. 7716, real estate transactions were not subject to VAT, they became subject to VAT
upon the effectivity of said law. Thus, the sale of the parcels of land by petitioner became subject to a 10% VAT, and
this was later increased to 12%, pursuant to Republic Act No. 9337.20 Petitioner afterwards becamea VAT-registered
taxpayer.

On September 19, 1996, in accordance with Revenue Regulations No. 7-95 (Consolidated VAT Regulations),
petitioner submitted to respondent BIR, Revenue District No. 44, Taguig and Pateros, an inventory list of its
properties as of February 29, 1996. The total book value of petitioner’s land inventory amounted to
₱71,227,503,200.00.21

On the basis of Section 105 of the NIRC,22 petitioner claims a transitional or presumptive input tax creditof 8% of
₱71,227,503,200.00, the total value of the real properties listed in its inventory, or a total input tax credit of
₱5,698,200,256.00.23 After the value of the real properties was reduced dueto a reconveyance by petitioner to BCDA
of a parcel of land, petitioner claims that it is entitled to input tax credit in the reduced amountof ₱4,250,475,000.48.24

What petitioner seeks to be refunded are the actual VAT payments made by it in cash, which it claims were either
erroneously paid by or illegally collected from it.25 Each Claim for Refund is based on petitioner’s position that it is
entitled to a transitional input tax credit under Section 105 of the old NIRC, which more than offsets the aforesaid
VAT payments.

G.R. No. 175707

Petitioner’s VAT returns filed with the BIR show that for the second quarter of 1997, petitioner received the total
amount of ₱5,014,755,287.40 from its sales and lease of lots, on which the output VAT payable was
₱501,475,528.74.26 The VAT returns likewise show that petitioner made cash payments totaling ₱486,355,846.78
and utilized its input tax credit of ₱15,119,681.96 on purchases of goods and services.27

On February 11, 1999, petitioner filed with the BIR a claim for refundof the amount of ₱486,355,846.78 which it paid
in cash as VAT for the second quarter of 1997.28

On May 21, 1999, petitioner filed with the CTA a petition for review29 by way of appeal, docketed as CTA Case No.
5885, from the alleged inaction by respondents of petitioner’s claim for refund with the BIR. On October 1, 1999, the
parties submitted tothe CTA a Stipulation of Facts, Documents and Issue.30 On October 13, 2000, the CTA issued its
Decision31 in CTA Case No. 5885 denying petitioner’s claim for refund for lack of merit.

On November 23, 2000, petitioner filed with the Court of Appeals a Petition for Review of the aforesaid CTA
Decision, which was docketed as CA-G.R SP No. 61516. On April 22, 2003, the CA issued its Decision32 dismissing
the Petition for Review. On November 30, 2006, the Court of Appeals issued its Resolution33 denying petitioner’s
Motion for Reconsideration.

On December 21, 2006, this Petition for Review was filed.

Petitioner submitted its Memorandum34 on November 7, 2008 while respondents filed their "Comment"35 on May 4,
2009.36

On December 2, 2009, petitioner submitted a Supplement37 to its Memorandum dated November 6, 2008,stating that
the said case is intimately related to the cases of Fort Bonifacio Development Corporation v. Commissioner of
Internal Revenue, G.R. No. 158885, and Fort Bonifacio Development Corporation v. Commissioner of Internal
Revenue," G.R. No. 170680, which were already decided by this Court, and which involve the same parties and
similar facts and issues.38

Except for the amounts of tax refund being claimed and the periods covered for each claim, the facts in this case
and in the other two consolidated cases below are thesame. The parties entered into similar Stipulations in the other
two cases consolidated here.39

G.R. No. 180035

We quote relevant portions of the parties’ Stipulation of Facts, Documents and Issue in CTA Case No. 6021 40 below:

1.11. Per VAT returns filed by petitioner with the BIR, for the second quarter of 1998, petitioner derived the
total amount of ₱903,427,264.20 from its sales and lease of lots, on which the output VAT payable to the
Bureau of Internal Revenue was ₱90,342,726.42.

1.12. The VAT returns filed by petitioner likewise show that to pay said amount of ₱90,342,726.42 due to the
BIR, petitioner made cash payments totalling ₱77,151,020.46 and utilized its regular input tax credit of
₱39,878,959.37 on purchases of goods and services.

1.13. On November 22, 1999, petitioner filed with the BIR a claim for refund of the amount of
₱77,151,020.46 which it paid as valueadded tax for the first quarter of 1998.

1.14. Earlier, on October 8, 1998 and November 17, 1998, February 11, 1999, May 11, 1999, and
September 10, 1999, based on similar grounds, petitioner filed with the BIR claims for refund of the amounts
of ₱269,340,469.45, ₱359,652,009.47, ₱486,355,846.78, ₱347,741,695.74, and ₱15,036,891.26,
representing value-added taxes paid by it on proceeds derived from its sales and lease of lots for the
quarters ended December 31, 1996, March 31, 1997, June 30, 1997, September 30, 1997, and December
31, 1997, respectively. After deducting these amounts of ₱269,340,469.45, ₱359,652,009.47,
₱486,355,846.78, ₱347,741,695.74, and ₱15,036,891.26 from the total amount of ₱5,698,200,256.00
claimed by petitioner as input tax credit, the remaining input tax credit more than sufficiently covers the
amount of ₱77,151,020.46 subject of petitioner’s claim for refund of November 22, 1999.
 1.15. As of the date of the Petition, no action had been taken by respondents on petitioner’s claim for refund
of November 22, 1999.41 (Emphases ours.)

The petition in G.R. No. 180035 "seeks to correct the unauthorized limitation of the term ‘real properties’ to
‘improvements thereon’ by Revenue Regulations 7-95 and the error of the Court of Tax Appeals and Court of
Appeals in sustaining the aforesaid Regulations."42 This theory of petitioner is the same for all three cases now
before us.

On March 14, 2013, petitioner filed a Motion for Consolidation43 of G.R. No. 180035 with G.R. No. 175707.

Petitioner submitted its Memorandum44 on September 15, 2009 while respondents filed theirson September 22,
2009.45

G.R. No. 181092

The facts summarized below are found in the parties’ Stipulation of Facts, Documents and Issue in CTA Case No.
569446:

1.09. Per VAT returns filed by petitioner with the BIR, for the fourth quarter of 1996, petitioner derived the
total amount of ₱3,498,888,713.60 from its sales and lease of lots, on which the output VAT payableto the
Bureau of Internal Revenue was₱318,080,792.14.

1.10. The VAT returns filed by petitioner likewise show that to pay said amount of ₱318,080,792.14 due to
the BIR, petitioner made cash payments totalling ₱269,340,469.45 and utilized (a) part of the total
transitional/presumptive input tax credit of ₱5,698,200,256.00 being claimed by it to the extent of
₱28,413,783.00; and (b) its regular input tax credit of ₱20,326,539.69 on purchases of goods and services.

1.11. On October 8, 1998 petitioner filed with the BIR a claim for refund of the amounts of ₱269,340,469.45,
which it paid as valueadded tax.

1.12. As of the date of the Petition, no action had been taken by respondents on petitioner’s claim for
refund.47 (Emphases ours.)

Petitioner submitted its Memorandum48 on January 18, 2010 while respondents filed theirs on October 14, 2010.49

On March 14, 2013, petitioner filed a Motion for Consolidation50 of G.R. No. 181092 with G.R. No. 175707.

On January 23, 2014, petitioner filed a Motion to Resolve51 these consolidated cases, alleging that the parties had
already filed their respective memoranda; and, more importantly, that the principal issue in these cases, whether
petitioner is entitled to the 8% transitional input tax granted in Section 105 (now Section 111[A]) of the NIRC based
on the value of its inventory of land, and as a consequence, to a refund of the amounts it paid as VAT for the
periods in question, had already been resolved by the Supreme Court En Bancin its Decision dated April 2, 2009 in
G.R. Nos. 158885 and 170680, as well as its Decision dated September 4, 2012 in G.R. No. 173425. Petitioner
further alleges that said decided cases involve the same parties, facts, and issues as the cases now before this
Court.52

THEORY OF PETITIONER

Petitioner claims that "the 10% value-added tax is based on the gross selling price or gross value in money of the
‘goods’ sold, bartered or exchanged."53 Petitioner likewise claims thatby definition, the term "goods" was limited to
"movable, tangible objects which is appropriable or transferable" and that said term did not originally include "real
property."54 It was previously defined as follows under Revenue Regulations No. 5-87:

(p) "Goods" means any movable, tangible objects which is appropriable or transferrable. Republic Act No. 7716 (E-
VAT Law, January 1, 1996) expanded the coverage of the original VAT Law (Executive Order No. 273), specifically
Section 100 of the old NIRC. According to petitioner, while under Executive Order No. 273, the term "goods" did not
include real properties, Republic Act No. 7716, in amending Section 100, explicitly included in the term "goods" "real
properties held primarily for sale to customers or held for lease in the ordinary course of trade or business."
Consequently, the sale, barter, or exchange of real properties was made subject to a VAT equivalent to 10% (later
increased to 12%, pursuant to Republic Act No. 9337) of the gross selling price of real properties.

Among the new provisions included by Executive Order No. 273 in the NIRC was the following: SEC. 105.
Transitional Input Tax Credits. — A person who becomes liable to value-added tax orany person who elects to be a
VAT registered person shall, subject to the filing of an inventory as prescribed by regulations, be allowed input tax
on his beginning inventory of goods, materials and supplies equivalent to 8%of the value of such inventory or the
actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable
against the output tax.

According to petitioner, the E-VAT Law, Republic Act No. 7716, did not amend Section 105. Thus, Section 105, as
quoted above, remained effective even after the enactment of Republic Act No. 7716.

Previously, or on December 9, 1995, the Secretary of Finance and the Commissioner of Internal Revenue issued
Revenue Regulations No. 7-95, which included the following provisions: SECTION 4.100-1. Value-added tax on sale
of goods or properties. — VAT is imposed and collected on every sale, barter or exchange or transactions "deemed
sale" of taxable goods or properties at the rate of 10% of the gross selling price.

"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 or properties, excluding the value-
added tax. The excise tax, if any, on such goods or properties shall form part of the gross selling price. In the case
of sale, barter or exchange of real property subject to VAT, gross selling price shall mean the consideration stated in
the sales document or the zonal value whichever is higher. Provided however, in the absence of zonal value, gross
selling price refers to the market value shown in the latest declaration or the consideration whichever is higher.

"Taxable sale" refers to the sale, barter, exchange and/or lease of goods or properties, including transactions
"deemed sale" and the performance of service for a consideration, all of which are subject to tax under Sections 100
and 102 of the Code.

Any person otherwise required to register for VAT purposes who fails to register shall also be liable to VAT on his
sale of taxable goods or properties as defined in the preceding paragraph. The sale of goods subject to excise tax is
also subject to VAT, except manufactured petroleum products (other than lubricating oil, processed gas, grease,
wax and petrolatum).

"Goods or properties" refer to all tangible and intangible objects which are capable of pecuniary estimation and shall
include:

1. Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business.

xxxx

SECTION 4.104-1. Credits for input tax. —

"Input tax"means the value-added tax due from or paid by a VAT registered person on importation of goodsor local
purchases of goods or services, including lease or use of property, from another VAT-registered person in the
course ofhis trade or business. It shall also include the transitional or presumptive input tax determined in
accordance with Section 105 of the Code.

xxxx

SECTION 4.105-1. Transitional input tax on beginning inventories. — Taxpayers who became VAT-registered
persons upon effectivity of RA No. 7716 who have exceeded the minimum turnover of ₱500,000.00 or who
voluntarily register even if their turnover does not exceed ₱500,000.00 shall be entitled to a presumptive input tax on
the inventory on hand as of December 31, 1995 on the following; (a) goods purchased for sale in their present
condition; (b) materials purchased for further processing, but which have not yet undergone processing; (c) goods
which have been manufactured by the taxpayer; (d) goods in process and supplies, all of which are for sale or for
use in the course of the taxpayer's trade or business as a VAT-registered person.

However, in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements, such
as buildings, roads, drainage systems, and other similar structures, constructed on or after effectivity of E.O. 273
(January 1, 1988).

The transitional input tax shall be 8% of the value of the inventory or actual VAT paid, whichever is higher, which
amount may be allowed as tax credit against the output tax of the VAT-registered person.

The value allowed for income tax purposes on inventories shall be the basis for the computation of the 8% excluding
goods that are exempt from VAT under SECTION 103. Only VAT-registered persons shall be entitled to
presumptive input tax credits.

xxxx

TRANSITORY PROVISIONS

(a) Presumptive Input Tax Credits—

(i) For goods, materials or supplies not for sale but purchased for use in business in their present condition,
which are not intended for further processing and are on hand as of December 31, 1995, a presumptive
input tax equivalent to 8% of the value of the goods or properties shall be allowed.

(ii) For goods or properties purchased with the object of resale in their present condition, the same
presumptive input tax equivalent to 8% of the value of the goods unused as of December 31, 1995 shall be
allowed, which amount may also be credited against the output tax of a VAT-registered person.

(iii) For real estate dealers, the presumptive input tax of 8% of the book value of improvements constructed
on or after January 1, 1988 (the effectivityof E.O. 273) shall be allowed.

For purposes of sub-paragraph (i), (ii) and (iii) above, an inventory as of December 31, 1995 of such goods or
properties and improvements showing the quantity, description, and amount should be filed with the RDO not later
than January 31, 1996. (Emphases supplied.)

Petitioner argues that Section 4.100-1 of Revenue Regulations No. 7-95 explicitly limited the term "goods" as
regards real properties to "improvements, such as buildings, roads, drainage systems, and other similar structures,"
thereby excluding the real property itself from the coverage of the term "goods" as it is used in Section 105 of the
NIRC. This has brought about, as a consequence, the issues involved in the instant case.

Petitioner claims that the "Court of Appeals erred in not holding that Revenue Regulations No. 6-97 has effectively
repealed or repudiated Revenue Regulations No. 7-95 insofar as the latter limited the transitional/presumptive input
tax credit which may be claimed under Section 105 of the NIRC to the ‘improvements’ on real properties."55Petitioner
argues that the provision in Section 4.105-1 of Revenue Regulations No. 7-95 stating that in the case of real estate
dealers, the basis of the input tax credit shall be the improvements, has been deleted by Revenue Regulations No.
6-97, dated January 2, 1997,which amended Revenue Regulations No. 7-95. Revenue Regulations No. 6-97 was
issued to implement Republic Act No. 8241 (the law amending Republic Act No. 7716, the E-VAT Law), which took
effect on January 1, 1997. Petitioner notes that Section 4.105-1 of Revenue Regulations No. 6-97 is but a
reenactment of Section 4.105-1 of Revenue Regulations No. 7-95, with the only difference being that the following
paragraph in Revenue Regulations No. 7-95 was deleted:

However, in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements, such
as buildings, roads, drainage systems, and other similar structures, constructed on or after the effectivity of E.O. 273
(January 1, 1988).

Petitioner calls this an express repeal, and with the deletion of the above paragraph, what stands and should be
applied "is the statutory definition in Section 100 of the NIRC of the term ‘goods’ in Section 105 thereof."56
Petitioner contends that the relevant provision now states that "[t]he transitional input tax credit shall be eight
percent (8%) of the value of the beginning inventory x x x on such goods, materials and supplies." It no longer limits
the allowable transitional input tax credit to "improvements" on the real properties. The amendment recognizes that
the basis of the 8% input tax credit should not be confinedto the value of the improvements. Petitioner further
contends that the Commissioner of Internal Revenue has in fact corrected the mistake in Revenue Regulations No.
7-95.57

Petitioner argues that Revenue Regulations No. 6-97, being beneficial to the taxpayer, should be given a retroactive
application.58 Petitioner states that the transactions involved inthese consolidated cases took place after Revenue
Regulations No. 6-97 took effect, under the provisions of which the transitional input tax credit with regardto real
properties would be based on the value of the land inventory and not limited to the value of the improvements.

Petitioner assigns another error: the Court of Appeals erred in holding that Revenue Regulations No. 7-95 isa valid
implementation of the NIRC and in according it great respect, and should have held that the same is invalid for
being contrary to the provisions of Section 105 of the NIRC.59 Petitioner contends that Revenue Regulations No. 7-
95 is not valid for being contrary to the express provisions of Section 105 of the NIRC, and in fact amends the same,
for it limited the scope of Section 105 "to less than what the law provides."60 Petitioner elaborates:

[Revenue Regulations No. 7-95] illegally constricted the provisions of the aforesaid section. It delimited the coverage
of Section 105 and practically amended it in violation of the fundamental principle that administrative regulations are
subordinate to the law. Based on the numerous authorities cited above, Section 4.105-1 and the Transitory
Provisions of Revenue Regulations No. 7-95 are invalid and ineffective insofar as they limit the input tax credit to 8%
of the value of the "improvements" on land, for being contrary to the express provisions of Section 105, in relation to
Section 100, of the NIRC, and the Court of Appeals should have so held.61 Petitioner likewise raises the following
arguments:

● The rule that the construction given by the administrative agency charged with the enforcement of the law should
be accorded great weight by the courts, does not apply here.62 ● x x x Section 4.105-1 of Revenue Regulations No.
7-95 neither exclude[s] nor prohibit[s] that the 8% input tax credit may also [be] based on the taxpayer’s inventory of
land.63

● The issuance of Revenue Regulations No. 7-95 by the [BIR], which changed the statutory definition of "goods"
with regard to the application of Section 105 of the NIRC, and the declaration of validity of said regulations by the
Court of Appeals and Court of Tax Appeals, was in violation of the fundamental principle of separation of powers.64

xxxx

Insofar, therefore, as Revenue Regulation[s] No. 7-95 limited the scope of the term "goods" under Section 105, to
"improvements" on real properties, contrary to the definition of "goods" in Section 100, [RR] No. 7-95 decreed "what
the law shall be", now "how the law may be enforced", and is, consequently, of no effect because it constitutes
undue delegation of legislative power.

xxxx

[T]he transgression by the BIR and the CTA and CA of the basic principle of separation of powers, including the
fundamental rule of nondelegation of legislative power, is clear.65 Furthermore, petitioner claims that:

SINCE THE PROVISIONS OF SECTION 105 OF THE [NIRC] IN RELATION TO SECTION 100 THEREOF,
ARE CLEAR, THERE WAS NO BASIS AND NECESSITY FOR THE BUREAU OF INTERNAL REVENUE
AND THE COURT OF APPEALS AND THE COURT OF TAX APPEALS TO INTERPRET AND CONSTRUE
THE SAME.66

PETITIONER IS CLEARLY ENTITLED TO THE TRANSITIONAL/PRESUMPTIVE INPUT TAX CREDIT

GRANTED IN SECTION 105 OF THE NIRCAND HENCE TO A REFUND OF THE VALUE-ADDED TAX
PAID BY IT FOR THE SECOND QUARTER OF 1997.67
Petitioner insists that there was no basis and necessity for the BIR, the CTA, and the Court of Appeals to interpret
and construe Sections 100 and 105 of the NIRC because "where the law speaks in clear and categorical language,
or the terms of the statute are clear and unambiguous and free from doubt, there is no room for interpretation or
construction and no interpretation or construction is called for; there is only room for application."68 Petitioner asserts
that legislative intent is determined primarily from the language of the statute; legislative intent has to be discovered
from the four corners of the law; and thus, where no ambiguity appears, it may be presumed conclusivelythat the
clear and explicit terms of a statute express the legislative intention.69

So looking at the cases now before us, petitioner avers that the Court of Appeals, the CTA, and the BIR did not
merely interpret and construe Section 105, and that they virtually amended the said section, for it is allegedly clear
from Section 105 of the old NIRC, in relation to Section 100, that "legislative intent is to the effect that the taxpayer
is entitled to the input tax credit based on the value of the beginning inventory of land, not merely on the
improvements thereon, and irrespective of any prior payment of sales tax or VAT."70

THEORY OF RESPONDENTS

Petitioner’s claims for refund were consistently denied in the three cases now before us. Even if inone case, G.R.
No. 180035, petitioner succeeded in getting a favorable decision from the CTA, the grant of refund or tax credit was
subsequently reversed on respondents’ Motion for Reconsideration, and such denial ofpetitioner’s claim was
affirmed by the Court of Appeals. Respondents’ reasons for denying petitioner’s claims are summarized in their
Comment in G.R. No. 175707, and we quote:

REASONS WHY PETITION SHOULD BE DENIED OR DISMISSED

1. The 8% input tax credit provided for in Section 105 of the NIRC, in relation to Section 100 thereof, is
based on the value of the improvements on the land.

2. The taxpayer is entitled to the input tax credit provided for in Section 105 of the NIRC only if it has
previously paid VAT or sales taxes on its inventory of land.

3. Section 4.105-1 of Revenue Regulations No. 7-95 of the BIR is valid, effective and has the force and
effect of law, which implemented Section 105 of the NIRC.71

In respondents’ Comment72 dated November 3, 2008 in G.R. No. 180035, they averred that petitioner’s claim for the
8% transitional/presumptive input tax is "inconsistent with the purpose and intent of the law in granting such tax
refund or tax credit."73 Respondents raise the following arguments:

1. The transitional input tax provided under Section 105 in relation to Section 100 of the Tax Code, as
amended by EO No. 273 effective January 1, 1988, is subject to certain conditions which petitioner failed to
meet.74

2. The claim for petitioner for transitional input tax is in the nature of a tax exemption which should be strictly
construed against it.75

3. Revenue Regulations No. 7-95 is valid and consistent with provisions of the NIRC.76 Moreover,
respondents contend that:

"[P]etitioner is not legally entitled to any transitional input tax credit, whether it be the 8% presumptive inputtax credit
or any actual input tax credit in respect of its inventory of land brought into the VAT regime beginning January 1,
1996, in view of the following:

1. VAT free acquisition of the raw land.– petitioner purchased and acquired, from the Government, the aforesaid raw
land under a VAT free sale transaction. The Government, as a vendor, was tax-exempt and accordingly did not pass
on any VAT or sales tax as part of the price paid therefor by the petitioner.

2. No transitory input tax on inventory of land is allowed. Section 105 of the Code, as amended by Republic Act No.
7716, and as implemented by Section 4.105-1 of Revenue Regulations No. 7-95, expressly provides that no
transitional input tax credit shall be allowed to real estate dealers in respect of their beginning inventory of land
brought into the VAT regime beginning January 1, 1996 (supra). Likewise, the Transitory Provisions [(a) (iii)] of
Revenue Regulations No. 7-95 categorically states that "for real estate dealers, the presumptive input tax of 8% of
the book value of improvements constructed on or after January 1, 1998 (effectivity of E.O. 273) shall be allowed."
For purposes of subparagraphs (i), (ii) and (iii) above, an inventory as of December 31, 1995 ofsuch goods or
properties and improvements showing the quantity, description, and amount should be filed with the RDO not later
than January 31, 1996. It is admitted that petitioner filed its inventory listing of real properties on September 19,
1996 or almost nine (9) months late in contravention [of] the requirements in Revenue Regulations No. 7-95."77

Respondents, quoting the Civil Code,78 argue that Section 4.105-1 of Revenue Regulations No. 7-95 has the force
and effect of a law since it is not contrary to any law or the Constitution. Respondents add that "[w]hen the
administrative agency promulgates rules and regulations, it makes a new law with the force and effect of a valid law
x x x."79

ISSUES

The main issue before us now is whether or not petitioner is entitled to a refund of the amounts of: 1)
₱486,355,846.78 in G.R. No. 175707, 2) ₱77,151,020.46 for G.R. No. 180035, and 3) ₱269,340,469.45 in G.R. No.
181092, which it paid as value-added tax, or to a tax credit for said amounts.

To resolve the issue stated above, it is also necessary to determine:

● Whether the transitional/presumptive input tax credit under Section 105 of the NIRC may be claimed only on the
"improvements" on real properties;

● Whether there must have been previous payment of sales tax or value added tax by petitioner on its land before it
may claim the input tax credit granted by Section 105 of the NIRC;

● Whether Revenue Regulations No. 7-95 is a valid implementation of Section 105 of the NIRC; and

● Whether the issuance of Revenue Regulations No. 7-95 by the BIR, and declaration of validity of saidRegulations
by the Court of Tax Appeals and the Court of Appeals, was in violation of the fundamental principle of separation of
powers.

THE RULINGS BELOW

A. G.R. No. 175707

1. CTA Case No. 5885 Decision (October 13, 2000)

The CTA traced the history of "transitional input tax credit" from the original VAT Law of 1988 (Executive Order No.
273) up to the Tax Reform Act of 1997 and looked into Section 105 of the Tax Code. According to the CTA, the BIR
issued Revenue Regulations No. 5-87, specifically Section 26(b),80 to implement the provisions of Section 105. The
CTA concluded from these provisions that "the purpose of granting transitional input tax credit to be utilized as
payment for output VAT is primarily to give recognition to the sales tax component of inventories which would qualify
as input tax credit had such goods been acquired during the effectivity of the VAT Law of 1988."81 The CTA stated
that the purpose of transitional input tax credit remained the same even after the amendments introduced by the E-
VAT Law.82 The CTA held that "the rationale in granting the transitional input tax credit also serves as its condition
for its availment as a benefit"83 and that "[i]nherent in the law is the condition of prior payment of VAT or sales
taxes."84 The CTA excluded petitioner from availing of the transitional input tax credit provided by law, reasoning that
"to base the 8% transitional input tax on the book value of the land isto negate the purpose of the law in granting
such benefit. It would be tantamount to giving an undeserved bonus to real estate dealers similarly situated as
petitioner which the Government cannot afford to provide."85 Furthermore, the CTA held that respondent was correct
in basing the 8% transitional input tax credit on the value of the improvements on the land, citing Section 4.105-1 of
Revenue Regulations No. 7-95, which the CTA claims is consistent and in harmony with the law it seeks to
implement. Thus, the CTA denied petitioner’s claim for refund.86
2. CA-G.R. No. 61516 Decision (April 22, 2003)

The Court of Appeals affirmed the CTA and ruled that petitioner is not entitled to refund or tax credit in the amount of
₱486,355,846.78 and stated that "Revenue Regulations No. 7-95 is a valid implementation of the NIRC."87
According to the Court of Appeals:

"[P]etitioner acquired the contested property from the National Government under a VAT-free transaction. The
Government, as a vendor was outside the operation of the VATand ergo, could not possibly have passed on any
VAT or sales tax as part of the purchase price to the petitioner as vendee."88

x x x [T]he grant of transitional input tax credit indeed presupposes that the manufacturers, producers and importers
should have previously paid sales taxes on their inventories. They were given the benefit of transitional input tax
credits, precisely, to make up for the previously paid sales taxes which were now abolished by the VAT Law. It
bears stressing that the VAT Law took the place of privilege taxes, percentage taxes and sales taxes on original or
subsequent sale of articles. These taxes were substituted by the VAT at the constant rate of 0% or 10%.89

3. CA-G.R. No. 61516 Resolution (November 30, 2006)

Upon petitioner’s Motion for Reconsideration, the Court of Appeals affirmed its decision, but we find the following
statement by the appellate court worthy of note:

We concede that the inventory restrictions under Revenue Regulation No. 7-95 limiting the coverage of the
inventory only to acquisition cost of the materials used in building "improvements" has already been deleted by
Revenue Regulation 6-97. This notwithstanding, we are poised to sustain our earlier ruling as regards the refund
presently claimed.90

B. G.R. No. 180035

1. CTA Case No. 6021 Decision (January 30, 2002)

The CTA sustained petitioner’s position and held that respondent erred in basing the transitional input tax credit of
real estate dealers on the value of the improvements.91 The CTA ratiocinated as follows:

This Court, in upholding the position taken by the petitioner, is convinced that Section 105 of the Tax Code is clear
in itself. Explicit therefrom is the fact that a taxpayer shall be allowed a transitional/presumptive input tax credit
based on the value of its beginning inventory of goods which is defined in Section 100 as to encompass even real
property. x x x.92

The CTA went on to point out inconsistencies it had found between the transitory provisions of Revenue Regulations
No. 7-95 and the law it sought to implement, in the following manner:

Notice that letter (a)(ii) of the x x x transitory provisions93 states that goods or properties purchased with the object of
resalein their present condition comes with the corresponding 8% presumptive input tax of the value of the goods,
which amount may alsobe credited against the output tax of a VAT-registered person. It must be remembered that
Section 100 as amended by Republic Act No. 7716 extends the term "goods or properties" to real properties held
primarily for sale to customers or held for lease in the ordinary course of trade or business. This provision alone
entitles Petitioner to the 8%presumptive input tax of the value of the land (goods or properties) sold. However in
letter (a)(iii) of the same Transitory Provisions, Respondent apparently changed his (sic) course when it declared
that real estate dealers are only entitled to the 8% of the value of the improvements. This glaring inconsistency
between the two provisions prove that Revenue Regulations No. 7-95 was not a result of an intensive study and
analysis and may have been haphazardly formulated.94

The CTA held that the implementing regulation, which provides that the 8% transitional input tax shall bebased on
the improvements only of the real properties, is neither valid nor effective.95 The CTA also sustained petitioner’s
argument that Revenue Regulations No. 7-95 provides no specific date as to when the inventory list should be
submitted. The relevant portion of the CTA decision reads:
The only requirement is that the presumptive input tax shall be supported by an inventory of goods asshown in a
detailed list to be submitted to the BIR. Moreover, the requirement of filing an inventory of goods not later than
January 31, 1996 inthe transitory provision of the same regulation refers to the recognition of presumptive input tax
on goods or properties on hand as of December 31, 1995 of taxpayers already liable to VAT as of that date.

Clearly, Petitioner is entitled to the presumptive input tax in the amount of ₱5,698,200,256.00, computed as follows:

Book Value of Inventory x x x ₱71,227,503,200.00

Multiply by Presumptive

Input Tax rate _____ 8%

Available Presumptive Input Tax ₱5,698,200,256.00

The failure of the Petitioner to consider the presumptive input tax in the computation of its output tax liability for the
1st quarter of 1998 results to overpayment of the VAT for the same period.

To prove the fact of overpayment, Petitioner presented the original Monthly VAT Declaration for the month of
January 1998 showing the amount of ₱77,151,020.46 as the cash component of the value-added taxes paid
(Exhibits E-14 & E-14-A) which is the subject matter of the instant claim for refund.

In Petitioner’s amended quarterly VAT return for the 1st quarter of 1998 (Exhibit D-1), Petitioner deducted the
amount of ₱77,151,020.46 from the total available input tax toshow that the amount being claimed would no longer
be available as input tax credit.

In conclusion, the Petitioner has satisfactorily proven its entitlement to the refund of value-added taxes paid for the
first quarter of taxable year 1998.

WHEREFORE, in view of the foregoing, the Petition for Review is GRANTED. Respondents are hereby ORDERED
to REFUND or issue a TAX CREDIT CERTIFICATE in favor of the Petitioner the total amount of ₱77,151,020.46
representing the erroneously paid value-added tax for the first quarter of 1998.96

2. CTA Case No. 6021 Resolution (March 28, 2003)

The CTA reversedits earlier ruling upon respondents’ motion for reconsideration and thus denied petitioner’s claim
for refund. The CTA reasoned and concluded as follows:

The vortex of the controversy in the instant case actually involves the question of whether or not Section 4.105-1 of
Revenue Regulations No. 7-95, issued by the Secretary of Finance upon recommendation of the Commissioner of
Internal Revenue, is valid and consistent with and not violative of Section 105 of the Tax Code, in relation to Section
100 (a)(1)(A).

xxxx

We agree with the position taken by the respondents that Revenue Regulations No. 7-95 is not contrary to the basic
law which it seeks to implement. As clearly worded, Section 105 of the Tax Code provides that a person who
becomes liable to value-added tax or any person who elects to be a VAT-registered person shall be allowed 8%
transitional input tax subject to the filing of an inventory as prescribed by regulations.

Section 105, which requires the filing of an inventory for the grant of the transitional input tax, is couched in a
manner where there is a need for an implementing rule or regulation tocarry its intendment. True to its wordings, the
BIR issued Revenue Regulations No. 7-95 (specifically Section 4.105-1) which succinctly mentioned that the basis
of the presumptive input tax shall be the improvements in case of real estate dealers.97

xxxx
WHEREFORE, in view of the foregoing, the instant Motion for Reconsideration filed by respondents is hereby
GRANTED. Accordingly, petitioner’s claim for refund of the alleged overpaid Value-Added Tax in the amount of
₱77,151,020.46 covering the first quarter of 1998 is hereby DENIEDfor lack of merit.98

3. CA-G.R. SP No. 76540 Decision (April 30, 2007)

The Court of Appeals affirmed the CTA’s Resolution denying petitioner’s claim for refund, and we quote portions of
the discussion from the Court of Appeals decision below:

To Our mind, the key to resolving the jugular issue of this controversy involves a deeper analysis on how the much-
contested transitional input tax credit has been encrypted in the country’s valueadded tax (VAT) system.

xxxx

x x x [T]he Commissioner of Internal Revenue promulgated Revenue Regulations No. 7-95which laid down, among
others, the basis of the transitional input tax credit for real estate dealers:99 x x x x

The Regulation unmistakably allows credit for transitional input tax of any person who becomes liable to VAT or who
elects to be a VAT registered person. More particularly, real estate dealers who were beforehand not subject to VAT
are allowed a tax credit to cushion the staggering effect of the newly imposed 10% output VAT liability under RA No.
7716.

Bearing in mind the purpose of the transitional input tax credit under the VAT system, We find it incongruous to
grant petitioner’s claim for tax refund. We take note of the fact that petitioner acquired the Global City lots from the
National Government. The transaction was not subject to any sales or business tax. Since the seller did not pass on
any tax liability to petitioner, the latter may not claim tax credit. Clearly then, petitioner cannot simply demand that it
is entitled to the transitional input tax credit.

xxxx

Another point.Section 105 of the National Internal Revenue Code, as amended by EO No. 273, explicitly provides
that the transitional input tax credit shall be based on "the beginning inventory of goods, materials and supplies
orthe actual value-added tax paid on such goods, materials and supplies, whichever is higher." Note that the law did
not simply say – the transitional input tax credit shall be 8% of the beginning inventory of goods, materials and
supplies.

Instead, lawmakers went on to say that the creditable input tax shall be whichever is higher between the value of the
inventory and the actual VAT paid. Necessarily then, a comparison of these two figures would have to be made.
This strengthens Our view that previous payment of the VAT is indispensable to determine the actual value of the
input tax creditable against the output tax. So too, this is in consonance with the present tax credit method adopted
in this jurisdiction whereby an entity can credit against or subtract from the VAT charged on its sales or outputs the
VAT paid on its purchases, inputs and imports.

We proceed to traverse another argument raised in this controversy. Petitioner insists that the term "goods" which
was one of the bases in computing the transitional inputtax credit must be construed so as to include real properties
held primarily for sale to customers. Petitioner posits that respondent Commissioner practically rewrote the law
when it issued Revenue Regulations No. 7-95 which limited the basis of the 8% transitional input tax credit to the
value of improvements alone.

Petitioner is clearly mistaken.

The term "goods" has been defined to mean any movable or tangible objects which are appreciable or tangible.
More specifically, the word "goods" is always used to designate wares, commodities, and personal chattels; and
does not include chattels real."Real property" on the other hand, refers to land, and generally whatever is erected or
growing upon or affixed to land. It is therefore quite absurd to equate "goods" as being synonymous to "properties".
The vast difference between the terms "goods" and "real properties" is so obvious that petitioner’s assertion must be
struckdown for being utterly baseless and specious.
Along this line, We uphold the validity of Revenue Regulations No. 7-95. The authority of the Secretary of Finance,
in conjunction with the Commissioner of Internal Revenue, to promulgate all needful rules and regulations for the
effective enforcement of internal revenue laws cannot be controverted. Neither can it be disputed that such rules
and regulations, as well as administrative opinions and rulings, ordinarily should deserve weight and respect by the
courts. Much more fundamental than either of the above, however, is that all such issuances must not override, but
must remain consistent and in harmony with, the law they seek to apply and implement. Administrative rules and
regulations are intended to carry out, neither to supplant nor to modify, the law. Revenue Regulations No. 7-95 is
clearly not inconsistent with the prevailing statute insofar as the provision on transitional inputtax credit is
concerned.100

4. CA-G.R. SP No. 76540 Resolution (October 8, 2007)

In this Resolution, the Court of Appeals denied petitioner’s Motion for Reconsideration of its Decision dated April 30,
2007.

C. G.R. No. 181092

1. CTA Case No. 5694 Decision (September 29, 2000)

The CTA ruled that petitioner is not automatically entitled to the 8% transitional input tax allowed under Section 105
of the Tax Code based solely on its inventory of real properties, and cited the rule on uniformity in taxation duly
enshrined in the Constitution.101 According to the CTA:

As defined under the above Section 104 of the Tax Code, an "input tax" means the VAT paid by a VAT-registered
person in the course of his trade or business on importation ofgoods or services from a VAT registered person; and
that such tax shall include the transitional input tax determined in accordance with Section 105 of the Tax
Code,supra.102

Applying the rule on statutory construction that particular words, clauses and phrases should not be studied as
detached and isolated expressions, but the whole and every part of the statute must be considered in fixing the
meaning of any of its parts in order to produce a harmonious whole, the phrase "transitional input tax" found in
Section 105 should be understood to encompass goods, materials and supplies which are subject to VAT, in line
with the context of "input tax" as defined in Section 104, most especially that the latter includes, and immediately
precedes, the former under its statutory meaning. Petitioner’s contention that the 8% transitional input tax is
statutorily presumed to the extent that its real properties which have not been subjected to VAT are entitled thereto,
would directly contradict "input tax" as defined in Section 104 and would invariably cause disharmony.103

The CTA held that the 8% transitional input tax should not be viewed as an outright grant or presumption without
need of prior taxes having been paid. Expounding on this, the CTA said: The simple instance in the aforesaid
paragraphs of requiring the tax on the materials, supplies or goods comprising the inventory to be currently
unutilized as deferred sales tax credit before the 8% presumptive input tax can be enjoyed readily leads to the
inevitable conclusion that such 8% tax cannot be just granted toany VAT liable person if he has no priorly paid
creditable sales taxes. Legislative intent thus clearly points to priorly paid taxes on goods, materials and supplies
before a VAT registered person can avail of the 8% presumptive input tax.104

Anent the applicability to petitioner’s case of the requirement under Article VI, Section 28, par. 1 of the Constitution
that the rule of taxation shall be uniform and equitable, the CTA held thus: Granting arguendo that Petitioner is
statutorily presumed to be entitled to the 8% transitional input tax as provided in Section 105, even without having
previously paid any tax on its inventory of goods, Petitioner would be placed at a more advantageous position than a
similar VAT-registered person who also becomes liable to VAT but who has actually paid VAT on his purchases of
goods, materials and supplies. This is evident from the alternative modes of acquiring the proper amount of
transitional input tax under Section 105, supra. One is by getting the equivalent amount of 8% tax based on the
beginning inventory of goods, materials and supplies and the other is by the actual VAT paid on such goods,
materials and supplies, whichever is higher.

As it is supposed to work, the transitional input tax should answer for the 10% output VAT liability thata VAT-
registered person will incur once he starts business operations. While a VAT-registered person who is allowed a
transitional input tax based on his actual payment of 10% VAT on his purchases can utilize the same to pay for his
output VAT liability, a similar VAT-registered person like herein Petitioner, when allowed the alternative 8%
transitional input tax, can offset his output VAT liability equally through such 8% tax even without having paid any
previous tax. This obvious inequity that may arise could not have been the intention and purpose of the lawmakers
in granting the transitional input tax credit. x x x105

Evidently, Petitioner is not similarly situated both as to privileges and liabilities to that of a VAT-registered person
who has paid actual 10% input VAT on his purchases of goods, materials and supplies. The latter person will not
earn anything from his transitional input tax which, to emphasize, has been paid by him because the same will just
offset his 10% output VAT liability. On the other hand, herein Petitioner will earn gratis the amount equivalent to
10% output VAT it has passed on to buyers for the simple reason that it has never previously paid any input tax on
its goods. Its gain will be facilitated by herein claim for refund if ever granted. This is the reason why we do not see
any incongruity in Section 4.105-1 of Revenue Regulations No. 7-95 as it relates to Section 105 of the 1996 Tax
Code, contrary to the contention of Petitioner. Section 4.105-1 (supra), which bases the transitional input tax credit
on the value of the improvements, is consistent with the purpose of the law x x x.106

2. CA-G.R. SP No. 61158 Decision (December 28, 2007) The Court of Appeals affirmed the CTA’s denial of
petitioner’s claim for refund and upheld the validity of the questioned Revenue Regulation issued by respondent
Commissioner ofInternal Revenue, reasoning as follows:

Sec. 105 of the NIRC, as amended, provides that the allowance for the 8% input tax on the beginning inventory of a
VAT-covered entity is "subject to the filing of an inventory as prescribed by regulations." This means that the
legislature left to the BIR the determination of what will constitute the beginning inventory ofgoods, materials and
supplies which will, in turn, serve as the basis for computing the 8% input tax.

While the power to tax cannot be delegated to executive agencies, details as to the enforcement and administration
of an exercise of such power may be left to them, including the power to determine the existence of facts on which
its operation depends x x x. Hence, there is no gainsaying that the CIR and the Secretary of Finance, in limiting the
application of the input tax of real estate dealers to improvements constructed on or after January 1, 1988, merely
exercised their delegated authority under Sec. 105, id., to promulgate rules and regulations defining what should be
included in the beginning inventory of a VAT-registered entity.

xxxx

In the instant case, We find that, contrary to petitioner’s attacks against its validity, the limitation on the beginning
inventory of real estate dealers contained in Sec. 4.105-1 of RR No. 7-95 is reasonable and consistent with the
natureof the input VAT. x x x.

Based on the foregoing antecedents, it is clear why the second paragraph of Sec. 4.105-1 of RR No. 7-95 limits the
transitional input taxes of real estate dealers to the value of improvements constructed on or after January 1, 1988.
Since the sale of the land was not subject to VAT or other sales taxes prior to the effectivity of Rep. Act No. 7716,
real estate dealers at that time had no input taxes to speak of. With this in mind, the CIR correctly limited the
application of the 8% transitional input tax to improvements on real estate dealers constructed on or after January 1,
1988 when the VAT was initially implemented. This is, as it should be, for to grant petitioner a refund or credit for
input taxes it never paid would be tantamount to unjust enrichment.

As petitioner itself observes, the input tax credit provided for by Sec. 105 of the NIRC is a mechanism used to grant
some relief from burden some taxes. It follows, therefore, that not having been burdened by VAT or any other sales
tax on its inventory of land prior to the effectivity of Rep. Act No. 7716, petitioner is not entitled to the relief afforded
by Sec. 105, id.107

The Court of Appeals ruled that petitioner is not similarly situated as those business entities which previously paid
taxes on their inputs, and stressed that "a tax refund or credit x x x is in the nature of a tax exemption which must be
construed strictissimi juris against the taxpayer x x x."108

THIS COURT’S RULING

As previously stated, the issues here have already been passed upon and resolved by this Court En Banc twice, in
decisions that have reached finality, and we are bound by the doctrine of stare decisis to apply those decisions to
these consolidated cases, for they involve the same facts, issues, and even parties.

Thus, we find for the petitioner.

DISCUSSION

The errors assigned by petitioner to the Court of Appeals and the arguments offered by respondents to support the
denial of petitioner’s claim for tax refund have already been dealt with thoroughly by the Court En Banc in Fort
Bonifacio Development Corporation v. Commissioner of Internal Revenue, G.R. Nos. 158885 and 170680 (Decision
- April 2, 2009; Resolution - October 2, 2009); and Fort Bonifacio Development Corporation v. Commissioner of
Internal Revenue, G.R. No. 173425 (Decision - September 4, 2012; Resolution - January 22, 2013).

The Court En Bancdecided on the following issues in G.R. Nos. 158885 and 170680:

1. In determining the 10% value-added tax in Section 100 of the [Old NIRC] on the sale of real properties by
real estate dealers, is the 8% transitional input tax credit in Section 105 applied only to the improvements on
the real property or is it applied on the value of the entire real property?

2. Are Section 4.105.1 and paragraph (a)(III) of the Transitory Provisions of Revenue Regulations No. 7-95
valid in limiting the 8% transitional input tax to the improvements on the real property?

Subsequently, in G.R. No. 173425, the Court resolved issues that are identical to the ones raised here by
petitioner,109 thus:

3.05.a. Whether Revenue Regulations No. 6-97 effectively repealed or repudiated Revenue Regulations No.
7-95 insofar as the latter limited the transitional/presumptive input tax credit which may be claimed under
Section 105 of the National Internal Revenue Code to the "improvements" on real properties.

3.05.b. Whether Revenue Regulations No. 7-95 is a valid implementation of Section 105 of the National
Internal Revenue Code.

3.05.c. Whether the issuance of Revenue Regulations No. 7-95 by the Bureau of Internal Revenue, and
declaration of validity of said Regulations by the Court of Tax Appeals and Court of Appeals, [were] in
violation of the fundamental principle of separation of powers.

3.05.d. Whether there is basis and necessity to interpret and construe the provisions of Section 105 of the
National Internal Revenue Code.

3.05.e. Whether there must have been previous payment of business tax [sales tax or value-added tax]110 by
petitioner on its land before it may claim the input tax credit granted by Section 105 of the National Internal
Revenue Code.

3.05.f. Whether the Court of Appeals and Court of Tax Appeals merely speculated on the purpose of the
transitional/presumptive input tax provided for in Section 105 of the National Internal Revenue Code.

3.05.g. Whether the economic and socialobjectives in the acquisition of the subject property by petitioner
from the Government should be taken into consideration.111

The Court’s pronouncements in the decided cases regarding these issues are discussed below. The doctrine of
stare decisis et non quieta movere, which means "to abide by, or adhere to, decided cases,"112 compels us to apply
the rulings by the Court tothese consolidated cases before us. Under the doctrine of stare decisis, "when this Court
has once laid down a principle of law as applicable to a certainstate of facts, it will adhere to that principle, and apply
it to all future cases, where facts are substantially the same; regardless of whether the parties and property are the
same."113 This is to provide stability in judicial decisions, as held by the Court in a previous case:
Stand by the decisions and disturb not what is settled. Stare decisis simply means that for the sake of certainty, a
conclusion reached in one case should be applied to those that follow if the facts are substantially the same, even
though the parties may be different. It proceeds from the first principle of justice that, absent any powerful
countervailing considerations, like cases ought to be decided alike.114

More importantly, we cannot depart from the legal precedents as laid down by the Court En Banc. It is provided in
the Constitution that "no doctrine or principle of law laid down by the court in a decision rendered en bancor in
division may be modified or reversed except by the court sitting en banc."115

What is left for this Court to do is to reiterate the rulings in the aforesaid legal precedents and apply them to these
consolidated cases.

As regards the main issue, the Court conclusively held that petitioner is entitled to the 8% transitional input tax on its
beginning inventory of land, which is granted in Section 105 (nowSection 111[A]) of the NIRC, and granted the
refund of the amounts petitioner had paid as output VAT for the different tax periods in question.116

Whether the transitional/presumptive

input tax credit under Section 105 of the
NIRC may be claimed only on the
"improvements" on real properties.

The Court held in the earlier consolidated decision, G.R. Nos. 158885 and 170680, as follows: On its face, there is
nothing in Section 105 of the Old NIRC that prohibits the inclusion of real properties, together with the improvements
thereon, in the beginning inventory of goods, materials and supplies, based on which inventory the transitional input
tax credit is computed. It can be conceded that when it was drafted Section 105 could not have possibly
contemplated concerns specific to real properties, as real estate transactions were not originally subject to VAT. At
the same time, when transactions on real properties were finally made subject to VAT beginning withRep. Act No.
7716, no corresponding amendment was adopted as regards Section 105 to provide for a differentiated treatment in
the application of the transitional input tax credit with respect to real properties or real estate dealers.

It was Section 100 of the Old NIRC, as amended by Rep. Act No. 7716, which made real estate transactions subject
to VAT for the first time. Prior to the amendment, Section 100 had imposed the VAT "on every sale, barter or
exchange of goods", without however specifying the kind of properties that fall within or under the generic class
"goods" subject to the tax.

Rep. Act No. 7716, which significantly is also known as the Expanded Value-Added Tax (EVAT) law, expanded the
coverage of the VAT by amending Section 100 of the Old NIRC in several respects, some of which we will
enumerate. First, it made every sale, barter or exchange of "goods or properties" subject to VAT. Second, it
generally defined "goods or properties" as "all tangible and intangible objects which are capable of pecuniary
estimation." Third, it included a non-exclusive enumeration of various objects that fall under the class "goods or
properties" subject to VAT, including "[r]eal properties held primarily for sale to customers or held for lease in the
ordinary courseof trade or business."

From these amendments to Section 100, is there any differentiated VAT treatment on realproperties or real estate
dealers that would justify the suggested limitations on the application of the transitional input tax on them? We see
none.

Rep. Act No. 7716 clarifies that it is the real properties "held primarily for sale to customers or held for lease in the
ordinary course of trade or business" that are subject to the VAT, and not when the real estate transactions are
engaged in by persons who do not sell or lease properties in the ordinary course of trade or business. It is clear that
those regularly engaged in the real estate business are accorded the same treatment as the merchants of other
goods or properties available in the market. In the same way that a milliner considers hats as his goods and a
rancher considers cattle as his goods, a real estate dealer holds real property, whether ornot it contains
improvements, as his goods.117 (Citations omitted, emphasis added.)

xxxx
Under Section 105, the beginning inventory of "goods" forms part of the valuation of the transitional input tax credit.
Goods, as commonly understood in the business sense, refers to the product which the VAT registered person
offers for sale to the public. With respect to real estate dealers, it is the real properties themselves which constitute
their "goods". Such real properties are the operating assets of the real estate dealer.

Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of "goods or properties" such "real properties held
primarily for sale to customers or held for lease in the ordinary course of trade or business." Said definition was
taken from the very statutory language of Section 100 of the Old NIRC. By limiting the definition of goods to
"improvements" in Section 4.105-1, the BIR not only contravened the definition of "goods" as provided in the Old
NIRC, but also the definition which the same revenue regulation itself has provided.118 (Emphasis added.)

The Court then emphasized in its Resolution in G.R. No. 158885 and G.R. No. 170680 that Section 105 of the old
NIRC, on the transitional input tax credit, remained intact despite the enactment of Republic Act No. 7716. Section
105 was amended by Republic Act No. 8424, and the provisions on the transitional input tax credit are now
embodied in Section 111(A) of the new NIRC, which reads:

Section 111. Transitional/Presumptive Input Tax Credits.—

(A) Transitional Input Tax Credits.— A person who becomes liable to value-added tax or any person who elects to
be a VAT-registered person shall, subject to the filing of an inventory according to rules and regulations prescribed
by the Secretary of [F]inance, upon recommendation of the Commissioner, be allowed input tax on his beginning
inventory of goods, materials and supplies equivalent for 8% of the value of such inventory or the actual value-
added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the
output tax.119

In G.R. Nos. 158885 and 170680, the Court asked, "If the plain text of Republic Act No. 7716 fails to supply any
apparent justification for limiting the beginning inventory of real estate dealers only to the improvements on their
properties, how then were the Commissioner of Internal Revenue and the courts a quoable to justify such a
view?"120 The Court then answered this question in this manner:

IV.

The fact alone that the denial of FBDC's claims is in accord with Section 4.105-1 of RR 7-95 does not, of course, put
this inquiry to rest. If Section 4.105-1 is itself incongruent to Rep. Act No. 7716, the incongruence cannot by itself
justify the denial of the claims. We need to inquire into the rationale behind Section 4.105-1, as well as the question
whether the interpretation of the law embodied therein is validated by the law itself.

xxxx

It is correct, as pointed out by the CTA, that upon the shift from sales taxes to VAT in 1987 newly-VAT registered
people would have been prejudiced by the inability to credit against the output VAT their payments by way of sales
tax on their existing stocks in trade. Yet that inequity was precisely addressed by a transitory provision in E.O. No.
273 found in Section 25 thereof. The provision authorized VAT-registered persons to invoke a "presumptive input
tax equivalent to 8% of the value of the inventory as of December 31, 1987 of materials and supplies which are not
for sale, the tax on which was not taken up or claimed as deferred sales tax credit," and a similar presumptive input
tax equivalent to 8% of the value of the inventory as of December 31, 1987 of goods for sale, the tax on which was
not taken up or claimed as deferred sales tax credit.121 (Emphasis ours.)

Whether there must have been previous

payment of sales tax or value-added tax
by petitioner on its land before petitioner
may claim the input tax credit granted by
Section 105 (now Section 111[A]) of the NIRC.

The Court discussed this matter lengthily in its Decision in G.R. Nos. 158885 and 170680, and we quote:
Section 25 of E.O. No. 273 perfectly remedies the problem assumed by the CTA as the basis for the introduction of
transitional input tax credit in 1987. If the core purpose of the tax credit is only, as hinted by the CTA, to allow for
some mode of accreditation of previously-paid sales taxes, then Section 25 alone would have sufficed. Yet E.O. No.
273 amended the Old NIRC itself by providing for the transitional input tax credit under Section 105, thereby
assuring that the tax credit would endure long after the last goods made subject to sales tax have been consumed.

If indeed the transitional input tax credit is integrally related to previously paid sales taxes, the purported causal link
between those two would have been nonetheless extinguished long ago. Yet Congress has reenacted the
transitional input tax credit several times; that fact simply belies the absence of any relationship between such tax
credit and the long-abolished sales taxes. Obviously then, the purpose behind the transitional input tax credit is not
confined to the transition from sales tax to VAT.

x x x Section 105 states that the transitional input tax credits become available either to (1) a person who becomes
liable to VAT; or (2) any person who elects to be VAT-registered. The clear language of the law entitles new trades
or businesses to avail of the tax credit once they become VAT-registered. The transitional input tax credit, whether
under the Old NIRC or the New NIRC, may be claimed by a newly-VAT registered person such as when a business
as it commences operations.

x x x [I]t is not always true that the acquisition of such goods, materials and supplies entail the payment of taxes on
the part of the new business. In fact, this could occur as a matter of course by virtue of the operation of various
provisions of the NIRC, and not only on account of a specially legislated exemption.

xxxx

The interpretation proffered by the CTA would exclude goods and properties which are acquired through sale not in
the ordinary course of trade or business, donation or through succession, from the beginning inventory on which the
transitional input tax credit is based. This prospect all but highlights the ultimate absurdity of the respondents'
position. Again, nothing in the Old NIRC (or even the New NIRC) speaks of such a possibility or qualifies the
previous payment of VAT or any other taxes on the goods, materials and supplies as a pre-requisite for inclusion in
the beginning inventory.

It is apparent that the transitional input tax credit operates to benefit newly VAT-registered persons, whether or not
they previously paid taxes in the acquisition of their beginning inventory of goods, materials and supplies. During
that period of transition from non-VAT to VAT status, the transitional input tax credit serves to alleviate the impact of
the VAT on the taxpayer. At the very beginning, the VAT-registered taxpayer is obliged to remit a significant portion
of the income it derived from its sales as output VAT. The transitional input tax credit mitigates this initial diminution
of the taxpayer's income by affording the opportunity to offset the losses incurred through the remittance of the
output VAT at a stage when the person is yet unable to credit input VAT payments.

There is another point that weighs against the CTA's interpretation. Under Section 105 of the Old NIRC, the rate of
the transitional input tax credit is "8% of the value of such inventory or the actual value-added tax paid on such
goods, materials and supplies, whichever is higher." If indeed the transitional input tax credit is premised on the
previous payment of VAT, then it does not make sense to afford the taxpayer the benefit of such credit based on
"8% of the value of such inventory" should the same prove higher than the actual VAT paid. This intent that the CTA
alluded to could have been implemented with ease had the legislature shared such intent by providing the actual
VAT paid as the sole basis for the rate of the transitional input tax credit.

The CTA harped on the circumstance that FBDC was excused from paying any tax on the purchase of its properties
from the national government, even claiming that to allow the transitional input tax credit is "tantamount to giving an
undeserved bonusto real estate dealers similarly situated as [FBDC] which the Government cannot afford to
provide." Yet the tax laws in question, and all tax laws in general, are designed to enforce uniform tax treatment to
persons or classes of persons who share minimum legislated standards. The common standard for the application
of the transitional input tax credit, as enacted by E.O. No. 273 and all subsequent tax laws which reinforced or
reintegrated the tax credit, is simply that the taxpayer in question has become liable to VAT or has elected to be a
VAT-registered person. E.O. No. 273 and the subsequent tax laws are all decidedly neutral and accommodating in
ascertaining who should be entitled to the tax credit, and it behooves the CIR and the CTA to adopt a similarly
judicious perspective.122 (Citations omitted, emphases ours.)
The Court En Bancin its Resolution in G.R. No. 173425 likewise discussed the question of prior payment of taxes as
a prerequisite before a taxpayer could avail of the transitional input tax credit. The Court found that petitioner is
entitled to the 8% transitional input tax credit, and clearly said that the fact that petitioner acquired the Global City
property under a tax-free transaction makes no difference as prior payment of taxes is not a prerequisite.123 We
quote pertinent portions of the resolution below:

This argument has long been settled. To reiterate, prior payment of taxes is not necessary before a taxpayer could
avail of the 8% transitional input tax credit. This position is solidly supported by law and jurisprudence, viz.:

First.Section 105 of the old National Internal Revenue Code (NIRC) clearly provides that for a taxpayer to avail of
the 8% transitional input tax credit, all that is required from the taxpayer is to file a beginning inventory with the
Bureau of Internal Revenue (BIR). It was never mentioned in Section 105 that prior payment of taxes is a
requirement. x x x.

xxxx

Second. Since the law (Section 105 of the NIRC) does not provide for prior payment of taxes, to require it now
would be tantamount to judicial legislation which, to state the obvious, is not allowed.

Third. A transitional input tax credit is not a tax refund per se but a tax credit. Logically, prior payment of taxes is not
required before a taxpayer could avail of transitional input tax credit. As we have declared in our September 4, 2012
Decision, "[t]ax credit is not synonymous to tax refund. Tax refund is defined as the money that a taxpayer overpaid
and is thus returned by the taxing authority. Tax credit, on the other hand, is an amount subtracted directly from
one's total tax liability. It is any amount given to a taxpayer as a subsidy, a refund, or an incentive to encourage
investment."

Fourth. The issue of whether prior payment of taxes is necessary to avail of transitional input tax credit is no longer
novel. It has long been settled by jurisprudence. x x x.

Fifth. Moreover, in Commissioner of Internal Revenue v. Central Luzon Drug Corp., this Court had already declared
that prior payment of taxes is not required in order toavail of a tax credit. x x x124 (Citations omitted, emphases ours.)

The Court has thus categorically ruled that prior payment of taxes is not required for a taxpayer toavail of the 8%
transitional input tax credit provided in Section 105 of the old NIRC and that petitioner is entitled to it, despite the
fact that petitioner acquired the Global City property under a tax-free transaction.125 The Court En Banc held:

Contrary to the view of the CTA and the CA, there is nothing in the abovequoted provision to indicate that prior
payment of taxes is necessary for the availment of the 8% transitional input tax credit. Obviously, all that is required
is for the taxpayerto file a beginning inventory with the BIR.

To require prior payment of taxes x x x is not only tantamount to judicial legislation but would also render nugatory
the provision in Section 105 of the old NIRC that the transitional input tax credit shall be "8% of the value of [the
beginning] inventory or the actual [VAT] paid on such goods, materials and supplies, whichever is higher" because
the actual VAT (now 12%) paid on the goods, materials, and supplies would always be higher than the 8% (now 2%)
of the beginning inventory which, following the view of Justice Carpio, would have to exclude all goods, materials,
and supplies where no taxes were paid. Clearly, limiting the value of the beginning inventory only to goods,
materials, and supplies, where prior taxes were paid, was not the intention of the law. Otherwise, it would have
specifically stated that the beginning inventory excludes goods, materials, and supplies where no taxes were paid.126

Whether Revenue Regulations No. 7-95 is

a valid implementation of Section 105 of
the NIRC.

In the April 2, 2009 Decision inG.R. Nos. 158885 and 170680, the Court struck down Section 4.105-1 ofRevenue
Regulations No. 7-95 for being in conflict with the law.127 The decision reads in part as follows:
[There] is no logic that coheres with either E.O. No. 273 or Rep. Act No. 7716 which supports the restriction
imposed on realestate brokers and their ability to claim the transitional input tax credit based on the value of their
real properties. In addition, the very idea of excluding the real properties itself from the beginning inventory simply
runs counter to what the transitional input tax credit seeks to accomplish for persons engaged in the sale of goods,
whether or not such "goods" take the form of real properties or more mundane commodities.

Under Section 105, the beginning inventory of "goods" forms part of the valuation of the transitional input tax credit.
Goods, as commonly understood in the business sense, refers to the product which the VAT registered person
offers for sale to the public. With respect to real estate dealers, it is the real properties themselves which constitute
their "goods". Such real properties are the operating assets of the real estate dealer.

Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of "goods or properties" such "real properties held
primarily for sale to customers or held for lease in the ordinary course of trade or business." Said definition was
taken from the very statutory language of Section 100 of the Old NIRC. By limiting the definition of goods to
"improvements" in Section 4.105-1, the BIR not only contravened the definition of "goods" as provided in the Old
NIRC, but also the definition which the same revenue regulation itself has provided.

The Court of Tax Appeals claimed that under Section 105 of the Old NIRC the basis for the inventory of goods,
materials and supplies upon which the transitional input VAT would be based "shall be left to regulation by the
appropriate administrative authority". This is based on the phrase "filing of an inventory as prescribed by
regulations" found in Section 105. Nonetheless, Section 105 does include the particular properties to be included in
the inventory, namely goods, materials and supplies. It is questionable whether the CIR has the power to actually
redefine the concept of "goods", as she did when she excluded real properties from the class of goods which real
estate companies in the business of selling real properties may include in their inventory. The authority to prescribe
regulations can pertain to more technical matters, such as how to appraise the value of the inventory or what papers
need to be filed to properly itemize the contents of such inventory. But such authority cannot go as far as to amend
Section 105 itself, which the Commissioner had unfortunately accomplished in this case.

It is of course axiomatic that a rule or regulation must bear upon, and be consistent with, the provisions of the
enabling statute if such rule or regulation is to be valid. In case of conflict between a statute and an administrative
order, the former must prevail. Indeed, the CIR has no power to limit the meaning and coverage of the term "goods"
in Section 105 of the Old NIRC absent statutory authority or basis to make and justify such limitation. A contrary
conclusion would mean the CIR could very well moot the law or arrogate legislative authority unto himself by
retaining sole discretion to provide the definition and scope of the term "goods."128 (Emphasis added.)

Furthermore, in G.R. No. 173425, the Court held:

Section 4.105-1 of RR 7-95 is

inconsistent with Section 105 of the
old NIRC

As regards Section 4.105-1 ofRR 7-95 which limited the 8% transitional input tax credit to the value of the
improvements on the land, the same contravenes the provision of Section 105 of the old NIRC, in relation to Section
100 of the same Code, as amended by RA 7716, which defines "goods or properties," to wit:

xxxx

In fact, in our Resolution dated October 2, 2009, in the related case of Fort Bonifacio, we ruled that Section 4.105-1
of RR 7-95, insofar as it limits the transitional input tax credit to the value of the improvement of the real properties,
is a nullity. Pertinent portions of the Resolution read:

As mandated by Article 7 of the Civil Code, an administrative rule or regulation cannot contravene the law on which
it is based. RR 7-95 is inconsistent with Section 105 insofar as the definition of the term "goods" is concerned. This
is a legislative act beyond the authority of the CIR and the Secretary of Finance. The rules and regulations that
administrative agencies promulgate, which are the product of a delegated legislative power to create new and
additional legal provisions that have the effect of law, should be within the scope of the statutory authority granted
by the legislature to the objects and purposes of the law, and should not be in contradiction to, but in conformity
with, the standards prescribed by law.
To be valid, an administrative rule or regulation must conform, not contradict, the provisions of the enabling law. An
implementing rule or regulation cannot modify, expand, or subtract from the law it is intended to implement. Any rule
that is not consistent with the statute itself is null and void.

While administrative agencies, such as the Bureau of Internal Revenue, may issue regulations to implement
statutes, they are without authority to limit the scope of the statute to less than what it provides, or extend or expand
the statute beyond itsterms, or in any way modify explicit provisions of the law. Indeed, a quasi-judicial body or an
administrative agency for that matter cannot amend an act of Congress. Hence, in case of a discrepancy between
the basic law and an interpretative or administrative ruling, the basic law prevails.

To recapitulate, RR 7-95, insofar as it restricts the definition of "goods" as basis of transitional input tax credit under
Section 105 is a nullity.

As we see it then, the 8% transitional input tax creditshould not be limited to the value of the improvements on the
real properties but should include the value of the real properties as well.129 (Citations omitted, emphasis ours.)

Whether the issuance of Revenue

Regulations No. 7-95 by the BIR, and
declaration of validity of said Regulations
by the CTA and the Court of Appeals,
was in violation of the fundamental
principle of separation of powers.

In the Resolution dated October 2, 2009 in G.R. Nos. 158885 and 170680 the Court denied the respondents’ Motion
for Reconsideration with finality and held:

[The April 2, 2009 Decision] held that the CIR had no power to limit the meaning and coverage of the term "goods"
in Section 105 of the Old NIRC sans statutory authority or basis and justification to make such limitation. This it did
when it restrictedthe application of Section 105 in the case of real estate dealers only to improvements on the real
property belonging to their beginning inventory.

xxxx

The statutory definition of the term "goods or properties" leaves no room for doubt. It states: "Sec. 100. Value-added
tax on sale of goods or properties.— (a) Rate and base of tax. — x x x (1) The term ‘goods or properties’ shall mean
all tangible and intangible objects which are capable of pecuniary estimation and shall include:

(A) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business;
x x x."

The amendatory provision of Section 105 of the NIRC, as introduced by RA 7716, states:

"Sec. 105. Transitional Input [T]ax Credits.— A person who becomes liable to value-added tax or any person who
elects to be a VAT-registered person shall, subject to the filing of an inventory as prescribed by regulations, be
allowed input tax on his beginning inventory of goods, materials and supplies equivalent to 8% of the value of such
inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall
be creditable against the output tax."

The term "goods or properties" by the unambiguous terms of Section 100 includes "real properties held primarily for
sale to c[u]st[o]mers or held for lease in the ordinary course of business." Having been defined in Section 100 of the
NIRC, the term "goods" as used in Section 105 of the same code could not have a different meaning. This has been
explained in the Decision dated April 2, 2009, thus:

xxxx

Section 4.105-1 of RR 7-95 restricted the definition of "goods," viz.:

"However, in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements, such
as buildings, roads, drainage systems, and other similar structures, constructed on or after the effectivity of EO 273
(January 1, 1988)."

As mandated by Article 7 of the Civil Code, an administrative rule or regulation cannot contravene the law on which
it is based. RR 7-95 is inconsistent with Section 105 insofar as the definition of the term"goods" is concerned. This is
a legislative act beyond the authority of the CIR and the Secretary of Finance. The rules and regulations that
administrative agencies promulgate, which are the product of a delegated legislative power to create new and
additional legal provisions that have the effect of law, should be within the scope of the statutory authority granted
bythe legislature to the objects and purposes of the law, and should not be in contradiction to, but in conformity with,
the standards prescribed by law.

To be valid, an administrative ruleor regulation must conform, not contradict, the provisions of the enabling law. An
implementing rule or regulation cannot modify, expand, or subtract from the law itis intended to implement. Any rule
that is not consistent with the statute itself is null and void. While administrative agencies, such as the Bureau of
Internal Revenue, may issue regulations to implement statutes, they are without authority to limit the scope of the
statute to less than what it provides, or extend or expand the statute beyond itsterms, or in any way modify explicit
provisions of the law. Indeed, a quasi-judicial body or an administrative agency for that mattercannot amend an act
of Congress. Hence, in case of a discrepancy between the basic law and an interpretative or administrative ruling,
the basic law prevails.

To recapitulate, RR 7-95, insofar as it restricts the definition of "goods" as basis of transitional inputtax credit under
Section 105 is a nullity.

On January 1, 1997, RR 6-97 was issued by the Commissioner of Internal Revenue. RR 6-97 was basically a
1âw phi 1

reiteration of the same Section 4.105-1 of RR 7-95, except that the RR 6-97 deleted the following paragraph:

"However, in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements, such
as buildings, roads, drainage systems, and other similar structures, constructed on or after the effectivity of E.O. 273
(January 1, 1988)."

It is clear, therefore, that under RR 6-97, the allowable transitional input tax credit is not limited to improvements on
real properties. The particular provision of RR 7-95 has effectively been repealed by RR 6-97 which is now in
consonance with Section 100 of the NIRC, insofar as the definition of real properties as goods is concerned. The
failure to add a specific repealing clause would not necessarily indicate that there was no intent to repeal RR 7-95.
The fact that the aforequoted paragraph was deleted created an irreconcilable inconsistency and repugnancy
between the provisions of RR 6-97 and RR 7-95.

xxxx

As pointed out in Our Decision ofApril 2, 2009, to give Section 105 a restrictive construction that transitional input
tax credit applies only when taxes were previously paid on the properties in the beginning inventory and there is a
law imposing the tax which is presumed to have been paid, is to impose conditions or requisites to the application of
the transitional tax input credit which are not found in the law. The courts must not read into the law what is not
there. To do so will violate the principle of separation of powers which prohibits this Court from engaging in judicial
legislation.130 (Emphases added.)

As the Court En Banc held in G.R. No. 173425, the issues in this case are not novel. These same issues have been
squarely ruled upon by this Court in the earlier decided casesthat have attained finality.131

It is now this Court’s duty to apply the previous rulings to the present case. Once a case has been decided one way,
any other case involving exactly the same point at issue, as in the present case, should be decided in the same
manner.132

Thus, we find that petitioner is entitled to a refund of the amounts of: 1) ₱486,355,846.78 in G.R. No. 175707, 2)
₱77,151,020.46 in G.R. No. 180035, and 3) ₱269,340,469.45 in G.R. No. 181092, which petitioner paid as value-
added tax, or toa tax credit for said amounts. WHEREFORE, in view of the foregoing, the consolidated petitions are
hereby GRANTED. The following are REVERSED and SET ASIDE:

1) Under G.R. No. 175707, the Decisiondated April 22, 2003 of the Court of Appeals in CA-G.R. SP No.
61516 and its subsequent Resolution dated November 30, 2006;

2) Under G.R. No. 180035, the Decisiondated April 30, 2007 of the Court of Appeals in CA-G.R. SP No.
76540 and its subsequent Resolution dated October 8, 2007; and

3) Under G.R. No. 181092, the Decisiondated December 28, 2007 of the Court of Appeals in CA-G.R. SP
No. 61158.

Respondent Commissioner of Internal Revenue is ordered to REFUND, OR, IN THE ALTERNATIVE, TO ISSUE A
TAX CREDIT CERTIFICATE to petitioner Fort Bonifacio Development Corporation, the following amounts:

1) ₱486,355,846. 78 paid as output value-added tax for the second quarter of 1997 (G.R. No. 175707);

2) ₱77,151,020.46 paid as output value-added tax for the first quarter of 1998 (G.R. No. 180035); and

3) ₱269,340,469.45 paid as output value-added tax for the fourth quarter of 1996 (G.R. No. 181092).

SO ORDERED.

G.R. No. 213943

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs
PHILIPPINE DAILY INQUIRER, INC., Respondent

DECISION

CARPIO, J.:

The Case

Before the Court is a petition for review1 assailing the 4 November 2013 Decision2 and the 1 August 2014
Resolution3 of the Court of Tax. Appeals (CTA) En Banc in CTA EB Case No. 905. The CTA En Banc affirmed the
16 February 2012 Decision4 and the 8 May 2012 Resolution5 of the CTA First Division in CTA Case No. 7853 which
granted the petition for review filed by Philippine Daily Inquirer, Inc. (PDI) and cancelled the Formal Letter of
Demand dated 11 March 2008 and Assessment No. LN # 116-AS-04-00-00038-000526 issued by the Bureau of
Internal Revenue (BIR) for deficiency Value Added Tax. (VAT) and income tax. for the taxable year 2004.

The Antecedent Facts

The facts of this case, as presented by the CTA, are as follows:

PDI is a corporation engaged in the business of newspaper publication. On 15 April 2005, it filed its Annual Income
Tax Return for taxable year 2004. Its Quarterly VAT Returns for the same year showed the following:

Date of Filing
For the First Quarter 20 April 2004
For the Second Quarter 16 July 2004
For the Third Quarter 18 October 2004
 For the Fourth Quarter 21 January 20056

On 10 August 2006, PDI received a letter dated 30 June 2006 from Region 020 Large Taxpayers' Service of BIR
under LN No. 116-AS-04-00- 00038. BIR alleged that based on the computerized matching it conducted on the
information and data provided by third party sources against PDI's declaration on its VAT Returns for taxable year
2004, there was an underdeclaration of domestic purchases from its suppliers amounting to P317,705,610.52. The
BIR invited PDI to reconcile the deficiencies with BIR's Large Taxpayers Audit & Investigation Division I (BIR-
LTAID). In response, PDI submitted reconciliation reports, attached to its letters dated 22 August 2006 and 19
December 2006, to BIR-LTAID. On 21 March 2007, PDI executed a Waiver of the Statute of Limitation (First Waiver)
consenting to the assessment and/or collection of taxes for the year 2004 which may be found due after the
investigation, at any time before or after the lapse of the period of limitations fixed by Sections 203 and 222 of the
National Internal Revenue Code (NIRC) but not later than 30 June 2007. The First Waiver was received on 23
March 2007 by Nestor Valeroso (Valeroso), OIC-ACTR of the Large Taxpayer Service. In a letter dated 7 May 2007,
PDI submitted additional partial reconciliation and explanations on the discrepancies found by the BIR. On 30 May
2007, PDI received a letter dated 28 May 2007 from Mr. Gerardo Florendo, Chief of the BIR-LTAID, informing it that
the results of the evaluation relative to the matching of sales of its suppliers against its purchases for the taxable
year 2004 had been submitted by Revenue Officer Narciso Laguerta under Group Supervisor Fe Caling. In the
same letter, BIR invited PDI to an informal conference to present any objections that it might have on the BIR's
findings. On 5 June 2007, PDI executed a Waiver of the Statute of Limitation (Second Waiver), which Valeroso
accepted on 8 June 2007.

In a Preliminary Assessment Notice (PAN) dated 15 October 2007 issued by the BIR-LTAID, PDI was assessed for
alleged deficiency income tax and VAT for taxable year 2004 on the basis of LN No. 116-AS-04-00- 00038. The
PAN states:

COMPUTATION OF DEFICIENCY VAT

Undeclared Income ₱1,007,565.03
Add: Overdeclared input VAT 1,601,652.43
Total undeclared income per Investigation ₱2,609,217.46
Less: Attributable input tax 715,371.17
VAT still payable per investigation ₱1,893,846.29
Add: Increments -
Interest from 1/26/05 to 11/15/07 ₱1,062,629.37
Compromise penalty 25,000.00 1,087,629.37
Amount Due and Collectible ₱2,981,475.66
COMPUTATION OF DEFICIENCY INCOME TAX
Undeclared Gross Income ₱10,075,650.28
Less: Cost of Sales 7,153,711.70
Undeclared Net Income ₱2,921,938.58
Multiply by income tax rate 32%
Income tax still due per investigation ₱935,020.35
Add: Increments -
Interest from 4/16/05 to 11/15/07 ₱483,648.88
Compromise penalty 20,000.00 503,648.88
Amount Due and Collectible ₱1,438,669.237
PDI received the PAN on 4 December 2007. In a letter dated 12 December 2007, PDI sought reconsideration of the
PAN and expressed its willingness to execute another Waiver (Third Waiver), which it did on the same date, thus
extending BIR's right to assess and/or collect from it until 30 April 2008. Romulo L. Aguila, Jr. (Aguila), OIC-Head
Revenue Executive Assistant for the Large Taxpayers Service-Regular, accepted the Third Waiver on 20 December
2007.

On 17 April 2008, PDI received a Formal Letter of Demand dated 11 March 2008 and an Audit Result/ Assessment
Notice from the BIR, demanding for the payment of alleged deficiency VAT and income tax, respectively, computed
as follows:

1. COMPUTATION OF (DEFICIENCY) VAT

Undeclared Income ₱1,007,565.03

Add: Overdeclared input VAT 1,601,652.43
Total Undeclared Income per Investigation ₱2,609,217.46
Less: Attributable input tax 715,371.17
VAT still payable per investigation ₱1,893,846.29
Add: Increments -
Interest from 1/26/05 to 11/15/07 ₱l,235,929.28
Compromise penalty 25,000.00 1,260,929.28
Amount Due and Collectible ₱3,154,775.56

2. COMPUTATION OF [DEFICIENCY INCOME TAX]

Undeclared Gross Income ₱10,075,650.28

Less: Cost of Sales 7,153,711.70
Undeclared Net Income 2,921,938.58
Multiply by income tax rate 32%
Income tax still due per investigation ₱935,020.35
Add: Increments -
Interest from 4/16/05 to 11/15/07 ₱569,209.65
Compromise penalty 20,000.00 589,209.65
Amount Due and Collectible ₱1,524,229.998

On 16 May 2008, PDI filed its protest. On 12 December 2008, PDI filed a Petition for Review against the
Commissioner of Internal Revenue (CIR) alleging that the 180-day period within which the BIR should act on its
protest had already lapsed.

The CTA First Division, quoting at length the CIR's Answer, presented the following facts:

Petitioner Philippine Daily inquirer is liable to pay the amount of Three Million One Hundred fifty Four Thousand
Seven hundred Seventy Five Pesos and 56/100 (₱3,154,775.56) and One Million Five Hundred Twenty Four
Thousand Two Hundred Twenty Nine Pesos and 99/100 (₱l,524,299.99) representing deficiency Value-Added Tax
(VAT and Income Tax, respectively, for the taxable year 2004.

1. The VAT and inc0me tax liabilities of petitioner in the aggregate amount of Four Million Six Hundred Seventy Nine
Thousand and Five Pesos and 55/100 (₱4,679,005.55) arose on account of the issuance to petitioner of Letter
Notice No. 116-AS-04-00-00038 dated June 30, 2006. Computerized matching conducted by respondent on
information/data provided by third party sources against its declaration per VAT returns revealed the aforesaid
discrepancies for taxable year 2004. The income and value-added tax liabilities were generated through the
Reconciliation of Listing for Enforcement (REUEF) system-Summary List of Sales and Purchases (SLSP) and Third
Party Matching. Through the system, respondent was able to detect tax leaks through the matching of data available
in the Integrated Tax Systems (ITS) with the information gathered from third party sources.

On the basis of the consolidation and cross-referencing of third party information, discrepancy reports on sales and
purchases were generated to uncover under-declared income and over-claimed purchases (goods and services).

As explicitly provided under Revenue Memorandum Order (RMO) No. 42-2003:

II. POLICIES

[x x x]

2. In order to intensify enforcement, the power of the Commissioner to authorize the examination of the taxpayer
and the assessment of the correct amount of tax is hereby ordered done through the so called 'no contact-audit-
approach '.

3. The 'no contact-audit-approach' includes the process of computerized matching of sales and purchases data
contained in the Schedules of Sales and Domestic Purchases, and Schedule of Importation submitted by VAT
taxpayer under the RELIEF system pursuant to RR No. 7- 95 as amended by RR Nos. 13-97, 7-99 and 8-2002. This
may also include the matching of data from other information or returns filed by the taxpayers with the BIR such as
Alphalist of Payees subject to Final or Creditable Withholding Taxes.

4. Even without conducting a detailed examination of taxpayer's books and records, the computerized/manual
matching of sales and purchases/expenses will reveal discrepancies which shall be communicated to the concerned
taxpayer through the issuance of a Letter Notice (LN) by the Commissioner.

5. LNs being served by the Bureau upon the taxpayer found to have understated their sales or over claimed their
purchases/expenses can be considered notice of audit or investigation in so far as the amendment of any return is
concerned which is the subject of such LN. A taxpayer is therefore disqualified from amending his return once an LN
is served upon him.

III. GUIDELINES

Xxx

5. The LN shall serve as a discrepancy notice to taxpayer similar to a Notice of Informal Conference, thus, the
procedures defined in RR 12-99 should likewise be observed.

Furthermore, in CTA Case No. 7092 entitled 'BIG AA Corporation represented by Erlinda L. Stohner vs. Bureau of
Internal Revenue' dated February 22, 2006, the Honorable Court had the opportunity to say:

'Letter Notices issued against a taxpayer in connection with the information of under declaration of sales and
purchases gathered through Third Party Information Program may be considered as a 'notice of audit or
investigation' in the absence of evident error or clear abuse of discretion.'

2. On the basis of the abovementioned LN and after a careful and extensive scrutiny of petitioner's documents,
resulting deficiency in income and Value-added taxes led to the issuance of the Preliminary Assessment Notice
(PAN) dated October 15, 2007 together with the Details of Discrepancies and subsequently, a Formal Letter of
Demand (FLD) dated March 11, 2008.

Relative thereto, Section 203 of the National Internal Revenue Code (NIRC) explicitly provides:

Section 203. Period of Limitation Upon Assessment and Collection of Taxes.

Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last
day prescribed by law for 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 i[s] filed
beyond the period prescribed by law, the three (3) year period shall be counted from the day [t]he 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 day.'

However, Section 222 of the NIRC provides the exceptions as regards to the provisions laid down under Section
203. In particular, as shown under Section (1) thereof, the three (3) [year] period of limitation in making assessment
shall not apply in cases where it involves false or fraudulent return or in cases where there is failure to file a return
[by] the person obliged to file such return. Section 222(a) of the National Internal Revenue Code provides:

'Section 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 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 executor[y], [t]he fact of fraud shall be judicially taken cognizance of in the civil and criminal action
for the collection thereof.'

Such being the case, the three (3) [year] period of limitation for the assessment of internal revenue tax liabilities
reckoned from the last day prescribed by law for the filing of the return shall not apply in the case at hand for the
simple reason that petitioner falsely filed the return for taxable year 2004. Such being the case, the applicable
provision shall be Section 222(a) where the period of limitation provides that the assessment may be made within
ten (10) years after the discovery of falsity, fraud or omission. In the case at hand, the reckoning period was from
the time during which the LN dated June 30, 2006 was issued to petitioner. Indubitably, the Formal Letter of
Demand dated March 11, 2008 was issued within the prescriptive period provided by law. Such being the case, the
FLD is considered valid and has the force and effect of law.

3. On the basis of the investigation conducted by respondent through the RELIEF system, respondent though the
FLD, outlined how the tax liabilities in the aggregate amount of ₱4,679,005.55 representing income and VAT
liabilities were arrived at. Upon matching the data gathered from respondent's Integrated Tax System (ITS) against
the Summary of List of Purchases (SLP) attached to the Quarterly VAT returns filed with respondent, the following
discrepancies remain unsettled despite petitioner's submission of supporting documents:

(a) An excess of SLP over the Letter Notices (LN) in the amount of ₱1,601,652.43 from the following suppliers:

Per SLP PerLN Discrepancy

Alliance Media Printing Corp. 109,073,375.58 107,640,812.95 1,432,562.63
Citimotors Inc. 70,454.55 70,056.65 397.90
Diamond Motors Corp. 288,181.82 142,363.64 145,818.18
Western Marketing Corp. 30,830.99 7,957.27 22,873.72
Total 109,462,842.94 107,861,190.51 1,601,652.43

(b) On the other hand, it is likewise evident than an excess of LN over the SLP also occurred in the total amount of
Seven Hundred Fifteen Thousand Three Hundred Seventy One Pesos and 17 /100 (₱715,3 71.17). The details of
which are shown hereunder:
 Per SLP PerLN Discrepancy
Grasco Industries Inc. 202.55 (202.55)
Harrison Communications Inc. 18,157.89 398,331.12 (380,173.23)
Makati Property Ventures 64.55 (64.55)
Mc[C]an[n] Erikson Phils. Inc. 204,769.38 (204,769.38)
Millennium Cars Inc. 89,545.45 (89,545.45)
WPP Marketing Communications Inc. 40,616.01 (40,616.01)
Total 18,157.89 733,529.06 (715,371.17)

On the basis of the aforesaid investigation, it can be observed that the SLP which petitioner attached as supporting
documents upon filing the quarterly VAT return revealed the declared amount of ₱l09,462,842.94 as its input VAT
for purchases incurred. However, on the basis of the LN, its suppliers recorded in its books of account the aggregate
amount of ₱107,861,190.51 as its corresponding VAT. Suffice it to say, the over-declared VAT input tax on the part
of petitioner led to the under declaration of VAT payable in the amount of ₱1,601,652.43 for the taxable year 2004.
Therefore, petitioner is liable to pay said outstanding VAT. In addition, the amount of ₱l0,075,650.28 which resulted
from the excess of the LN over the SLP amounting to ₱715,371.17 must be likewise added to arrive at the total VAT
liability of ₱3,l 54,775.56 (including increments up to April 30, 2008). Details of the computation are shown in the
FLD.

As stated earlier, the excess of LN over the SLP in the amount of ₱715,371.17 resulted to under-declared input tax
on the part of petitioner which led to an under[-]declared purchases of ₱7,153,711.70, arrived at by dividing
₱715,371.17 by the VAT rate of 10%. As can be gleaned from the LN, suppliers declared in its books of accounts
output VAT for sales made to petitioner. However, in petitioner's SLP, no declaration of such amount incurred for the
taxable year 2004 was shown. Such being the case, petitioner under-declared its purchases that resulted to the
under-declared amount of Input VAT. If petitioner has under[-]declared its purchases, it would likewise have under-
declared its Gross Income which will be worked back by using the ratio of Cost of Sales against its Gross Income
per Income Tax Return. In the case at hand, the ratio of Cost of Sales against its Gross Income per Income Tax
Return filed for taxable year 2004 is 71%. If petitioner divides the amount of ₱7,153,711.70 by the cost ratio of 71%,
the under-declared Gross Income of ₱l0,075,650.28 will be arrived at. Such being the case, petitioner would then be
liable to pay the corresponding income tax for the under-declared Net [I]ncome at the rate of 32%. Net Income was
arrived at by deducting from the Gross Income of ₱l0,075,650.28 the corresponding Cost of Sales of ₱7,153,711.70.
Hence, the amount of income tax still to be paid is ₱l,524,229.99 (including additional increments until April 30,
2008). For ready reference of this Honorable Court, the full details of the aforesaid computation are shown in the
Formal Letter of Demand issued to petitioner.

4. Petitioner emphasized that it is a service company deriving its main source of income from newspaper
and advertising sales, thus any understatement of expenses or purchases (also mostly from services) does not
mean it understated its sales. It goes further by saying that its transactions pertaining mostly to services and goods
must be reflected as Operating Expenses and not as part of the Cost of Sales. It revealed that Harrison
Communications Inc., McCann Erikson Inc., WPP Marketing Corporation are some of the advertising agencies
which rendered direct professional services to petitioner in the form of marketing or promotional purposes. To
bolster its claim, it likewise stated that the transactions with aforesaid three (3) main entities should not be treated as
cost of sales since what these entities provided were 'not materials' in order for petitioner to gain income that can be
both taxable under the income tax and VAT provisions.

Corollary thereto, Section 27 E(4) of the NIRC specifically provides:

'(4) Gross Income Defined. For purposes of applying the minimum corporate income tax provided under Section (E)
hereof, the term 'gross income' shall mean gross sales less sales returns, discounts and allowances and cost of
goods sold. 'Cost of goods sold' shall include business expenses directly incurred to produce the merchandise to
bring them to their present location and use.

xxx
In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns,
allowances, discounts and cost of services. 'Cost of services' shall mean direct costs and expenses necessarily
incurred to provide the services required by the customers and clients including (a) salaries and employee benefits
of personnel, consultants and specialists directly rendering the service and (b) cost of facilities directly utilized in
providing the service such as depreciation or rental of equipment used and cost of supplies.'

Petitioner, by its own admission, is a service-oriented company which derives its income from sale of newspaper
and advertisement. It is without doubt that in selling newspapers to the public, it necessarily incurs direct costs to
bring about the merchandise it sells to its present state and/or condition. In the same vein, in selling advertisements
to clients/customers, it likewise incurs direct costs for the rendition of services in the process. On the basis of the
aforesaid provision of the NIRC, 'cost of services' include[s] direct costs and expenses necessarily incurred to
provide the services required by its customers or clients. Applying the same at hand, in order for petitioner to boost
its sales on advertisement, it would actually employ services of companies which would handle the promotion and
marketing of the services it is offering. The direct and professional services rendered by the three (3) advertising
companies nan1ely Harrison Communications Inc., McCann Erikson Inc. and WPP Marketing Corporation should be
considered as part of the cost of advertisement sales/services by petitioner.

In view of the foregoing, the amount of discrepancy that resulted on account of the under-declared input tax of P7 l
5,3 71.17 should be treated as Cost of Sales of services and not just an ordinary operating expenses because the
services provided by the aforementioned three (3) advertising agencies are direct costs and expenses necessary to
bring about the advertisement sales of petitioner."9

After the presentation of oral and documentary evidence and submission of the parties' respective Memoranda, the
case was submitted for resolution.

The Decision of the CTA First Division

The CTA First Division resolved the following issues raised by the parties:

1. Whether or not respondent's authority to issue an assessment against petitioner for deficiency value-added and
income taxes has prescribed;

2. Whether or not respondent erred in assessing petitioner deficiency value-added tax and income tax for calendar
year 2004;

3. Whether petitioner is liable to pay the aggregate amount of Four Million Six Hundred Seventy Nine Thousand Five
Pesos and 55/100 (Php 4,679,005.55) representing alleged deficiency income and value-added tax for taxable year
2004, including interest and compromise penalty from 30 April 2008 until fully paid pursuant to Sections 248 and
249 of the Tax Code, arising from discrepancies which were generated through the Reconciliation of Listing for
Enforcement (RELIEF) System-Summary List of Sales and Purchases and Third Party Matching of Data available in
the Integrated Tax System (ITS) of respondent against information gathered from third party sources;

4. Whether the fees paid to the three (3) advertising agencies, namely Harrison Communications Inc., McCann
Erikson Inc., and WPP Marketing Corporation are considered part of the cost of sales made by petitioner for taxable
year 2004;

5. Whether Section 222 of the Tax Code is applicable in the case at hand;

6. Whether the Formal Letter of Demand dated 11 March 2008 was issued within the prescriptive period provided by
law; and

7. Whether or not petitioner should be assessed a compromise penalty.10

In its 16 February 2012 Decision, the CTA First Division ruled m favor of PDI.

The CTA First Division ruled that the period of limitation in the assessment and collection of taxes is governed by
Section 203 of the NIRC which provides:
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.

The CTA First Division ruled that internal revenue taxes must be assessed on time. It added that the period of
assessment must not extend indefinitely because doing so will deprive the taxpayer of the assurance that it will not
be subjected to further investigation after the expiration of a reasonable period of time. Nevertheless, the CTA First
Division noted that the three-year prescriptive period under Section 203 of the NIRC applies only when the returns
are filed pursuant to legal requirements. The CTA First Division explained that for false or fraudulent tax returns, or
for failure to file returns, the prescriptive period is 10 years after the discovery of the falsity or fraud, or from failure to
file tax returns. It also added that in the absence of a false or fraudulent return, or where a return has been filed, the
period of limitation may still be extended in cases where the taxpayer and the CIR have agreed in writing, prior to
the expiration of the period prescribed under Section 203 of the NIRC, to an assessment within the time agreed
upon.

In ruling on the prescriptive period, the CTA First Division had to determine whether PDI's tax returns were false or
fraudulent. The CTA First Division ruled that in ascertaining the correctness of any return, or in determining the tax
liability of any person, the CIR is authorized to obtain information, on a regular basis, from any person other than the
taxpayer subject of the audit or investigation. It further ruled that the CIR may rely on the information obtained from
third parties in issuing assessments to taxpayers, and that the CIR enjoys the presumption of regularity in obtaining
such information. Further, the CTA First Division stated that the determinations and assessments of the CIR are
presumed correct and made in good faith, and it is the duty of the taxpayer to prove otherwise. The CTA First
Division then ruled that in this case, PDI introduced proof that the determination made by the CIR on the supposed
overdeclared input tax of ₱l,601,652.43 is not correct. The CTA First Division ruled that the CIR failed to disprove
the findings submitted by the Independent Certified Public Accountant (ICPA) that supported PDI's assertions.

The CTA First Division rejected the CIR's theory that since there was an underdeclaration of the input tax and of
purchases, it translates to taxable income for tax purposes and taxable gross receipts for VAT purposes. According
to the CTA First Division, the following elements must be present in the imposition of income tax: (1) there must be
gain or profit; (2) the gain or profit is realized or received, actually or constructively; and (3) it is not exempted by law
or treaty from income tax. In this case, the CTA First Division ruled that in the imposition or assessment of income
tax, it must be clear that there was an income and the income was received by the taxpayer. The basis could not be
merely an underdeclaration of purchases. The CTA First Division added that for income tax purposes, a taxpayer
may either deduct from its gross income a lesser amount, or not claim any deduction at all. It stated that what is
prohibited is to claim a deduction beyond the amount authorized by law. According to the CTA First Division, even
when there was underdeclaration of input tax, which means there was an underdeclaration of purchases and
expenses, the same is not prohibited by law.

As regards the VAT assessment, the CTA First Division ruled that the 10% VAT is assessed on "gross receipts
derived from the sale or exchange of services." As such, it is critical to show that the taxpayer received an amount
of money or its equivalent, and not only that there was underdeclared input taxes or purchases. The CTA First
Division ruled that it was an error for the CIR to impose a deficiency income tax based on the underdeclared input
tax, and the income tax return cannot be treated as false. Thus, the CTA First Division ruled that the prescriptive
period applicable to the case is the three-year period, and the deficiency income tax assessment issued by the BIR
beyond the three-year prescriptive period is void.

The CTA First Division further ruled that Section 222(b) of the NIRC authorizes the extension of the original three-
year prescriptive period by the execution of a valid waiver upon the agreement in writing between the taxpayer and
the BIR, provided: (1) the agreement was made before the expiration of the three-year period and (2) the guidelines
in the proper execution of the waiver are strictly foll0wed. The CTA First Division found that while the First and
Second Waivers were executed in three copies, the BIR failed to provide the office accepting the waivers with their
respective third copies. The CTA First Division found that the third copies were still attached to the docket of the
case. The CTA First Division also found that the BIR failed to prove that the Third Waiver was executed in three
copies. Further, the revenue official who accepted the Third Waiver was not authorized to do so. The CTA First
Division also noted that the Second Waiver would have expired on 31 December 2007 but the Third Waiver was
already executed on 20 December 2007, meaning there was enough time to have it signed by the ACIR of the Large
Taxpayers Service. The CTA First Division concluded that due to the defects in the Waivers, the three-year period
within which to assess PDI was not extended. The CTA First Division further ruled that the compromise penalties
should likewise be cancelled. The dispositive portion 0f ~he CTA First Division's Decision reads:

WHEREFORE, premises considered, the instant Petition for Review is hereby GRANTED. The Formal Letter of
Demand dated March 11, 2008 and Assessment No. LN # 116-AS-04-00-00038- [000526) for calendar year 2004
issued by the BIR against petitioner are hereby CANCELLED and SET ASIDE.

SO ORDERED.11

The CIR filed a motion for reconsideration. In its 8 May 2012 Resolution, the CTA First Division denied the motion
for lack of merit.

The CIR filed a petition for review before the CTA En Banc.

The Decision of the CTA En Banc

In its 4 November 2013 Decision, the CTA En Banc cited the CTA First Division's Decision extensively. The CTA En
Banc ruled that it found no reason to depart from the CTA First Division's findings. The CTA En Banc held that PDI
sufficiently discharged its burden of proving that the VAT assessment and the Income Tax assessment made by the
CIR were not correct. The CTA En Banc ruled that the presumptions of correctness and regularity cited by the CIR
were overturned by the evidence presented by PDI particularly, the final report of the ICPA, accounts payable,
check vouchers, invoices, official receipts, and credit memoranda. The CTA En Banc noted that the CIR did not
present any evidence to the contrary. The CTA En Banc rejected the CIR's allegation that PDI made a false return
and held that the three-year prescriptive period based on Section 203, in relation to Section 222(a) of the NIRC, as
amended, should apply in this case. The CTA En Banc likewise sustained the CTA First Division's ruling that the
Waivers issued by PDI were defective and could not extend the three-year prescriptive period. The CTA En
Banc also sustained the CTA First Division's ruling that it can resolve the issue of prescription because the CIR did
not contest it when it was raised by PDI.

The dispositive p01iion of the CTA En Bane's Decision reads:

WHEREFORE, premises considered, the Petition for Review is hereby DENIED for lack of merit. Accordingly, the
Decision and Resolution dated February 16, 2012 and May 8, 2012, respectively, are hereby AFFIRMED in toto.

SO ORDERED.12

The CIR filed a motion for reconsideration. In its 1 August 2014 Resolution, the CTA En Banc denied the motion for
lack of merit.

Hence, the CIR filed a petition for review on certiorari before this Court.

The Issues

The CIR raised the following issues in her petition:

(l) The CTA En Banc erred in ruling that petitioner's assessment for deficiency VAT and income tax was adequately
controverted by respondent;

(2) The CTA En Banc erred in ruling that the petitioner's right to assess respondent for deficiency VAT and income
tax has prescribed; and

(3) The CTA En Banc erred in ruling that respondent is not estopped from raising the defense of prescription.13

The Ruling of this Court

BIR 's assessment was not adequately controverted by PDI

Reconciliation of Listing for Enforcement information technology tool used by the administration.14 The system was
created -

x x x to support third party information program and voluntary assessment program of the Bureau through the cross-
referencing of third party information from the taxpayers' Summary Lists of Sales and Purchases prescribed to be
submitted on a quarterly basis pursuant to Revenue Regulations Nos. 7-95, as amended by RR 13-97, RR 7-99 and
RR 8-2002.15

In addition -

[RELIEF] can detect tax leaks by matching the data available under the Bureau's Integrated Tax System (ITS) with
data gathered from third party sources (i.e. Schedules of Sales and Domestic Purchases, and Schedule of
Importations submitted by VAT taxpayers pursuant to RR No. 7-95, as amended by RR Nos. 13-97, 7-99 and 8-
2002).

Through the consolidation and cross-referencing of third party information, discrepancy reports on sales and
purchases can be generated to uncover under declared income and over claimed purchases (goods and services).
Timely recognition and accurate reporting of unregistered taxpayers and non-filers can be made possible.16

Using the RELIEF system, the BIR assessed PDI for deficiency VAT and income tax amounting to ₱3,154,775.57
and ₱l ,525,230.00, respectively. According to the BIR, the computerized matching conducted by its office, using
information and data from third party sources against PDI's VAT returns for 2004 showed an underdeclaration of
domestic purchases from its suppliers amounting to ₱317,705,610.52. PDI. denied the allegation.

In ruling on the case, the CTA recognized that the BIR may obtain information from third party sources in assessing
taxpayers. The CTA also stated that the BIR enjoyed a presumption of regularity in obtaining the information, and its
assessments are presumed correct and made in good faith. Indeed, the burden to controvert the assessments made
by the BIR lies with the taxpayer. In this case, the CTA rejected BIR's finding that PDI underdeclared its input tax
and purchases. According to the CTA, PDI was able to disprove BIR's assessments.

The general rule is that findings of fact of the CTA are not to be disturbed by this Court unless clearly shown to be
unsupported by substantial evidence.17 Since by the very nature of its functions, the CTA has developed an
expertise to resolve tax issues, the Court will not set aside lightly the conclusions reached by them, unless there has
been an abuse or improvident exercise of authority.18

In reaching their conclusions, the CTA First Division and En Banc relied on the report submitted by the ICPA.
According to the CTA, the BIR failed to rebut the ICPA report. After going over the ICPA report, as well as the
affidavit summarizing the examination submitted by Jerome Antonio B. Constantino (Constantino), a Certified Public
Accountant and the Managing Partner of the firm that conducted the examination, this Court notes that:

(1) Purchases made from Harrison Communications, Inc. were recorded as general and administrative expenses
and selling expenses in the 2004 General Ledger and 2004 Audited Financial Statements and not as cost of sales;19

(2) The 2004 purchases from Harrison Communications, Inc. and McCann Erickson, Inc. were recorded in PDI's
book in 2005 and 2006 as "Summary List of Purchases." There was a discrepancy between the purchases from
Harrison Communications, Inc. and McCann Erickson, Inc. and the BIR's Letter Notice amounting to Pl 50,203.29
and Pl 91,406.02, respectively, but the ICPA was not able to account for the difference because according to PDI,
the details were not provided in the BIR's Letter Notice;20

(3) Promotional services purchased from Harrison Communications, Inc. and McCann Erickson, Inc. in 2004 were
recorded in PDI's books in 2005 and 2006. According to Constantino, the VAT input on purchases from Harrison
Communications, Inc. and McCann Erickson, Inc. recorded in 2005 and 2006, amounting to ₱206,713.63 and
₱13,363.36, respectively, were supported only by photocopies of sales invoices because PDI claimed that it could
not find the original documents despite diligent efforts to locate them;21
(4) Constantino reported that no input taxes were recorded in 2004 from McCann Erickson, Inc., Millennium Cars,
Inc., WPP Marketing Communications, Inc., Grasco Industries, Inc., and Makati Property Ventures. Constantino was
not able to vouch for supporting documents for purchase transactions from WPP Marketing Communications, Inc.,
Grasco Industries, Inc., and Makati Property Ventures. He established that the purchase from Millennium Cars, Inc.
was for a car loan account for an employee and was recorded to Advances to Officers and Employees;22

(5) Alliance Media Printing, Inc.'s erroneous posting of data in the BIR RELIEF caused the discrepancies in the
analysis of suppliers' sales and purchases made by PDI.23

The foregoing showed that there were discrepancies that PDI were able to explain. In particular, the ICPA report
showed that the purchase from Millennium Cars, Inc. was made on behalf of an employee as a loan. In addition, the
underdeclared input tax insofar as Alliance Printing, Inc. is concerned was due to the latter's erroneous posting of
data, a fact that the corporation admitted. However, there are still issues that need to be resolved. In particular, PDI
failed to justify its erroneous listing of purchases from Harrison Communications, Inc., McCann Erickson, Inc., and
WPP Marketing Corporation as general and administrative expenses.

The CIR pointed out that PDI could not treat purchases from Harrison Communications, Inc. and McCann Erickson,
Inc. as general and administrative expenses. Indeed, Section 27(E)(4) of the NIRC provides:

xxxx

(4) Gross Income Defined. For purposes of applying the minimum corporate income tax provided under Subsection
(E) hereof, the term "gross income" shall mean gross sales less sales returns, discounts and allowances and cost of
goods sold. "Cost of goods sold" shall include business expenses directly incurred to produce the merchandise to
bring them to their present location and use.

xxxx

In the case of taxpayers engaged in the sale of service, "gross income" means gross receipts less sales returns,
allowances, discounts and cost of services. "Cost of services" shall mean direct costs and expenses necessarily
incurred to provide the services required by the customers and, clients including (a) salaries and employee benefits
of personnel, consultants and specialists directly rendering the service and (b) cost of facilities directly utilized in
providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however,
That in the case of banks, "cost of services" shall include interest expense.

The ICPA report found nothing wrong in the entries. However, as pointed out by the Office of the Solicitor General,
PDI is a service-oriented company that derives its income fr0m the sale of newspapers and advertisements. The
services rendered by Harrison Communications, Inc., McCann Erickson, Inc., and \VPP Marketing Corporation were
meant to promote and market the advertising services offered by PDI. As such, their services should be considered
part of cost of services instead of general and administrative expenses and operating expenses.

Such finding would ordinarily call for a recomputation. However, we need to resolve first whether the BIR's
assessment was made within the prescriptive period.

Prescription and Estoppel

We will discuss the second and third issues jointly.

The CIR alleges that PDT filed a false or fraudulent return. As such, Section 222 of the NIRC should apply to this
case and the applicable prescriptive period is 10 years from the discovery of the falsity of the return. The CIR argues
that the ten-year period starts from the time of the issuance of its Letter Notice on 10 August 2006. As such, the
assessment made I through the Formal Letter of Demand dated 11 March 2008 is within the prescriptive period.

We do not agree.

Under Section 203 of the NIRC, the prescriptive period to assess is set at three years. This rule is subject to the
exceptions provided under Section 222 of the NIRC. The CIR invokes Section 222(a) which provides:
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.

In Commissioner of Internal Revenue v. Javier,24 this Court ruled that fraud is never imputed. The Court stated that it
will not sustain findings of fraud upon circumstances which, at most, create only suspicion.25 The Court added that
the mere understatement of a tax is not itself proof of fraud for the purpose of tax evasion.26 The Court explained:

x x x. The fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting of
deception willfully and deliberately done or resorted to in order to induce another to give up some legal right.
Negligence, whether slight or gross, is not equivalent to fraud with intent to evade the tax contemplated by law. It
must amount to intentional wrongdoing with the sole object of avoiding the tax. x x x.27

In Samar-1 Electric Cooperative v. Commissioner of Internal Revenue,28 the Court differentiated between false and
fraudulent returns. Quoting Aznar v. Court of Tax Appeals,29 the Court explained in Samar-l the acts or omissions
that may constitute falsity, thus:

Petitioner argues that Sec. 332 of the NIRC does not apply because the taxpayer did not file false and fraudulent
returns with intent to evade tax, while respondent Commissioner of Internal Revenue insists contrariwise, with
respondent Court of Tax Appeals concluding that the very "substantial underdeclarations of income for six
consecutive years eloquently demonstrate the falsity or fraudulence of the income tax returns with an intent to evade
the payment of tax."

To our minds we can dispense with these controversial arguments on facts, although we do not deny that the
findings of facts by the Court of Tax Appeals, supported as they are by very substantial evidence, carry great
weight, by resorting to a proper interpretation of Section 332 of the NIRC. We believe that the proper· and
reasonable interpretation of said provision should be that in the three different cases of (1) false return, (2)
fraudulent return with intent to evade tax, (3) 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 (1) falsity, (2) fraud, (3) omission. Our stand that the law should be interpreted to mean a separation
of the three different situations of false return, fraudulent return with intent to evade tax, and failure to file a return is
strengthened immeasurably by the last portion of the provision which segregates the situation into three different
classes, namely "falsity," "fraud," and "omission." That there is a difference between "false return" and "fraudulent
return" cannot be denied. While the first implies deviation from the truth, whether intentional or not, the second
implies intentional or deceitful entry with intent to evade the taxes due.

The ordinary period of prescription of 5 years within which to assess tax liabilities under Sec. 331 of the NIRC
should be applicable to normal circumstances, but whenever the government is placed at a disadvantage so as to
prevent its lawful agents from proper assessment of tax liabilities due to false returns, fraudulent return intended to
evade payment of tax or failure to file returns, the period of ten years provided for in Sec. 332(a) NIRC, from the
time of discovery of the falsity, fraud or omission even seems to be inadequate and should be the one enforced.30

Thus, while the filing of a fraudulent return necessarily implies that the act of the taxpayer was intentional and done
with intent to evade the taxes due, the filing of a false return can be intentional or due to honest mistake.
In CIR v. B.F. Goodrich Phils., Inc.,31 the Court stated that the entry of wrong information due to mistake,
carelessness, or ignorance, without intent to evade tax, does not constitute a false return. In this case, we do not
find enough evidence to prove fraud or intentional falsity on the part of PDI.

Since the case does not fall under the exceptions, Section 203 of the NIRC should apply. It provides:

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.

Indeed, the Waivers executed by the BIR and PDI were meant to extend the three-year prescriptive period, and
would have extended such period were it not for the defects found by the CTA. This further shows that at the outset,
the BIR did not find any ground that would make the assessment fall under the exceptions.

In Commissioner of Internal Revenue v. Kudos Metal Corporation,32 the Court ruled:

Section 222(b) of the NIRC provides that the period to assess and collect taxes may only be extended upon a
written agreement between the CIR and the taxpayer executed before the expiration of the three-year period. RMO
20-90 issued on April 4, 1990 and RDAO 05-01 issued on August 2, 2001 lay down the procedure for the proper
execution of the waiver, to wit:

1. The waiver must be in the proper form prescribed by RMO 20-90. The phrase "but not after __ 19_", which
indicates the expiry date of the period agreed upon to assess/collect the tax after the regular three-year period of
prescription, should be filled up.

2. The waiver must be signed by the taxpayer himself or his duly authorized representative. In the case of a
corporation, the waiver must be signed by any of its responsible officials. In case the authority is delegated by the
taxpayer to a representative, such delegation should be in writing and duly notarized.

3. The waiver should be duly notarized.

4. The CIR or the revenue official authorized by him must sign the waiver indicating that the BIR has accepted and
agreed to the waiver. The date of such acceptance by the BIR should be indicated. However, before signing the
waiver, the CIR or the revenue official authorized by him must make sure that the waiver is in the prescribed form,
duly notarized, and executed by the taxpayer or his duly authorized representative.

5. Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before the expiration
of the period of prescription or before the lapse of the period agreed upon in case a subsequent agreement is
executed.

6. The waiver must be executed in three copies, the original copy to be attached to the docket of the case, the
second copy for the taxpayer and the third copy for the Office accepting the waiver. The fact of receipt by the
taxpayer of his/her file copy must be indicated in the original copy to show that the taxpayer was notified of the
acceptance of the BIR and the perfection of the agreement.33

In this case, the CTA found that contrary to PDI's allegntions, the First and Second Waivers were executed in three
copies. However, the CTA also found that the CIR failed to provide the office accepting the First and Second
1âwphi1

Waivers with their respective third copies, as the CTA found them still attached to the docket of the case. In addition,
the CTA found that the Third Waiver was not executed in three copies.

The failure to provide the office accepting the waiver with the third copy violates RMO 20-90 and RDAO 05-01.
Therefore, the First Waiver was not properly executed on 21 March 2007 and thus, could not have extended the
three-year prescriptive period to assess and collect taxes for the year 2004. To make matters worse, the CIR
committed the same error in the execution of the Second Waiver on 5 June 2007. Even if we consider that the First
Waiver was validly executed, the Second Waiver failed to extend the prescriptive period because its execution was
contrary to the procedure set forth in RMO 20-90 and RDAO 05-01. Granting further that the First and Second
Waivers were validly executed, the Third Waiver executed on 12 December 2007 still failed to extend the three-year
prescriptive period because it was not executed in three copies. In short, the records of the case showed that the
CIR's three-year prescriptive period to assess deficiency tax had already prescribed due to the defects of all the
Waivers.

In Commissioner of Internal Revenue v. The Stanley Works Sales (Phils.), Incorporated,34 the Court explained the
nature of a waiver of assessment. The Court said:
In Philippine Journalist, Inc. v. Commissioner of Internal Revenue, the Court categorically stated that a Waiver must
strictly conform to RMO No. 20-90. The mandatory nature of the requirements set forth in RMO No. 20-90, as ruled
upon by this Court, was recognized by the BIR itself in the latter's subsequent issuances, namely, Revenue
Memorandum Circular (RMC) Nos. 6-2005 and 29-2012. Thus. the BIR cannot claim the benefits of extending the
period to collect the deficiency tax as a consequence of the Waiver when, in truth it was the BIR's inaction which is
the proximate cause of the defects of the Waiver. The BIR has the burden of ensuring compliance with the
requirements of RMO No. 20-90 as they have the burden of securing the right of the government to assess and
collect tax deficiencies. This right would prescribe absent any showing of a valid extension of the period set by the
law.

To emphasize, the Waiver was not a unilateral act of the taxpayer; hence, the BIR must act on it, either by
conforming to or by disagreeing with the extension. A waiver of the statute of limitations, whether on assessment or
collection, should not be construed as a waiver of the right to invoke the defense 0f prescription but, rather, an
agreement between the taxpayer and the BIR to extend the period to a date certain, within which the latter could still
assess or collect taxes due. The waiver does not imply that the taxpayer relinquishes the right to invoke prescription
unequivocally.

Although we recognize that the power of taxation is deemed inherent in order to support the government, tax
provisions are not all about raising revenue. Our legislature has provided safeguards and remedies beneficial to
both the taxpayer, to protect against abuse; and the government, to promptly act for the availability and recovery of
revenues. A statute of limitations on the assessment and collection of internal revenue taxes was adopted to serve a
purpose that would benefit both the taxpayer and the governn1ent.35

Clearly, the defects in the Waivers resulted to the non-extension of the period to assess or collect taxes, and made
the assessments issued by the BIR beyond the three-year prescriptive period void.36

The CIR also argues that PDI is estopped from questioning the validity of the Waivers. We do not agree. As stated
by the CTA, the BIR cannot shift the blame to the taxpayer for issuing defective waivers.37 The Court has ruled that
the BIR cannot hide behind the doctrine of estoppel to cover its failure to comply with RMO 20-90 and RDAO 05-01
which were issued by the BIR itself.38 A waiver of the statute of limitations is a derogation of the taxpayer's right to
security against prolonged and unscrupulous investigations and thus, it must be carefully and strictly construed.39

Since the three Waivers in this case are defective, they do not produce any effect and did not suspend the three-
year prescriptive period under Section 203 of the NIRC. As such, we sustain the cancellation of the Formal Letter of
Demand dated 11 March 2008 and Assessment No. LN # 116-AS- 04-00-00038-000526 for taxable year 2004
issued by the BIR against PDI.

WHEREFORE, we DENY the petition.

SO ORDERED.

G.R. No. 183408

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
LANCASTER PHILIPPINES, INC., Respondent

DECISION

MARTIRES, J.:

This is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court seeking to reverse and set aside the
30 April 2008 Decision2 and 24 June 2008 Resolution3 of the Court of Tax Appeals (CTA) En Banc in CTA EB No.
352.

The assailed decision and resolution affirmed the 12 September 2007 Decision4 and 12 December 2007
Resolution5of the CTA First Division (CTA Division) in CTA Case No. 6753.
THE FACTS

The facts6 are undisputed.

Petitioner Commissioner of Internal Revenue (CIR) is authorized by law, among others, to investigate or examine
and, if necessary, issue assessments for deficiency taxes.

On the other hand, respondent Lancaster Philippines, Inc. (Lancaster) is a domestic corporation established in 1963
and is engaged in the production, processing, and marketing of tobacco.

In 1999, the Bureau of Internal Revenue (BIR) issued Letter of Authority (LOA) No. 00012289 authorizing its
revenue officers to examine Lancaster's books of accounts and other accounting records for all internal revenue
taxes due from taxable year 1998 to an unspecified date. The LOA reads:

SEPT. 30 1999

LETTER OF AUTHORITY

LANCASTER PHILS. INC.

11th Flr. Metro Bank Plaza
Makati City

SIRJMADAM/GENTLEMEN:

The bearer(s) hereof RO’s Irene Goze & Rosario Padilla to be Supervise by GH Catalina_Leny Barrion of the
Special Team created pursuant to RSO 770-99 is/are authorized to examine your books of accounts and other
accounting records for a11 internal revenue taxes for the period from example year, 1998 to ______, 19___. He
is/[t]hey are provided with the necessary identification card(s) which shall be presented to you upon request.

It is requested that all facilities be extended to the Revenue Officer(s) in order to expedite the examination.

You will be duly informed of the results of the examination upon approval of the report submitted by the
aforementioned Revenue Officer(s).7

After the conduct of an examination pursuant to the LOA, the BIR issued a Preliminary Assessment Notice
(PAN)8which cited Lancaster for:

1) overstatement of its purchases for the fiscal year April 1998 to March1999; and 2) noncompliance with the
generally accepted accountingprinciple of proper matching of cost and revenue.9 More concretely, the BIR
disallowed the purchases of tobacco from farmers covered by Purchase Invoice Vouchers (PIVs) for the months
of February and March 1998 as deductions against income for the fiscal year April 1998 to March 1999. The
computation of Lancaster's tax deficiency, with the details of discrepancies, is reproduced below:

INCOME TAX:

Taxable Income per ITR -0-

Add: Adjustments-Disallowed purchases 11,496,770.18

Adjusted Taxable Income per Investigation ₱11,496,770.18

INCOME TAX DUE-Basic
April 1 - December 31, 1998
(9/12x ₱l1,496,770.18 x 34%) ₱2,913,676.4
January 1 - March 31, 1999
(3/12x ₱l1,496,770.18 x 33%) 948,483.54
 Income tax still due per investigation ₱3,880,159.94
Interest (6/15/99 to 10115/02) .66 2,560,905.56

Compromise Penalty 25,000

TOTAL DEFlCIENCY INCOME TAX ₱6,466,065.50

DETAILS OF DISCREPANCIES
Assessment No. LTAID II-98-00007

A. INCOME TAX (₱3,880,159.94) - Taxpayer's fiscal year covers April 1998 to March 1999. Verification of the books
of accounts and pertinent documents disclosed that there was an overstatement of purchases for the year.
Purchase Invoice Vouchers (PIVs) for February and March 1998 purchases amounting to ₱ll,496,770.18 were
included as part of purchases for taxable year 1998 in violation of Section 45 of the National Internal Revenue Code
in relation to Section 43 of the same and Revenue Regulations No. 2 which states that the Crop-Basis method of
reporting income may be used by a farmer engaged in producing crops which take more than one (1) year from the
time of planting to the time of gathering and disposing of crop, in such a case, the entire cost of producing the crop
must be taken as deduction in the year in which the gross income from the crop is realized and that the taxable
income should be computed upon the basis of the taxpayer's annual accounting period, (fiscal or calendar year, as
the case may be) in accordance with the method of accounting regularly employed in keeping with the books of the
taxpayer. Furthermore, it did not comply with the generally accepted principle of proper matching of cost and
revenue.10

Lancaster replied11 to the PAN contending, among other things, that for the past decades, it has used an
entire 'tobacco-cropping season' to determine its total purchases covering a one-year period from 1 October up
to 30 September of the followingyear (as against its fiscal year which is from 1 April up to 31 March of the
followingyear);that it has been adopting the 6~month timing difference to conform to the matching concept (of cost
and revenue); and that this has long been installed as part of the company's system and consistently applied in its
accounting books.12

Invoking the same provisions of the law cited in the assessment, i.e., Sections 4313 and 4514 of the National Internal
Revenue Code (NJRC), in conjunction with Section 4515 of Revenue Regulation No. 2, as amended, Lancaster
argued that the February and March 1998 purchases should not have been disallowed. It maintained that the
situation of farmers engaged in producing tobacco, like Lancaster, is unique in that the costs, i.e., purchases, are
taken as of a different period and posted in the year in which the gross income from the crop is realized. Lancaster
concluded that it correctly posted the subject purchases in the fiscal year ending March 1999 as it was only in this
year that the gross income from the crop was realized.

Subsequently on 6 November 2002, Lancaster received from the BIR a final assessment
notice (FAN),16 captioned Formal Letter of Demand andAudit Result/Assessment .Notice LTAID II IT-98-
00007, dated 11 October2002, which assessed Lancaster's deficiency income tax amounting to Pl l,496,770.18, as
a consequence of the disallowance of purchases claimed for the taxable year ending199931. March 1999.

Lancaster duly protested17 the FAN. There being no action taken by the Commissioner on its protest, Lancaster filed
on 21 August 2003 a petition for review18 before the CTA Division.

The Proceedings before the CTA

In its petition before the CTA Division, Lancaster essentially reiterated its arguments in the protest against the
assessment, maintaining that the tobacco purchases in February and March 1998 are deductible in its fiscal year
ending 31 March 1999.

The issues19 raised by the parties for the resolution of the CTA Division were:

I
WHETHER OR NOT PETITIONER COMPLIED WITH THE GENERALLY ACCEPTED ACCOUNTING PRINCIPLE
OF PROPER MATCHING OF COST AND REVENUE;

II

WHETHER OR NOT THE DEFICIENCY TAX ASSESSMENT AGAINST PETITIONER FOR THE TAXABLE YEAR
1998 IN THE AGGREGATE AMOUNT OF ₱6,466,065.50 SHOULD BE CANCEILED AND WITHDRAWN BY
RESPONDENT.

After trial, the CTA Division granted the petition of Lancaster, disposing as follows;

IN VIEW OF THE FOREGOING, the subject Petition for Review is hereby GRANTED. Accordingly, respondent is
ORDERED to CANCEL and WITHDRAW the deficiency income tax assessment issued against petitioner under
Formal l;etter of Demand and Audit Result/Assessment Notice No. L TAID II IT-98-00007 dated October 11, 2002, in
the amount of ₱6,466,065.50, covering the fiscal year from April l, 1998 to March 31, 1999.20

The CIR move21 but failed to obtain reconsideration of the CTA Division ruling.22

Aggrieved, the CIR sought recourse23 from the CTA En Banc to seek a reversal of the decision and the resolution of
the CTA Division.

However, the CTA En Banc found no reversible error in the CTA Division's ruling, thus, it affirmed the cancellation of
the assessment against Lancaster. The dispositive portion of the decision of the CTA En Banc states:

WHEREFORE, premises considered, the present Petition for Review is hereby DENIED DUE COURSE, and,
accordingly DISMISSED for lack of merit.24

The CTA En Banc likewise denied25 the motion for reconsideration from its Decision.

Hence, this petition.

The CIR assigns the following errors as committed by the CTA En Banc:

I.

THE COURT OF TAX APPEALS EN BANC ERRED IN HOLDING THAT PETITIONER'S REVENUE OFFICERS
EXCEEDED THEIR AUTHORITY TO INVESTIGATE THE PERJOD NOT COVERED BY THEIR LETTER OF
AUTHORITY.

II.

THE COURT OF TAX APPEALS EN BANC ERRED IN ORDERING PETITIONER TO CANCEL AND WITHDRAW
THE DEFICIENCY ASSESSMENT ISSUED AGAINST RESPONDENT.26

THE COURT'S RULING

We deny the petition.

The CTA En Banc did not err when it ruled

that the BIR revenue officers had
exceeded their authority.

To support its first assignment of error, the CIR argues that the revenue officers did not exceed their authority when,
upon examination (of the Lancaster's books of accounts and other accounting records), they verified that Lancaster
made purchases for February and March of 1998, which purchases were not declared in the latter's fiscal year from
1 April 1997 to 31 March 1998. Additionally, the CIR posits that Lancaster did not raise the issue on the scope of
authority of the revenue examiners at any stage of the proceedings before the CTA and, consequently, the CTA had
no jurisdiction to rule on said issue.

On both counts, the CIR is mistaken.

A. The Jurisdiction of the CTA

Preliminarily, we shall take up the CTA's jurisdiction to rule on the issue of the scope of authority of the revenue
officers to conduct the examination of Lancaster's books of accounts and accounting records.

The law vesting unto the CTA its jurisdiction is Section 7 of Republic Act No. 1125 (R.A. No. 1125),27 which in part
provides:

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; x
x x. (emphasis supplied)

Under the aforecited provision, the jurisdiction of the CTA is not limited only to cases which involve decisions or
inactions of the CIR on matters relating to assessments or :refunds but also includes other cases arising from the
NIRC o:r related laws administered by the BIR. 28 Thus, for instance, we had once held that the question of whether
or not to impose a deficiency tax assessment comes within the purview of the words "othermatters arising under the
National Internal Revenue Code."[[29]

The jurisdiction of the CTA on such other matters arising under theNIRC was retained under the amendments
introduced by R.A No. 9282.30Under R.A. No. 9282, Section 7 now reads:

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 mattersarising 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; x x x."
(emphasis supplied)

Is the question on the authority of revenue officers to examine the books and records of any person cognizable by
the CTA?

It must be stressed that the assessment of inten1al revenue taxes is one of the duties of the BIR. Section 2 of the
NIRC states:

Sec. 2. Powers and Duties oftheBureau of Internal Revenue. - The Bureau of Internal Revenue shall be under the
supervision and control of the Department of Fin[:l.11ce and its powers: and duties shall comprehend
the assessment and collection of all national internal revenue taxes, fees, andcharges, and the enforcement of all
forfeitures, penalties, and fines connected therewith, including the execution of judgments in all cases decided in its
favor by the Court of Tax Appeals and the ordinary courts.
The Bureau shall give effect to and administer the supervisory and police powers conferred to it by this Code or
other laws. (emphasis supplied)

In connection therewith, the CIR may authorize the examination of any taxpayer and correspondingly make an
assessment whenever necessary.31 Thus, to give more teeth to such power of the CIR, to make an assessment, the
NIRC authorizes the CIR to examine any book, paper, record, or data of any person.32 The powers granted by law to
the CIR are intended, among other things, to determine the liability of any person for any national internal revenue
tax.

It is pursuant to such pertinent provisions of the NIRC conferring the powers to the CIR that the petitioner (CIR) had,
in this case, authorized its revenue officers to conduct an examination of the books of account and accounting
records of Lancaster, and eventually issue a deficiency assessment against it.

From the foregoing, it is clear that the issue on whether the revenue officers who had conducted the examination on
Lancaster exceeded their authority pursuant to LOA No. 00012289 may be considered as covered by the terms
"other matters" under Section 7 of R.A. No. 1125 or its amendment, R.A. No. 9282. The authority to make an
examination or assessment, being a matter provided for by the NIRC, is well within the exclusive and appellate
jurisdiction of the CTA.

On whether the CTA can resolve an issue which was not raised by the parties, we rule in the affirmative.

Under Section 1, Rule 14 of A.M. No. 05-11-07-CTA, or the Revised Rules of the Court of Tax Appeals,33 the CT A is
not bound by the issues specifically raised by the parties but may also rule upon related issues necessary to
achieve an orderly disposition of the case. The text of the provision reads:

SECTION 1. Rendition of judgment. - x xx

In deciding the case, the Court may not limit itself to the issues stipulated by the parties but may also rule upon
related issues necessary to achieve an orderly disposition of the case.

The above section is clearly worded. On the basis thereof, the CTA Division was, therefore, well within its authority
to consider in its decision the question on the scope of authority of the revenue officers who were named in the LOA
even though the parties had not raised the same in their pleadings or memoranda. The CTA En Banc was likewise
correct in sustaining the CTA Division's view concerning such matter.

B. The Scope of the Authority

of the Examining Officers

In the assailed decision of the CTA Division, the trial court observed that LOA No. 00012289 authorized the BIR
officers to examine the books of account of Lancaster for the taxable year 1998 only or, since Lancaster adopted a
fiscal year (FY), for the period 1April1997 to 31March1998. However, the deficiency income tax assessment which
the BIR eventually issued against Lancaster was based on the disallowance of expenses reported in FY 1999, or for
the period 1 April 1998 to 31March1999. The CTA concluded that the revenue examiners had exceeded their
authority when they issued the assessment against Lancaster and, consequently, declared such assessment to be
without force and effect.

We agree.

The audit process normally commences with the issuance by the CIR of a Letter of Authority. The LOA gives notice
to the taxpayer that it is under investigation for possible deficiency tax assessment; at the same time it authorizes or
empowers a designated revenue officer to examine, verify, and scrutinize a taxpayer's books and records, in relation
to internal revenue tax liabilities for a particular period.34

In this case, a perusal of LOA No. 00012289 indeed shows that the period of examination is the taxable year 1998.
For better clarity, the pertinent portion of the LOA is again reproduced, thus:
The bearer(s) hereof x x x is/are authorized to examine your books of accounts and other accounting records for all
internal revenue taxes for the period from taxable year, 1998 to __, 19_. x x x." (emphasis supplied)

Even though the date after the words "taxable year 1998 to" is unstated, it is not at all difficult to discern that the
period of examination is the whole taxable year 1998. This means that the examination of Lancaster must cover the
FY period from 1April1997 to 31March1998. It could not have contemplated a longer period. The examination for the
full taxable year 1998 only is consistent with the guideline in Revenue Memorandum Order (RMO) No. 43-90, dated
20 September 1990, that the LOA shall cover a taxable period not exceeding one taxable year.35 In other words,
absent any other valid cause, the LOA issued in this case is valid in all respects.

Nonetheless, a valid LOA does not necessarily clothe validity to an assessment issued on it, as when the revenue
officers designated in the LOA act in excess or outside of the authority granted them under said LOA. Recently
in CIR v. De La Salle University, Inc.36 we accorded validity to the LOA authorizing the examination of DLSU
for "Fiscal Year Ending 2003and Unverified Prior Years" and correspondingly held the assessment fortaxable year
2003 as valid because this taxable period is specified in the LOA. However, we declared void the assessments for
taxable years 2001 and 2002 for having been unspecified on separate LOAs as required under RMO No. 43-90.

Likewise, in the earlier case of CIR v. Sony, Phils., Inc.,37 we affirmed the cancellation of a deficiency VAT
assessment because, while the LOA covered "the period 1997and unverified prior years, " the said deficiency was
arrived at based on the records of a later year, from January to March 1998, or using the fiscal year which ended
on 31March1998. We explainedthat the CIR knew which period should be covered by the investigation and that if
the CIR wanted or intended the investigation to include the year 1998, it would have done so by including it in the
LOA or by issuing another LOA.38

The present case is no different from Sony in that the subject LOA specified that the examination should be for the
taxable year 1998 only but the subsequent assessment issued against Lancaster involved disallowed expenses
covering the next fiscal year, or the period ending 31 March 1999. This much is clear from the notice of assessment,
the relevant portion of which we again restate as follows:
1âw phi1

INCOME TAX:

Taxable Income per ITR -0-

Add: Adjustments-Disallowed purchases 11,496, 770.18

Adjusted Taxable Income per Investigation ₱l 1,496,770.18
INCOME TAX DUE-Basic

April 1 -December 31, 1998

(9/12xPl1,496,770.18 x 34%) ₱2,913,676.4

January 1-March 31, 1999

(3/12xPl1,496,770.18 x 33%) 948,483.54

Income tax still due per investigation ₱3,880,159.94

Interest (6/15/99 to 10/15/02) .66 2,560,905.56

Compromise Penalty 25,000

TOTAL DEFICIENCY INCOME TAX ₱6,466,065.50

(emphasis supplied)

The taxable year covered by the assessment being outside of the period specified in the LOA in this case, the
assessment issued against Lancaster is, therefore, void.

This point alone would have sufficed to invalidate the subject deficiency income tax assessment, thus, obviating any
further necessity to resolve the issue on whether Lancaster erroneously claimed the February and March 1998
expenses as deductions against income for FY 1999.
But, as the CTA did, we shall discuss the issue on the disallowance for the proper guidance not only of the parties,
but the bench and the bar as well.

II.

The CTA En Banc correctly sustained the

order cancelling and withdrawing
the deficiency tax assessment.

To recall, the assessment against Lancaster for deficiency income tax stemmed from the disallowance of its
February and March 1998 purchases which Lancaster posted in its fiscal year ending on 31 March 1999 (FY
1999) instead of the fiscal year ending on 31March1998 (FY 1998).

On the one hand, the BIR insists that the purchases in question should have been reported in FY 1998 in order to
conform to the generally accepted accounting principle of proper matching of cost and revenue. Thus, when

Lancaster reported the said purchases in FY 1999, this resulted in overstatement of expenses warranting their
disallowance and, by consequence, resulting in the deficiency in the payment of its income tax for FY 1999.

Upon the other hand, Lancaster justifies the inclusion of the February and March 1998 purchases in its FY 1999
considering that they coincided with its crop year covering the period of October 1997 to September 1998.
Consistent with Revenue Audit Memorandum (RAM) No. 2-95,39 Lancaster argues that its purchases in February
and March 1998 were properly posted in FY 1999, or the year in which its gross income from the crop was realized.
Lancaster concludes that by doing so, it had complied with the matching concept that was also relied upon by the
BIR in its assessment.

The issue essentially boils down to the proper timing when Lancaster should recognize its purchases in
computing its taxable income. Such issue directly correlates to the fact that Lancaster's 'crop year ' does not
exactly coincide with its fiscal year for tax purposes.

Noticeably, the records of this case are rife with terms and concepts in accounting. As a science,
accounting 40pervades many aspects of financial planning, forecasting, and decision making in business. Its reach,
however, has also permeated tax practice.

To put it into perspective, although the foundations of accounting were built principally to analyze finances and
assist businesses, many of its principles have since been adopted for purposes of taxation.41 In our jurisdiction, the
concepts in business accounting, including certain generally accepted accounting principles (GAAP), embedded in
the NIRC comprise the rules on tax accounting.

To be clear, the principles under financial or business accounting, in theory and application, are not necessarily
interchangeable with those in tax accounting. Thus, although closely related, tax and business accounting had
invariably produced concepts that at some point diverge in understanding or usage. For instance, two of such
important concepts are taxable income and business income (or accounting income). Much of the difference can be
attributed to the distinct purposes or objectives that the concepts of tax and business accounting are aimed at. Chief
Justice Querube Makalintal made an apt observation on the nature of such difference. In Consolidated Mines, Inc. v.
CTA,42he noted:

While taxable income is based on the method of accounting used by the taxpayer, it will almost always differ from
accounting income. This is so because of a fundamental difference in the ends the two concepts serve. Accounting
attempts to match cost against revenue. Tax law is aimed at collecting revenue. It is quick to treat an item as
income, slow to recognize deductions or losses. Thus, the tax law will not recognize deductions for contingent future
losses except in very limited situations. Good accounting, on the other hand, requires their recognition. Once this
fundamental difference in approach is accepted, income tax accounting methods can be understood more
easily.43 (emphasis supplied)

While there may be differences between tax and accounting,44 it cannot be said that the two mutually exclude each
other. As already made clear, tax laws borrowed concepts that had origins from accounting. In truth, tax cannot do
away with accounting. It relies upon approved accounting methods and practices to effectively carry out its objective
of collecting the proper amount of taxes from the taxpayers. Thus, an important mechanism established in many tax
systems is the requirement for taxpayers to make a return of their true income.45 Maintaining accounting books and
records, among other important considerations, would in turn assist the taxpayers in complying with their obligation
to file their income tax returns. At the same time, such books and records provide vital information and possible
bases for the government, after appropriate audit, to make an assessment for deficiency tax whenever so warranted
under the circumstances.

The NIRC, just like the tax laws in other jurisdictions, recognizes the important facility provided by generally
accepted accounting principles and methods to the primary aim of tax laws to collect the correct amount of taxes.
The NIRC even devoted a whole chapter on accounting periods and methods of accounting, some relevant
provisions of which we cite here for more emphasis:

CHAPTER VIII

ACCOUNTING PERIODS AND METHODS OF ACCOUNTING

Sec. 43. General Rule. - The taxable income shall be computed upon the basis of the taxpayer's annual accounting
period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly
employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if
the method employed does not clearly reflect the income, the computation shall be made in accordance with such
method as in the opinion of the Commissioner clearly reflects the income.

If the taxpayer's annual accounting period is other than a fiscal year, as defined in Section 22(Q), or if the taxpayer
has no annual accounting period, or does not keep books, or if the taxpayer is an individual, the taxable income
shall be computed on the basis of the calendar year.

Sec. 44. Period in which Items of Gross Income Included. - The amount of all items of gross income shall be
included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of
accounting permitted under Section 43, any such amounts are to be properly accounted for as of a different period.

In the case of the death of a taxpayer, there shall be included in computing taxable income for the taxable period in
which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in
respect of such period or a prior period.

Sec. 45. Period/or which Deductions and Credits Taken. - The deductions provided for in this Title shall be taken
for the taxable year in which 'paid or accrued' or 'paid or incurred,' dependent upon the method of accounting upon
the basis of which the net income is computed, unless in order to clearly reflect the income, the deductions should
be taken as of a different period. In the case of the death of a taxpayer, there shall be allowed as deductions for the
taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise
properly allowable in respect of such period or a prior period.

Sec. 46. Change of Accounting Period. - If a taxpayer, other than an individual, changes his accounting period
from fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to another, the net income
shall, with the approval of the Commissioner, be computed on the basis of such new accounting period, subject to
the provisions of Section 47.

xxxx

Sec. 48. Accounting for Long-term Contracts. - Income from long-term contracts shall be repo1ied for tax
purposes in the manner as provided in this Section.

As used herein, the term 'long-term contracts' means building, installation or construction contracts covering a
period in excess of one (1) year.

Persons whose gross income is derived in whole or in part from such contracts shall report such income upon the
basis of percentage of completion. 1âwphi1
The return should be accompanied by a return certificate of architects or engineers showing the percentage of
completion during the taxable year of the entire work performed under contract.

There should be deducted from such gross income all expenditures made during the taxable year on account of the
contract, account being taken of the material and supplies on hand at the beginning and end of the taxable period
for use in connection with the work under the contract but not yet so applied.

If upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly
reflected for any year or years, the Commissioner may permit or require an amended return.

Sec. 49. Installment Basis. -

(A) Sales of Dealers in Personal Property. - Under rules and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner, a person who regularly sells or otherwise disposes of personal
property on the installment plan may return as income therefrom in any taxable year that proportion of the
installment payments actually received in that year, which the gross profit realized or to be realized when payment is
completed, bears to the total contract price.

(B) Sales of Realty and Casual Sales of Personality. - In the case (1) of a casual sale or other casual disposition
of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer
if on hand at the close of the taxable year), for a price exceeding One thousand pesos (₱1,000), or (2) of a sale or
other disposition of real prope1iy, if in either case the initial payments do not exceed twenty-five percent (25%) of
the selling price, the income may, under the rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, be returned on the basis and in the manner above prescribed in this Section.

As used in this Section, the term 'initial payments' means the payments received in cash or property other than
evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.

(C) Sales of Real Property Considered as Capital Asset by Individuals. - An individual who sells or disposes of real
property, considered as capital asset, and is otherwise qualified to report the gain therefrom under Subsection (B)
may pay the capital gains tax in installments under rules and regulations to be promulgated by the Secretary of
Finance, upon recommendation of the Commissioner.

(D) Change from Accrual to Installment Basis. - If a taxpayer entitled to the benefits of Subsection (A) elects for any
taxable year to report his taxable income on the installment basis, then in computing his income for the year of
change or any subsequent year, amounts actually received during any such year on account of sales or other
dispositions of property made in any prior year shall not be excluded." (emphasis in the original)

We now proceed to the matter respecting the accounting method employed by Lancaster.

An accounting method is a "set of rules for determining when and how to report income and deductions."46 The
provisions under Chapter VIII, Title II of the NIRC cited above enumerate the methods of accounting that the law
expressly recognizes, to wit:

(1) Cash basis method;47

(2) Accrual method;48

(3) Installment method;49

(4) Percentage of completion method;50 and

(5) Other accounting methods.

Any of the foregoing methods may be employed by any taxpayer so long as it reflects its income properly and such
method is used regularly. The peculiarities of the business or occupation engaged in by a taxpayer would largely
determine how it would report incomes and expenses in its accounting books or records. The NIRC does not
prescribe a uniform, or even specific, method of accounting.

Too, other methods approved by the CIR, even when not expressly mentioned in the NIRC, may be adopted if such
method would enable the taxpayer to properly reflect its income. Section 43 of the NIRC authorizes the CIR to allow
the use of a method of accounting that in its opinion would clearly reflect the income of the taxpayer. An example of
such method not expressly mentioned in the NIRC, but duly approved by the CIR, is the 'crop method of
accounting' authorized under RAM No. 2-95. The pertinent provision reads:

II. Accounting Methods

xxxx

F. Crop Year Basis is a method applicable only to farmers engaged in the production of crops which take more than
a year from the time of planting to the process of gathering and disposal. Expenses paid or incurred are deductible
in the year the gross income from the sale of the crops are realized.

The crop method recognizes that the harvesting and selling of crops do not fall within the same year that they are
planted or grown. This method is especially relevant to farmers, or those engaged in the business of producing
crops who, pursuant to RAM No. 2-95, would then be able to compute their taxable income on the basis of their crop
year. On when to recognize expenses as deductions against income, the governing rule is found in the second
sentence of Subsection F cited above. The rule enjoins the recognition of the expense (or the deduction of the cost)
of crop production in the year that the crops are sold (when income is realized).

In the present case, we find it wholly justifiable for Lancaster, as a business engaged in the production and
marketing of tobacco, to adopt the crop method of accounting. A taxpayer is authorized to employ what it finds
suitable for its purpose so long as it consistently does so, and in this case, Lancaster does appear to have utilized
the method regularly for many decades already. Considering that the crop year of Lancaster starts from October up
to September of the following year, it follows that all of its expenses in the crop production made within the crop year
starting from October 1997 to September 1998, including the February and March 1998 purchases covered by
purchase invoice vouchers, are rightfully deductible for income tax purposes in the year when the gross income from
the crops are realized. Pertinently, nothing from the pleadings or memoranda of the parties, or even from their
testimonies before the CT A, would support a finding that the gross income from the crops (to which the subject
expenses refer) was actually realized by the end of March 1998, or the closing of Lancaster's fiscal year for 1998.
Instead, the records show that the February and March 1998 purchases were recorded by Lancaster
as advances and later taken up as purchases by the close of the crop year in September 1998, or as stated very
clearly above, within the fiscal year 1999.51On this point, we quote with approval the ruling of the CT A En Banc,
thus:

Considering that [Lancaster] is engaged in the production oftobacco, it applied the crop year basis in determining its
total purchases for each fiscal year. Thus, [Lancaster's] total cost for the production of its crops, which includes its
purchases, must be taken as a deduction in the year in which the gross income is realized. Thus, We agree with the
following ratiocination of the First Division:

Evident from the foregoing, the crop year basis is one unusual method of accounting wherein the entire cost of
producing the crops (including purchases) must be taken as a deduction in the year in which the gross income from
the crop is realized. Since the petitioner's crop year starts in October and ends in September of the following year,
the same does not coincide with petitioner's fiscal year which starts in April and ends in March of the following year.
However, the law and regulations consider this peculiar situation and allow the costs to be taken up at the time the
gross income from the crop is realized, as in the instant case.

[Lancaster's] fiscal period is from April 1, 1998 to March 31, 1999. On the other hand, its crop year is from October
1, 1997 to September 1, 1998. Accordingly, in applying the crop year method, all the purchases made by the
respondent for October 1, 1997 to September 1, 1998 should be deducted from the fiscal year ending March 31,
1999, since it is the time when the gross income from the crops is realized.52

The matching principle

Both petitioner CIR and respondent Lancaster, it must be noted, rely upon the concept of matching cost against
revenue to buttress their respective theories. Also, both parties cite RAM 2-95 in referencing the crop method of
accounting.

We are tasked to determine which view is legally sound.

In essence, the matching concept, which is one of the generally accepted accounting principles, directs that the
expenses are to be reported in the same period that related revenues are earned. It attempts to match revenue with
expenses that helped earn it.

The CIR posits that Lancaster should not have recognized in FY 1999 the purchases for February and March
1998.53 Apparent from the reasoning of the CIR is that such expenses ought to have been deducted in FY 1998,
when they were supposed to be paid or incurred by Lancaster. In other words, the CIR is of the view that the subject
purchases match with revenues in 1998, not in 1999

A reading of RAM No. 2-95, however, clearly evinces that it conforms with the concept that the
expenses paid or incurred be deducted in the year in which gross income from the sale of the crops is realized. Put
in another way, the expenses are matched with the related incomes which are eventually earned. Nothing from the
provision is it strictly required that for the expense to be deductible, the income to which such expense is related to
be realized in the same year that it is paid or incurred. As noted by the CTA,54 the crop method is an unusual method
of accounting, unlike other recognized accounting methods that, by mandate of Sec. 45 of the NIRC, strictly require
expenses be taken in the same taxable year when the income is 'paid or incurred, ' or 'paid or accrued, ' depending
upon the method of accounting employed by the taxpayer.

Even if we were to accept the notion that applying the 1998 purchases as deductions in the fiscal year 1998
conforms with the generally accepted principle of matching cost against revenue, the same would still not lend any
comfort to the CIR. Revenue Memorandum Circular (RMC) No. 22-04, entitled "Supplement to Revenue
Memorandum Circular No. 44-2002 on Accounting Methods to be Used by Taxpayers for Internal Revenue Tax
Purposes"55dated 12 April 2004, commands that where there is conflict between the provisions of the Tax Code
(NIRC), including its implementing rules and regulations, on accounting methods and the generally accepted
accounting principles, the former shall prevail. The relevant portion of RMC 22-04 reads:

II. Provisions of the Tax Code Shall Prevail.

All returns required to be filed by the Tax Code shall be prepared always in conformity with the provisions of the Tax
Code, and the rules and regulations implementing said Tax Code. Taxability of income and deductibility of expenses
shall be determined strictly in accordance with the provisions of the Tax Code and the rules and regulations issued
implementing said Tax Code. In case of difference between the provisions of the Tax Code and the rules and
regulations implementing the Tax Code, on one hand, and the general(v accepted accounting principles (GAAP)
and the generally accepted accounting standards (GAAS), on the other hand, the provisions of the Tax Code and
the rules and regulations issued implementing said Tax Code shall prevail. (italics supplied)

RAM No. 2-95 is clear-cut on the rule on when to recognize deductions for taxpayers using the crop method of
accounting. The rule prevails over any GAAP, including the matching concept as applied in financial or business
accounting.

In sum, and considering the foregoing premises, we find no cogent reason to overturn the assailed decision and
resolution of the CT A. As the CTA decreed, Assessment Notice LTAID II IT-98-00007, dated 11 October 2002, in
the amount of ₱6,466,065.50 for deficiency income tax should be cancelled and set aside. The assessment is void
for being issued without valid authority. Furthermore, there is no legal justification for the disallowance of
Lancaster's expenses for the purchase of tobacco in February and March 1998.

WHEREFORE, the petition is DENIED. The assailed 30 April 2008 Decision and 24 June 2008 Resolution of the
Court of Tax Appeals En Banc are AFFIRMED. No cost

SO ORDERED.
G.R. No. 227544

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
TRANSITIONS OPTICAL PHILIPPINES, INC., Respondent

DECISION

LEONEN, J.:

Estoppel applies against a taxpayer who did not only raise at the earliest opportunity its representative's lack of
authority to execute two (2) waivers of defense of prescription, but was also accorded, through these waivers, more
time to comply with the audit requirements of the Bureau of Internal Revenue. Nonetheless, a tax assessment
served beyond the extended period is void.

This Petition for Review on Certiorari1 seeks to nullify and set aside the June 7, 2016 Decision2 and September 26,
2016 Resolution3 of the Court of Tax Appeals En Banc in CTA EB No. 1251. The Court of Tax Appeals En Banc
affirmed its First Division's September 1, 2014 Decision,4 cancelling the deficiency assessments against Transitions
Optical Philippines, Inc. (Transitions Optical).

On April 28, 2006, Transitions Optical received Letter of Authority No. 00098746 dated March 23, 2006 from
Revenue Region No. 9, San Pablo City, of the Bureau of Internal Revenue. It was signed by then Officer-in-Charge-
Regional Director Corazon C. Pangcog and it authorized Revenue Officers Jocelyn Santos and Levi Visaya to
examine Transition Optical's books of accounts for internal revenue tax purposes for taxable year 2004.5

On October 9, 2007, the parties allegedly executed a Waiver of the Defense of Prescription (First Waiver).6 In this
supposed First Waiver, the prescriptive period for the assessment of Transition Optical's internal revenue taxes for
the year 2004 was extended to June 20, 2008.7 The document was signed by Transitions Optical's Finance
Manager, Pamela Theresa D. Abad, and by Bureau of Internal Revenue's Revenue District Officer; Myrna S.
Leonida.8

This was followed by another supposed Waiver of the Defense of Prescription (Second Waiver) dated June 2, 2008.
This time, the prescriptive period was supposedly extended to November 30, 2008.9

Thereafter, the Commissioner of Inte1nal Revenue, through Regional Director Jaime B. Santiago (Director
Santiago), issued a Preliminary Assessment Notice (PAN) dated November 11, 2008, assessing Transitions Optical
for its deficiency taxes for taxable year 2004. Transitions Optical filed a written protest on November 26, 2008.10

The Commissioner of Internal Revenue, again through Director Santiago, subsequently issued against Transitions
Optical a Final Assessment Notice (FAN) and a Formal Letter of Demand (FLD) dated November 28, 2008 for
deficiency income tax, value-added tax, expanded withholding tax, and final tax for taxable year 2004 amounting to
₱l 9, 701,849.68.11

In its Protest Letter dated December 8, 2008 against the FAN, Transitions Optical alleged that the demand for
deficiency taxes had already prescribed at the time the FAN was mailed on December 2, 2008. In its Supplemental
Protest, Transitions Optical pointed out that the FAN was void because the FAN indicated 2006 as the return period,
but the assessment covered calendar year 2004.12

Years later, the Commissioner of Internal Revenue, through Regional Director Jose N. Tan, issued a Final Decision
on the Disputed Assessment dated January 24, 2012, holding Transitions Optical liable for deficiency taxes in the
total amount of ₱l9,701,849.68 for taxable year 2004, broken down as follows;

Tax Amount

Income Tax ₱3,153,371.04

Value-Added Tax 1,231,393.4 7

 Expanded Withholding Tax 175,339.51
Final Tax on Royalty 14,026,247.90

Final Tax on Interest Income 1,115,497. 76

Total ₱19,701,849.6813

On March 16, 2012, Transitions Optical filed a Petition for Review before the Court of Tax Appeals.14

In her Answer, the Commissioner of Internal Revenue interposed that Transitions Optical's claim of prescription was
inappropriate because the executed Waiver of the Defense of Prescription extended the assessment period. She
added that the posting of the FAN and FLD was within San Pablo City Post Office's exclusive control. She averred
that she could not be faulted if the FAN and FLD were posted for mailing only on December 2, 20081 since
November 28, 2008 fell on a Friday and the next supposed working day, December 1, 2008, was declared a Special
Holiday.15

After trial and upon submission of the parties' memoranda, the First Division of the Court of Tax Appeals (First
Division) rendered a Decision on September 1, 2014.16 It held:

In summary therefore, the Court hereby finds the subject Waivers to be defective and therefore void. Nevertheless,
granting for the sake of argument that the subject Waivers were validly executed, for failure of respondent however
to present adequate supporting evidence to prove that it issued the FAN and the FLD within the extended period
agreed upon in the 2nd Waiver, the subject assessment must be cancelled for being issued beyond the prescriptive
period provided by law to assess.

WHEREFORE, in light of the foregoing considerations, the instant Petition for Review is hereby GRANTED.
Accordingly, the Final Assessment Notice, Formal Letter of Demand and Final Decision on Disputed Assessment
finding petitioner Transitions Optical Philippines, Inc. liable for deficiency income tax, deficiency expanded
withholding tax, deficiency value-added tax and deficiency final tax for taxable year 2004 in the total amount of
₱19,701,849.68 are hereby CANCELLEU and SET ASIDE.

SO ORDER.ED.17 (Emphasis in the original)

The Commissioner of Internal Revenue filed a Motion for Reconsideration, which was denied by the First Division in
its Resolution18 dated November 7, 2014.

The Court of Tax Appeals En Banc affirmed the First Division Decision19 and subsequently denied the Commissioner
of Internal Revenue's Motion for Reconsideration.20

Hence, this Petition was filed before this Court. Transitions Optical filed its Comment.21

Petitioner contends that "[t]he two Waivers executed by the parties on October 9, 2007 and June 2, 2008
substantially complied with the requirements of Sections 203 and 222 of the [National Internal Revenue Code]."22She
adds that technical rules of procedure of administrative bodies, such as those provided in Revenue Memorandum
Order (RMO) No. 20-90 issued on April 4, 1990 and Revenue Delegation Authority Order (RDAO) No. 05-01 issued
on August 2, 2001, must be liberally applied to promote justice.23 At any rate, petitioner maintains that respondent is
estopped from questioning the validity of the waivers since their execution was caused by the delay occasioned by
respondent's own failure to comply with the orders of the Bureau of Internal Revenue to submit documents for audit
and examination.24

Furthermore, petitioner argues that the assessment required to be issued within the three (3)-year period provided in
Sections 203 and 222 of the National Internal Revenue Code refer to petitioner's actual issuance of the notice of
assessment to the taxpayer or what is usually known as PAN, and not the FAN issued in case the taxpayer files a
protest.25
On the other hand, respondent contends that the Court of Tax Appeals properly found the waivers defective, and
therefore, void. It adds that the three (3)-year prescriptive period for tax assessment primarily benefits the taxpayer,
and any waiver of this period must be strictly scrutinized in light of the requirements of the laws and
rules.26Respondent posits that the requirements for valid waivers are not mere technical rules of procedure that can
be set aside.27

Respondent further asserts that it is not estopped from questioning the validity of the waivers as it raised its
objections at the earliest opportunity.28 Besides, the duty to ensure compliance with the requirements of RMO No.
20-90 and RDAO No. 05-01, including proper authorization of the taxpayer's representative, fell primarily on
petitioner and her revenue officers. Thus, petitioner came to court with unclean hands and cannot be permitted to
invoke the doctrine of estoppel.29 Respondent insists that there was no clear showing that the signatories in the
waivers were duly sanctioned to act on its behalf.30

Even assuming that the waivers were valid, respondent argues that the assessment would still be void as the FAN
was served only on December 4, 2008, beyond the extended period of November 30, 2008.31 Contrary to petitioner's
stance, respondent counters that the assessment required to be served within the three (3)-year prescriptive period
is the FAN and FLD, not just the PAN.32 According to respondent, ''it is the FAN and FLD that formally notifly] the
taxpayer, and categorica1ly [demand] from him, that a deficiency tax is due."33

The issues for this Court's resolution are:

First, whether or not the two (2) Waivers of the Defense of Prescription entered into by the parties on October 9,
2007 and June 2, 2008 were valid; and

Second, whether or not the assessment of deficiency taxes against respondent Transitions Optical Philippines, Inc.
for taxable year 2004 had prescribed.

This Court denies the Petition. The Court of Tax Appeals committed no reversible error in cancelling the deficiency
tax assessments.

As a general rule, petitioner has three (3) years to assess taxpayers from the filing of the return. Section 203 of the
National Internal Revenue Code provides:

Section 203. Period of Limitation Upon Assessment m1d 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.

An exception to the rule of prescription is found in Section 222(b) and (d) of this Code, viz:

Section 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. -

....

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

....

(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 in
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.

Thus, the period to assess and collect taxes may be extended upon the Commissioner of Internal Revenue and the
taxpayer's written agreement, executed before the expiration of the three (3)-year period.

In this case, two (2) waivers were supposedly executed by the parties extending the prescriptive periods for
assessment of income tax, value-added tax, and expanded and final withholding taxes to June 20, 2008, and then to
November 30, 2008.

The Court of Tax Appeals, both its First Division and En Banc, declared as defective and void the two (2) Waivers of
the Defense of Prescription for non-compliance with the requirements for the proper execution of a waiver as
provided in RMO No. 20-90 and RDAO No. 05-01. Specifically, the Court of Tax Appeals found that these Waivers
were not accompanied by a notarized written authority from respondent, authorizing the so-called representatives to
act on its behalf. Likewise, neither the Revenue District Office's acceptance date nor respondent's receipt of the
Bureau of Internal Revenue's acceptance was indicated in either document.34

However, Presiding Justice Roman G. Del Rosario (Justice Del Rosario) in his Separate Concurring Opinion 35 in the
Court of Tax Appeals June 7, 2016 Decision, found that respondent is estopped from claiming that the waivers were
invalid by reason of its own actions, which persuaded the government to postpone the issuance of the assessment.
He discussed:

In the case at bar, respondent performed acts that induced the BIR to defer the issuance of the assessment.
Records reveal that to extend the BIR's prescriptive period to assess respondent for deficiency taxes for taxable
year 2004, respondent executed two (2) waivers. The first Waiver dated October 2007 extended the period to
assess until June 20, 2008, while the second Waiver, which was executed on June 2, 2008, extended the period to
assess the taxes until November 30, 2008. As a consequence of the issuance of said waivers, petitioner delayed the
issuance of the assessment.

Notably, when respondent filed its protest on November 26, 2008 against the Preliminary Assessment Notice dated
November 11, 2008, it merely argued that it is not liable for the assessed deficiency taxes and did not raise as an
issue the invalidity of the waiver and the prescription of petitioner's right to assess the deficiency taxes. In its protest
dated December 8, 2008 against the FAN, respondent argued that the year being audited in the FAN has already
prescribed at the time such FAN was mailed on December 2, 2008. Respondent even stated in that protest that it
received the letter (referring to the FAN dated November 28, 2008) on December 5, 2008, which accordingly is five
(5) days after the waiver it issued had prescribed. The foregoing narration plainly does not suggest that respondent
has any objection to its previously executed waivers. By the principle of estoppel, respondent should not be allowed
to question the validity of the waivers.36

In Commissioner of Internal Revenue v. Next Mobile, Inc. (formerly Nextel Communications Phils., lnc.),37 this Comi
recognized the doctrine of estoppel and upheld the waivers when both the taxpayer and the Bureau of Internal
Revenue were in part de lie to. The taxpayer's act of impugning its waivers after benefitting from them was
considered an act of bad faith:

In this case, respondent, after deliberately executing defective waivers, raised the very same deficiencies it caused
to avoid the tax liability determined by the BIR during the extended assessment period. It must be remembered that
by virtue of these Waivers, respondent was given the opportunity to gather and submit documents to substantiate its
claims before the [Commissioner of Internal Revenue] during investigation. It was able to postpone the payment of
taxes, as well as contest and negotiate the assessment against it. Yet, after enjoying these benefits, respondent
challenged the validity of the Waivers when the consequences thereof were not in its favor. In other words,
respondent's act of impugning these Waivers after benefiting therefrom and allowing petitioner to rely on the same is
an act of bad faith.38

This Court found the taxpayer estopped from questioning the validity of its waivers:

Respondent executed five Waivers and delivered them to petitioner, one after the other. It allowed petitioner to rely
on them and did not raise any objection against their validity until petitioner assessed taxes and penalties against it.
Moreover, the application of estoppel is necessary to prevent the undue injury that the government would suffer
because of the cancellation of petitioner's assessment of respondent's tax liabilities.39 (Emphasis in the original)

Parenthetically, this Court stated that when both parties continued to deal with each other in spite of knowing and
without rectifying the defects of the waivers, their situation is "dangerous and open to abuse by unscrupulous
taxpayers who intend to escape their responsibility to pay taxes by mere expedient of hiding behind technicalities."40

Estoppel similarly applies in this case.

Indeed, the Bureau of Internal Revenue was at fault when it accepted respondent's Waivers despite their non-
compliance with the requirements of RMO No. 20-90 and RDAO No. 05-01.

Nonetheless, respondent's acts also show its implied admission of the validity of the waivers. First, respondent
never raised the invalidity of the Waivers at the earliest opportunity, either in its Protest to the PAN, Protest to the
FAN, or Supplemental Protest to the FAN.41 It thereby impliedly recognized these Waivers' validity and its
representatives' authority to execute them. Respondent only raised the issue of these Waivers' validity in its Petition
for Review filed with the Court of Tax Appeals.42 In fact, as pointed out by Justice Del Rosario, respondent's Protest
to the FAN clearly recognized the validity of the Waivers,43 when it stated:

This has reference to the Final Assessment Notice ("[F]AN") issued by your office, dated November 28, 2008. The
said letter was received by Transitions Optical Philippines[,] Inc. (TOPI) on December 5, 2008, five days after the
waiver we issued which was valid until November 30, 2008 had prescribed.44(Emphasis supplied)

Second, respondent does not dispute petitioner's assertion45 that respondent repeatedly failed to comply with
petitioner's notices, directing it to submit its books of accounts and related records for examination by the Bureau of
Internal Revenue. Respondent also ignored the Bureau of Internal Revenue's request for an Informal Conference to
discuss other "discrepancies" found in the partial documents submitted. The Waivers were necessary to give
respondent time to fully comply with the Bureau of Internal Revenue notices for audit examination and to respond to
its Informal Conference request to discuss the discrepancies.46 Thus, having benefitted from the Waivers executed
at its instance, respondent is estopped from claiming that they were invalid and that prescription had set in.

II

But, even as respondent is estopped from questioning the validity of the Waivers, the assessment is nonetheless
void because it was served beyond the supposedly extended period.

The First Division of the Court of Tax Appeals found that "the date indicated in the envelope/mail matter containing
the FAN and the FLD is December 4, 2008, which is considered as the date of their mailing."47 Since the validity
period of the second Waiver is only until November 30, 2008, prescription had already set in at the time the FAN
and the FLD were actually mailed on December 4, 2008.

For lack of adequate supp01ting evidence, the Court of Tax Appeals rejected petitioner's claim that the FAN and the
FLD were already delivered to the post office for mailing on November 28, 2008 but were actually processed by the
post office on December 2, 2008, since December 1, 2008 was declared a Special Holiday.48 The testimony of
petitioner's witness, Dario A. Consignado, Jr., that he brought the mail matter containing the FAN and the FLD to the
post office on November 28, 2008 was considered self-serving, uncorroborated by any other evidence. Additionally,
the Certification presented by petitioner certifying that the FAN issued to respondent was delivered to its
Administrative Division for mailing on November 28, 2008 was found insufficient to prove that the actual date of
mailing was November 28, 2008.

This Court finds no clear and convincing reason to overturn these factual findings of the Court of Tax Appeals. 1âwphi 1

Finally, petitioner's contention that the assessment required to be issued within the three (3)-year or extended
period provided in Sections 203 and 222 of the National Internal Revenue Code refers to the PAN is untenable.

Considering the functions and effects of a PAN vis a vis a FAN, it is clear that the assessment contemplated in
Sections 203 and 222 of the National Internal Revenue Code refers to the service of the FAN upon the taxpayer.
A PAN merely informs the taxpayer of the initial findings of the Bureau of Internal Revenue.49 It contains the
proposed assessment, and the facts, law, rules, and regulations or jurisprudence on which the proposed
assessment is based.50 It does not contain a demand for payment but usually requires the taxpayer to reply within 15
days from receipt. Otherwise, the Commissioner of Internal Revenue will finalize an assessment and issue a FAN.

The PAN is a part of due process.51 It gives both the taxpayer and the Commissioner of Internal Revenue the
opportunity to settle the case at the earliest possible time without the need for the issuance of a FAN.

On the other hand, a FAN contains not only a computation of tax liabilities but also a demand for payment within a
prescribed period.52 As soon as it is served, an obligation arises on the part of the taxpayer concerned to pay the
amount assessed and demanded. It also signals the time when penalties and interests begin to accrue against the
taxpayer. Thus, the National Internal Revenue Code imposes a 25% 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.53Likewise, an interest of 20% per annum, or such higher rate as may be prescribed by rules and
regulations, is to be collected from the date prescribed for payment until the amount is fully paid.54 Failure to file an
administrative protest within 30 days from receipt of the FAN will render the assessment final, executory, and
demandable.

WHEREFORE, the Petition is DENIED. The June 7, 2016 Decision and September 26, 2016 Resolution of the Court
of Tax Appeals En Banc in CTAEB No. 1251 are AFFIRMED.

SO ORDERED.

G.R. No. 221590

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
ASALUS CORPORATION, Respondent

DECISION

MENDOZA, J.:

This petition for review on certiorari seeks to reverse and set aside the July 30, 2015 Decision1 and the November 6,
2015 Resolution2 of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 1191, which affirmed the April 2, 2014
Decision3 of the CTA Third Division (CTA Division).

The Antecedents

On December 16, 2010, respondent Asalus Corporation (Asalus) received a Notice of Informal Conference from
Revenue District Office (RDO) No. 47 of the Bureau of Internal Revenue (BIR). It was in connection with the
investigation conducted by Revenue Officer Fidel M. Bañares II (Bañares) on the Value-Added
Tax (VAT) transactions of Asalus for the taxable year 2007.4 Asalus filed its Letter-Reply,5 dated December 29,
2010, questioning the basis of Bañares' computation for its VAT liability.

On January 10, 2011, petitioner Commissioner of Internal Revenue (CIR) issued the Preliminary Assessment
Notice (PAN) finding Asalus liable for deficiency VAT for 2007 in the aggregate amount of ₱413, 378, 058.11,
inclusive of surcharge and interest. Asalus filed its protest against the PAN but it was denied by the CIR. 6

On August 26, 2011, Asalus received the Formal Assessment Notice (FAN) stating that it was liable for deficiency
VAT for 2007 in the total amount of ₱95,681,988.64, inclusive of surcharge and interest. Consequently, it filed its
protest against the FAN, dated September 6, 2011. Thereafter, Asal us filed a supplemental protest stating that the
deficiency VAT assessment had prescribed pursuant to Section 203 of the National Internal Revenue Code (NIRC).7

On October 16, 2012, Asal us received the Final Decision on Disputed Assessment8 (FDDA) showing VAT
deficiency for 2007 in the aggregate amount of ₱106,761,025.17, inclusive of surcharge and interest and
₱25,000.00 as compromise penalty. As a result, it filed a petition for review before the CTA Division.
The CTA Division Ruling

In its April 2, 2014 Decision, the CT A Division ruled that the VAT assessment issued on August 26, 2011 had
prescribed and consequently deemed invalid. It opined that the ten (10)-year prescriptive period under Section 222
of the NIRC was inapplicable as neither the FAN nor the FDDA indicated that Asalus had filed a false VAT return
warranting the application of the ten (10)-year prescriptive period. It explained that it was only in the PAN where an
allegation of false or fraudulent return was made. The CTA stressed that after Asalus had protested the PAN, the
CIR never mentioned in both the FAN and the FDDA that the prescriptive period would be ten (10) years. It further
pointed out that the CIR failed to present evidence regarding its allegation of fraud or falsity in the returns.

The CTA wrote that "the three instances where the three-year prescriptive period will not apply must always be
alleged and established by clear and convincing evidence and should not be anchored on mere conjectures and
speculations,9 before the ten (10) year prescriptive period could be considered. Thus, it disposed:

WHEREFORE, the instant Petition for Review is hereby GRANTED. Accordingly, the deficiency VAT assessment
for taxable year 2007 and the compromise penalty are hereby CANCELLED and WITHDRAWN, on ground of
prescription.

SO ORDERED.10

The CIR moved for reconsideration but its motion was denied.

The CTA En Banc Ruling

In its July 30, 2015 Decision, the CTA En Banc sustained the assailed decision of the CT A Division and dismissed
the petition for review filed by the CIR. It explained that there was nothing in the FAN and the FDDA that would
indicate, the non-application of the three (3) year prescriptive period under Section 203 of the NIRC. It found that the
CIR did not present any evidence during the trial to substantiate its claim of falsity in the returns and again missed
its chance to do so when it failed to file its memorandum before the CTA Division.

The CTA En Banc further explained that the PAN alone could not be used as a basis because it was not the
assessment contemplated by law. Consequently, the allegation of falsity in Asalus' tax returns could not be
considered as it was not reiterated in the FAN. The dispositive portion thus reads:

WHEREFORE, premises considered, the present Petition for Review is hereby DENIED, and accordingly,
DISMISSED for lack of merit.

SO ORDERED.11

The CIR sought the reconsideration of the decision of the CTA En Banc, but the latter upheld its decision in its
November 6, 2015 resolution.

Hence, this petition.

ISSUES

WHETHER PETITIONER HAD SUFFICIENTLY APPRISED RESPONDENT THAT THE FAN AND FDDA ISSUED
AGAINST THE LATTER FALLS UNDER SECTION 222(A) OF THE 1997 NIRC, AS AMENDED;

II

WHETHER RESPONDENT'S FAILURE TO REPORT IN ITS VAT RETURNS ALL THE FEES IT COLLECTED
FROM ITS MEMBERS APPLYING FOR HEALTHCARE SERVICES CONSTITUTES "FALSE" RETURN UNDER
SECTION 222(A) OF THE 1997 NIRC, AS AMENDED; AND
 II

WHETHER PETITIONER'S RIGHT TO ASSESS RESPONDENT FOR ITS DEFICIENCY VAT FOR TAXABLE
YEAR 2007 HAD ALREADY PRESCRIBED.12

The CIR, through the Office of the Solicitor General (OSG), argues that the VAT assessment had yet to prescribe as
the applicable prescriptive period is the ten (10)-year prescriptive period under Section 222 of the NIRC, and not the
three (3) year prescriptive period under Section 203 thereof. It claims that Asalus was informed in the PAN of the ten
(10)-year prescriptive period and that the FAN made specific reference to the PAN. In turn, the FDDA made
reference to the FAN. Asalus, on the other hand, only raised prescription in its supplemental protest to the FAN. The
CIR insists that Asalus was made fully aware that the prescriptive period under Section 222 would apply.

Moreover, the CIR asserts that there was substantial understatement in Asalus' income, which exceeded 30% of
what was declared in its VAT returns as appearing in its quarterly VAT returns; and the underdeclaration was
supported by the judicial admission of its lone witness that not all the membership fees collected from members
applying for healthcare services were reported in its VAT returns. Thus, the CIR concludes that there was prima
facie evidence of a false return.

The Position of Asalus

In its Comment/Opposition,13 dated April 22, 2016, Asalus countered that the present petition involved a question of
fact, which was beyond the ambit of a petition for review under Rule 45. Moreover, it asserted that the findings of
fact of the CT A Division, which were affirmed by the CTA En Banc, were conclusive and binding upon the Court. It
posited that the CIR could not raise for the first time on appeal a new argument that "the FDDA and the FAN need
not explicitly state the applicability of the ten-year prescriptive period and the bases thereof as long as the totality of
the circumstances show that the taxpayer was 'sufficiently informed' of the facts in support of the assessment.
Based on the totality of the circumstances, it was informed of the facts in support of the assessment." 14

Asalus reiterated that the CIR, either in the FAN or the FDDA, failed to show that it had filed false returns warranting
the application of the extraordinary prescriptive period under Section 222 of the NIRC. It insisted that it was not
informed of the facts and law on which the assessment was based because the FAN did not state that it filed false
or fraudulent returns. For this reason, Asalus averred that the assessment had prescribed because it was made
beyond the three (3)-year period as provided in Section 203 of the NIRC.

The Reply of the CIR

In its Reply, 15 dated August 15, 2016, the CIR argued that the findings of the CT A might be set aside on appeal if
they were not supported with substantial evidence or if there was a showing of gross error or abuse. It repeated that
there was presumption of falsity in light of the 30% underdeclaration of sales. The CIR emphasized that even
Asalus' own witness testified that not all the membership fees collected were reported in its VAT returns. It insisted
that Asalus was sufficiently informed of its assessment based on the prescriptive period under Section 222 of the
NIRC as early as when the PAN was issued.

On another note, the CIR manifested that Asalus' counsels made use of insulting words in its Comment, which could
have been dispensed with. Particularly, it highlighted the use of the following phrases as insulting: "even to the
uninitiated," "petitioner's habit of disregarding firmly established rules of procedure," "twist establish facts to suit her
ends," "just to indulge petitioner," and "she then tried to calculate, on her own but without factual basis." It asserted
that "[w]hile a lawyer has a complete discretion on what legal strategy to employ in a case, the overzealousness in
protecting his client's interest does not warrant the use of insulting and profane language in his pleadings xxx." 16

The Court's Ruling

There is merit in the petition.

It is true that the findings of fact of the CT A are, as a rule, respected by the Court, but they can be set aside in
exceptional cases. In Barcelon, Roxas Securities, Inc. (now known as UBP Securities, Inc.) v. Commissioner of
Internal Revenue, this Court in Toshiba Information Equipment (Phils.), Inc. v. Commissioner of Internal
Revenue, 17explicitly pronounced-

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 [G.R. No. 122605, 30 April 2001, 357 SCRA 441, 445-446],
this Court recognizes that the Court of Tax Appeals, which by the very nature of its function is dedicated exclusively
to the consideration of tax problems, has necessarily developed an expertise on the subject, and its conclusions 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. 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.18 [Emphasis supplied]

After a review of the records and applicable laws and jurisprudence, the Court finds that the CTA erred in concluding
that the assessment against Asalus had prescribed.

Generally, internal revenue taxes shall be assessed within three (3) years after the ,last day prescribed by law for
the filing of the return, or where the return is filed beyond the period, from the day the return was actually
filed. 19Section 222 of the NIRC, however, provides for exceptions to the general rule. It states that in the case of a
false or fraudulent return with intent to evade tax or of failure to file a return, the assessment may be made within
ten (10) years from the discovery of the falsity, fraud or omission.

In the oft-cited Aznar v. CTA,20the Court compared a false return to a fraudulent return in relation to the applicable
prescriptive periods for assessments, to wit:

Petitioner argues that Sec. 332 of the NIRC does not apply because the taxpayer did not file false and fraudulent
returns with intent to' evade tax, while respondent Commissioner of Internal Revenue insists contrariwise, with
respondent Court of Tax Appeals concluding that the very "substantial under declarations of income for six
consecutive years eloquently demonstrate the falsity or fraudulence of the income tax returns with an intent to evade
the payment of tax."

xxxx

xxx We believe that the proper and reasonable interpretation of said provision should be that in the three different
cases of (1) false return, (2) fraudulent return with intent to evade tax, (3) 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 assessmeμt, at any time
within ten years after the discovery of the (1) falsity, (2) fraud, (3) omission. Our stand that the law should be
interpreted to mean a separation of the three different situations of false return, fraudulent return with intent
to evade tax, and failure to file a return is strengthened immeasurably by the last portion of the provision
which seggregates the situations into three different classes, namely "falsity", "fraud" and "omission." That
there is a difference between "false return" and "fraudulent return" cannot be denied. While the first merely
implies deviation from the truth, whether intentional or not, the second implies intentional or deceitful entry
with intent to evade the taxes due.

The ordinary period of prescription of 5 years within which to assess tax liabilities under Sec. 331 of the NIRC
should be applicable to normal circumstances, but whenever the government is placed, at a disadvantage so as to
prevent its lawful agents from proper assessment of tax liabilities due to false returns, fraudulent return intended to
evade payment of tax or failure to file returns, the period of ten years provided for in Sec. 332 (a) NIRC, from the
time of the discovery of the falsity, fraud or omission even seems to be inadequate and should be the one enforced.

There being undoubtedly false tax returns in this case, We affirm the conclusion of the respondent Court of Tax
Appeals that Sec. 332 (a) of the NIRC should apply and that the period of ten years within which to assess
petitioner's tax liability had not expired at the time said assessment was made. (Emphasis supplied)

Thus, a mere showing that the returns filed by the taxpayer were false, notwithstanding the absence of intent to
defraud, is sufficient to warrant the application of the ten (10) year prescriptive period under Section 222 of the
NIRC.
Presumption of Falsity of Returns

In the present case, the CTA opined that the CIR failed to substantiate with clear and convincing evidence its claim
that Asalus filed a false return. As it noted that the CIR never presented any evidence to prove the falsity in the
returns that Asalus filed, the CTA ruled that the assessment was subject to the three (3) year ordinary prescriptive
period.

The Court is of a different view.

Under Section 248(B) of the NIRC,21 there is a prima facie evidence of a false return if there is a substantial
underdeclaration of taxable sales, receipt or income. The failure to report sales, receipts or income in an amount
exceeding 30% what is declared in the returns constitute substantial underdeclaration. A prima facie evidence is one
which that will establish a fact or sustain a judgment unless contradictory evidence is produced. 22

In other words, when there is a showing that a taxpayer has substantially underdeclared its sales, receipt or income,
there is a presumption that it has filed a false return. As such, the CIR need not immediately present evidence to
support the falsity of the return, unless the taxpayer fails to overcome the presumption against it.

Applied in this case, the audit investigation revealed that there were undeclared VA Table sales more than 30% of
that declared in Asalus' VAT returns. Moreover, Asalus' lone witness testified that not all membership fees,
particularly those pertaining to medical practitioners and hospitals, were reported in Asalus' VAT returns. The
testimony of its witness, in trying to justify why not all of its sales were included in the gross receipts reflected in the
VAT returns, supported the presumption that the return filed was indeed false precisely because not all the sales of
Asalus were included in the VAT returns.

Hence, the CIR need not present further evidence as the presumption of falsity of the returns was not overcome.
Asalus was bound to refute the presumption of the falsity of the return and to prove that it had filed accurate returns.
Its failure to overcome the same warranted the application of the ten (10)-year prescriptive period for assessment
under Section 222 of the NIRC. To require the CIR to present additional evidence in spite of the presumption
provided in Section 248(B) of the NIRC would render the said provision inutile.

Substantial Compliance of Notice Requirement

The CTA also posited that the ordinary prescriptive period of three (3) years applied in this case because there was
no mention in the FAN or the FDDA that what would apply was the extraordinary prescriptive period and that the
CIR did not present any evidence to support its claim of false returns.

Again, the Court disagrees.

It is true that neither the FAN nor the FDDA explicitly stated that the applicable prescriptive period was the ten (10)-
year period set in Section 222 of the NIRC. They, however, made reference to the PAN, which categorically stated
that "[t]he running of the three-year statute of limitation I as provided un4er Section 203 of the 1997 National Internal
Revenue Code (NIRC) is not i applicable xxx but rather to the ten (10) year prescriptive period pursua11t to Section
222(A) of the tax code xxx." 23 In Samar-I Electric Cooperative v. COMELEC,24the Court ruled that it sufficed that the
taxpayer was substantially informed of the legal and factual bases of the assessment enabling him to file an
effective protest, to wit:

Although, the FAN and demand letter issued to petitioner were not accompanied by a written explanation of the
legal and factual bases of the deficiency taxes assessed against the petitioner, the records showed that respondent
in its letter dated April 10, 2003 responded to petitioner's October 14, 2002 letter-protest, explaining at length the
factual and legal bases of the deficiency tax assessments and denying the protest.

Considerirg the foregoing exchange of correspondence and Document between the parties, we find that the
requirement of Section 228 was substantially complied with. Respondent had fully informed I petitioner in
writing of the factual and legal bases of the deficiency taxes assessment, which enabled the latter to file an
"effective" protest, much unlike the taxpayer's situation in Enron. Petitioner's right to due process was thus not
violated. [Emphasis supplied]
Thus, substantial compliance with the requirement as laid down under Section 228 of the NIRC suffices, for what is
important is that the taxpayer has been sufficiently informed of the factual and legal bases of the assessment so that
it may file an effective protest against the assessment. In the case at bench, Asalus was sufficiently informed that
with respect to its tax liability, the extraordinary period laid down in Section 222 of the NIRC would apply. This was
categorically stated in the PAN and all subsequent communications from the CIR made reference to the PAN.
Asalus was eventually able to file a protest addressing the issue on prescription, although it was done only in its
supplemental protest to the FAN.

Considering the existing circumstances, the assessment was timely made because the applicable prescriptive
period was the ten (10)-year prescriptive period under Section 222 of the NIRC. To reiterate, there was a prima
facie showing that the returns filed by Asalus were false, which it failed to controvert. Also, it was adequately
informed that it was being assessed within the extraordinary prescriptive period.

A Reminder

A lawyer is indeed expected to champion the cause of his client with utmost zeal and competence. Such
exuberance, however, must be tempered to meet the standards of civility and decorum. Rule 8.01 of the Code of
Professional Responsibility mandates that "[a] lawyer shall not, in his professional dealings, use language which is
abusive, offensive or otherwise improper." In Noble v. Atty. Ailes, 25 the Court cautioned lawyers to be careful in their:
choice of words as not to unduly malign the other party, to wit:

Though a lawyer's language may be forceful and emphatic, it should always be dignified and respectful, befitting the
dignity of the legal profession. The use of intemperate language and unkind ascriptions has no place in the dignity
1âwphi1

of the judicial forum. In Buatis Jr. v. People, the Court treated a lawyer's use of the words "lousy," "inutile," "carabao
English," "stupidity," and "satan" in a letter addressed to another colleague as defamatory and injurious which
effectively maligned his integrity. Similarly, the hurling of insulting language to describe the opposing counsel is
considered conduct unbecoming of the legal profession.

xxx

On this score, it must be emphasized that membership in the bar is a privilege burdened with conditions
such that a lawyer's words and actions directly affect the public's opinion of the legal profession. Lawyers
are expected to observe such conduct of nobility and uprightness which should remain with them, whether
in their public or private lives, and may be disciplined in the event their conduct falls short of the standards imposed
upon them. Thus, in this case, it is inconsequential that the statements were merely relayed to Orlando's brother in
private. As a member of the bar, Orlando should have been more circumspect in his words, being fully
aware that they pertain to another lawyer to whom fairness as well as candor is owed. It was highly improper
for Orlando to interfere and insult Maximino to his client.

Indulging in offensive personalities in the course of judicial proceedings, as in this case, constitutes unprofessional
conduct which subjects a lawyer to disciplinary action. While a lawyer is entitled to. present his case with vigor
and courage, such enthusiasm does not justify the use of offensive and abusive language. The Court has
consistently reminded the members of the bar to abstain from all offensive personality and to advance no fact
prejudicial to the honor and reputation of a party. xxx26[Emphases supplied]

While the Court recognizes and appreciates the passion of Asalus' counsels in promoting and protecting its interest,
they must still be reminded that they should be more circumspect in their choice of words to argue their client's
position. As much as possible, words which undermine the integrity, competence and ability of the opposing party,
or are otherwise offensive, must be avoided especially if the message may be delivered in a respectful, yet equally
emphatic manner. A counsel's mettle will not be viewed any less should he choose to pursue his cause without
denigrating the other party.

WHEREFORE, petition is GRANTED. The July 30, 2015 Decision and the November 6, 2015 Resolution of the
Court of Tax Appeals En Banc are REVERSED and SET ASIDE. The case is ordered REMANDED to the Court of
Tax Appeals for the determination of the Value Added Tax liabilities of the Asalus Corporation.

SO ORDERED.
G.R. No. 215957

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
FITNESS BY DESIGN, INC., Respondent

DECISION

LEONEN, J.:

To avail of the extraordinary period of assessment in Section 222(a) of the National Internal Revenue Code, the
Commissioner of Internal Revenue should show that the facts upon which the fraud' is based is communicated to
the taxpayer. The burden of proving that the facts exist in any subsequent proceeding is with the Commissioner.
Furthermore, the Final Assessment Notice is not valid if it does not contain a definite due date for payment by the
taxpayer.

This resolves a Petition for Review on Certiorari1 filed by the Commissioner of Internal Revenue, which assails the
Decision2 dated July 14, 2014 and Resolution3 dated December 16, 2014 of the Court of Tax Appeals. The Court of
Tax Appeals En Banc affirmed the Decision of the First Division, which declared the assessment issued against
Fitness by Design, Inc. (Fitness) as invalid.4

On April 11, 1996, Fitness filed its Annual Income Tax Return for the taxable year of 1995.5 According to Fitness, it
was still in its pre-operating stage during the covered period.6

On June 9, 2004, Fitness received a copy of the Final Assessment Notice dated March 17, 2004.7 The Final
Assessment Notice was issued under Letter of Authority No. 00002953.8 The Final Assessment Notice assessed
that Fitness had a tax deficiency in the amount of ₱10,647,529.69.9 It provides:

FINAL ASSESSMENT NOTICE

March 17, 2004

FITNESS BY DESIGN, INC

169 Aguirre St., BF Homes,
Paranaque City

Gentlemen:

Please be informed that after investigation of your Internal revenue Tax Liabilities for the year 1995 pursuant to
Letter of Authority No. 000029353 dated May 13, 2002, there has been found due deficiency taxes as shown
hereunder:

Assessment No. _____________

Income Tax

Taxable Income per return ₱

Add: Unreported Sales 7,156,336.08
Taxable Income per audit 7,156,336.08

Tax Due (35%) 2,504,717.63

Add: Surcharge (50%) ₱ 1,252,358.81
Interest (20%/annum) until 4-15-04 4,508,491. 73 5, 760,850.54
Deficiency Income Tax ₱ 8,265,568.17

Value Added Tax

Unreported Sales ₱ 7,156,336.08

Output Tax (10%) 715,633.61
Add: Surcharge (50%) ₱ 357,816.80
Interest (20%/ annum) until 4-15-04 1,303,823.60 1,661,640.41
Deficiency VAT ₱ 2,311,214.02
Documentary Stamp Tax

Subscribe Capital Stock ₱ 375,000.00

DST due (2/200) 3,750.00
Add: Surcharge (25%) 937.50
Deficiency DST ₱ 4,687.50

Total Deficiency Taxes ₱ 10,647,529.69

The complete details covering the aforementioned discrepancies established during the investigation of this case
are shown in the accompanying Annex 1 of this Notice. The 50% surcharge and 20% interest have been imposed
pursuant to Sections 248 and 249(B) of the [National Internal Revenue Code], as amended. Please note, however,
that the interest and the total amount due will have to be adjusted if paid prior or beyond April 15, 2004.

In view thereof, you are requested to pay your aforesaid deficiency internal revenue taxes liabilities through the duly
authorized agent bank in which you are enrolled within the time shown in the enclosed assessment
notice.10 (Emphasis in the original)

Fitness filed a protest to the Final Assessment Notice on June 25, 2004. According to Fitness, the Commissioner's
period to assess had already prescribed. Further, the assessment was without basis since the company was only
incorporated on May 30, 1995.11

On February 2, 2005, the Commissioner issued a Warrant of Distraint and/or Levy with Reference No. OCN WDL-
95-05-005 dated February 1, 2005 to Fitness.12

Fitness filed before the First Division of the Court of Tax Appeals a Petition for Review (With Motion to Suspend
Collection of Income Tax, Value Added Tax, Documentary Stamp Tax and Surcharges and Interests) on March 1,
2005.13

On May 17, 2005, the Commissioner of Internal Revenue filed an Answer to Fitness' Petition and raised special and
affirmative defenses.14 The Commissioner posited that the Warrant of Distraint and/or Levy was issued in
accordance with law.15 The Commissioner claimed that its right to assess had not yet prescribed under Section
222(a)16 of the National Internal Revenue Code.17 Because the 1995 Income Tax ,Return filed by Fitness was false
and fraudulent for its alleged intentional failure to reflect its true sales, Fitness' respective taxes may be assessed at
any time within 10 years from the discovery of fraud or omission.18
The Commissioner asserted further that the assessment already became final and executory for Fitness' failure , to
file a protest within the reglementary period.19 The Commissioner denied that there was a protest to the Final
Assessment Notice filed by Fitness on June 25, 2004.20 According to the Commissioner, the alleged protest was
"nowhere to be found in the [Bureau of Internal Revenue] Records nor reflected in the Record Book of the Legal
Division as normally done by [its]' receiving clerk when she received [sic] any document."21 Therefore, the
Commissioner had sufficient basis to collect the tax deficiency through the Warrant of Distraint and/or Levy.22

The alleged fraudulent return was discovered through a tip from a confidential informant.23 The revenue officers'
investigation revealed that Fitness had been operating business with sales operations amounting to ₱7,156,336.08
in 1995, which it neglected toreport in its income tax return.24 Fitness' failure to report its income resulted in
deficiencies to its income tax and value-added tax of ₱8,265,568.17 and ₱2,377,274.02 respectively, as well as the
documentary stamp tax with regard to capital stock subscription.25

Through the report, the revenue officers recommended the filing of a civil case for collection of taxes and a criminal
case for failure to declare Fitness' purported sales in its 1995 Income Tax Return.26 Hence, a criminal complaint
against Fitness was filed before the Department of Justice.27

The Court of Tax Appeals First Division granted Fitness' Petition on the ground that the assessment has already
prescribed.28 It cancelled and set aside the Final Assessment Notice dated March 1 7, 2004 as well as the Warrant
of Distraint and/or Levy issued by the Commissioner.29 It ruled that the Final Assessment Notice is invalid for failure
to comply with the requirements of Section 22830 of the National Internal Revenue Code. The dispositive portion of
the Decision reads:

WHEREFORE, the Petition for Review dated February 24, 2005 filed by petitioner Fitness by Design, Inc., is
hereby GRANTED. Accordingly, the Final Assessment Notice dated 'March 17, 2004, finding petitioner liable for
deficiency income tax, documentary stamp tax and value-added tax for taxable year 1995 in the total amount of
₱10,647,529.69 is hereby CANCELLED and SET ASIDE. The Warrant of Distraint and Levy dated February 1,
2005 is 'likewise CANCELLED and SET ASIDE.

SO ORDERED.31 (Emphasis in the original)

The Commissioner's Motion for Reconsideration and its Supplemental Motion for Reconsideration were denied by
the Court of Tax Appeals First Division.32

Aggrieved, the Commissioner filed an appeal before the Court of Tax Appeals En Banc.33 The Commissioner
asserted ,that it had 10 years to make an assessment due to the fraudulent income tax return filed by Fitness.34 It
also claimed that the assessment already attained finality due to Fitness' failure to file its protest within the period
provided by law.35

Fitness argued that the Final Assessment Notice issued to it could not be claimed as a valid deficiency assessment
that could justify the issuance of a warrant of distraint and/or levy.36 It asserted that it was a mere request for
payment as it did not provide the period within which to pay the alleged liabilities.37

The Court of Tax Appeals En Banc ruled in favor of Fitness. It affirmed the Decision of the Court of Tax Appeals
First Division, thus:

WHEREFORE, the instant Petition for Review is DENIED for lack of merit. Accordingly, both the Decision and
Resolution in CTA Case No. 7160 dated July 10, 2012 and November 21, 2012 respectively are AFFIRMED in
toto.38 (Emphasis in the original)

The Commissioner's Motion for Reconsideration was denied by the Court of Tax Appeals En Banc in the
Resolution39 dated December 16, 2014.

Hence, the Commissioner of Internal Revenue filed before this Court a Petition for Review.
Petitioner Commissioner of Internal Revenue raises the sole issue of whether the Final Assessment Notice issued
against respondent Fitness by Design, Inc. is a valid assessment under Section 228 of the National Internal
Revenue Code and Revenue Regulations No. 12-99.40

Petitioner argues that the Final Assessment Notice issued to respondent is valid since it complies with Section 228
of the National Internal Revenue Code and Revenue Regulations No. 12-99.41 The law states that the taxpayer shall
be informed in writing of the facts, jurisprudence, and law on which the assessment is based.42 Nothing in the law
provides that due date for payment is a substantive requirement for the validity of a final assessment notice.43

Petitioner further claims that a perusal of the Final Assessment Notice shows that April 15, 2004 is the due date for
payment.44 The pertinent portion of the assessment reads:

The complete details covering the aforementioned discrepancies established during the investigation of this case
are shown in the accompanying Annex 1 of this Notice. The 50% surcharge and 20% interest have been imposed
pursuant to Sections 248 and 249(B) of the [National Internal Revenue Code], as amended. Please note, however,
that the interest and the total amount due will have to be adjusted if paid prior or beyond April 15, 2004.45 (Emphasis
supplied)

This Court, through the Resolution46 dated July 22, 2015, required respondent to comment on the Petition for
Review.

In its Comment,47 respondent argues that the Final Assessment Notice issued was merely a request and not a
demand for payment of tax liabilities.48 The Final Assessment Notice cannot be considered as a final deficiency
assessment because it deprived respondent of due process when it failed to reflect its fixed tax liabilities.49Moreover,
it also gave respondent an indefinite period to pay its tax liabilities.50

Respondent points out that an assessment should strictly comply with the law for its validity.51 Jurisprudence
provides that "not all documents coming from the [Bureau of Internal Revenue] containing a computation of the tax
liability can be deemed assessments[,] which can attain finality."52 Therefore, the Warrant of Distraint and/or Levy
cannot be enforced since it is based on an invalid assessment.53

Respondent likewise claims that since the Final Assessment Notice was allegedly based on fraud, it must show the
details of the fraudulent acts imputed to it as part of due process.54

The Petition has no merit.

An assessment "refers to the determination of amounts due from a person obligated to make payments."55 "In the
context of national internal revenue collection, it refers to the determination of the taxes due from a taxpayer under
the National Internal Revenue Code of 1997."56

The assessment process starts with the filing of tax return and payment of tax by the taxpayer.57 The initial
assessment evidenced by the tax return is a self-assessment of the taxpayer.58 The tax is primarily computed and
voluntarily paid by the taxpayer without need of any demand from government.59 If tax obligations are properly paid,
the Bureau of Internal Revenue may dispense with its own assessment.60

After filing a return, the Commissioner or his or her representative may allow the examination of any taxpayer for
assessment of proper tax liability.61 The failure of a taxpayer to file his or her return will not hinder the Commissioner
from permitting the taxpayer's examination.62 The Commissioner can examine records or other data relevant to his or
her inquiry in order to verify the correctness of any return, or to make a return in case of noncompliance, as well as
to determine and collect tax liability.63

The indispensability of affording taxpayers sufficient written notice of his or her tax liability is a clear definite
requirement.64 Section 228 of the National Internal Revenue Code and Revenue Regulations No. 12-99, as
amended, transparently outline the procedure in tax assessment.65
Section 3 of Revenue Regulations No. 12-99,66 the then prevailing regulation regarding the due process requirement
in the issuance of a deficiency tax assessment, requires a notice for informal conference.67 The revenue officer who
audited the taxpayer's records shall state in his or her report whether the taxpayer concurs with his or her findings of
liability for deficiency taxes.68 If the taxpayer does not agree, based on the revenue officer's report, the taxpayer shall
be informed in writing69 of the discrepancies in his or her payment of internal revenue taxes for "Informal
Conference."70 The informal conference gives the taxpayer an opportunity to present his or her side of the case.71

The taxpayer is given 15 days from receipt of the notice of informal conference to respond.72 If the taxpayer fails to
respond, he or she will be considered in default.73 The revenue officer74 endorses the case with the least possible
delay to the Assessment Division of the Revenue Regional Office or the Commissioner or his or her authorized
representative.75 The Assessment Division of the Revenue Regional Office or the Commissioner or his or her
authorized representative is responsible for the "appropriate review and issuance of a deficiency tax assessment, if
warranted."76

If, after the review conducted, there exists sufficient basis to assess the taxpayer with deficiency taxes, the officer
'shall issue a preliminary assessment notice showing in detail the facts, jurisprudence, and law on which the
assessment is based.77 The taxpayer is given 15 days from receipt of the pre-assessment notice to respond.78 If the
taxpayer fails to respond, he or she will be considered in default, and a formal letter of demand and assessment
notice will be issued.79

The formal letter of demand and assessment notice shall state the facts, jurisprudence, and law on which the
assessment was based; otherwise, these shall be void.80 The taxpayer or the authorized representative may
administratively protest the formal letter of demand and assessment notice within 30 days from receipt of the
notice.81

II

The word "shall" in Section 228 of the National Internal Revenue Code and Revenue Regulations No. 12-99 means
the act of informing the taxpayer of both the legal and factual bases of the assessment is mandatory.82 The law
requires that the bases be reflected in the formal letter of demand and assessment notice.83 This cannot be
presumed.84 Otherwise, the express mandate of Section 228 and Revenue Regulations No. 12-99 would be
nugatory.85 The requirement enables the taxpayer to make an effective protest or appeal of the assessment or
decision.86

The rationale behind the requirement that taxpayers should be informed of the facts and the law on which the
assessments are based conforms with the constitutional mandate that no person shall be deprived of his or her
property without due process of law.87 Between the power of the State to tax and an individual's right to due process,
the scale favors the right of the taxpayer to due process.88

The purpose of the written notice requirement is to aid the taxpayer in making a reasonable protest, if
necessary.89Merely notifying the taxpayer of his or her tax liabilities without details or particulars is not enough.90

Commissioner of Internal Revenue v. United Salvage and Towage (Phils.), Inc.91 held that a final assessment notice
that only contained a table of taxes with no other details was insufficient:

In the present case, a mere perusal of the [Final Assessment Notice] for the deficiency EWT for taxable year
1994 will show that other than a tabulation of the alleged deficiency taxes due, no further detail regarding the
assessment was provided by petitioner. Only the resulting interest, surcharge and penalty were anchored with legal
basis. Petitioner should have at least attached a detailed notice of discrepancy or stated an explanation why the
amount of P48,461.76 is collectible against respondent and how the same was arrived at.92

Any deficiency to the mandated content of the assessment or its process will not be tolerated.93 In Commissioner of
Internal Revenue v. Enron,94 an advice of tax deficiency from the Commissioner of Internal Revenue to an employee
of Enron, including the preliminary five (5)-day letter, were not considered valid substitutes for the mandatory written
notice of the legal and factual basis of the assessment.95 The required issuance of deficiency tax assessment notice
to the taxpayer is different from the required contents of the notice.96 Thus:
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
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[National Internal Revenue Code] and [Revenue Regulations] No. 12-99 would be rendered nugatory. The alleged
"factual bases" in the advice, preliminary letter and "audit working papers" did not suffice. There was no going
around the mandate of the law that the legal and factual bases of the assessment be stated in writing in the formal
letter of demand accompanying the assessment notice.97 (Emphasis supplied)

However, the mandate of giving the taxpayer a notice of the facts and laws on which the assessments are based
should not be mechanically applied.98 To emphasize, the purpose of this requirement is to sufficiently inform the
taxpayer of the bases for the assessment to enable him or her to make an intelligent protest.99

In Samar-I Electric Cooperative v. Commissioner of Internal Revenue,100 substantial compliance with Section 228 of
the National Internal Revenue Code is allowed, provided that the taxpayer would be later apprised in writing of the
factual and legal bases of the assessment to enable him or her to prepare for an effective protest.101 Thus:

Although the [Final Assessment Notice] and demand letter issued to petitioner were not accompanied by a written
explanation of the legal and factual bases of the deficiency taxes assessed against the petitioner, the records
showed that respondent in its letter dated April 10, 2003 responded to petitioner's October 14, 2002 letter-protest,
explaining at length the factual and legal bases of the deficiency tax assessments and denying the protest.

Considering the foregoing exchange of correspondence and documents between the parties, we find that the
requirement of Section 228 was substantially complied with. Respondent had fully informed petitioner in writing of
the factual and legal bases of the deficiency taxes assessment, which enabled the latter to file an "effective" protest,
much unlike the taxpayer's situation in Enron. Petitioner's right to due process was thus not violated.102

A final assessment notice provides for the amount of tax due with a demand for payment.103 This is to determine the
amount of tax due to a taxpayer.104 However, due process requires that taxpayers be informed in writing of the facts
and law on which the assessment is based in order to aid the taxpayer in making a reasonable protest.105 To
immediately ensue with tax collection without initially substantiating a valid assessment contravenes the principle in
administrative investigations "that taxpayers should be able to present their case and adduce supporting
evidence."106

Respondent filed its income tax return in 1995.107 Almost eight (8) years passed before the disputed final assessment
notice was issued. Respondent pleaded prescription as its defense when it filed a protest to the Final Assessment
Notice. Petitioner claimed fraud assessment to justify the belated assessment made on respondent.108If fraud was
indeed present, the period of assessment should be within 10 years.109 It is incumbent upon petitioner to clearly state
the allegations of fraud committed by respondent to serve the purpose of an assessment notice to aid respondent in
filing an effective protest.

III

The prescriptive period in making an assessment depends upon whether a tax return was filed or whether the tax
return filed was either false or fraudulent. When a tax return that is neither false nor fraudulent has been filed, the
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Bureau of Internal Revenue may assess within three (3) years, reckoned from the date of actual filing or from the
last day prescribed by law for filing.110 However, in case of a false or fraudulent return with intent to evade tax,
Section 222(a) provides:

Section 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. (Emphasis supplied)
In Aznar v. Court of Tax Appeals,111 this Court interpreted Section 332112 (now Section 222[a] of the National Internal
Revenue Code) by dividing it in three (3) different cases: first, in case of false return; second, in case of a fraudulent
return with intent to evade; and third, in case of failure to file a return.113 Thus:

Our stand that the law should be interpreted to mean a separation of the three different situations of false return,
fraudulent return with intent to evade tax and failure to file a return is strengthened immeasurably by the last portion
of the provision which aggregates the situations into three different classes, namely "falsity'', "fraud" and
"omission."114

This Court held that there is a difference between "false return" and a "fraudulent return."115 A false return simply
involves a "deviation from the truth, whether intentional or not" while a fraudulent return "implies intentional or
deceitful entry with intent to evade the taxes due."116

Fraud is a question of fact that should be alleged and duly proven.117 "The willful neglect to file the required tax return
or the fraudulent intent to evade the payment of taxes, considering that the same is accompanied by legal
consequences, cannot be presumed."118 Fraud entails corresponding sanctions under the tax law. Therefore, it is
indispensable for the Commissioner of Internal Revenue to include the basis for its allegations of fraud in the
assessment notice.

During the proceedings in the Court of Tax Appeals First Division, respondent presented its President, Domingo C.
Juan Jr. (Juan, Jr.), as witness.119 Juan, Jr. testified that respondent was, in its pre-operating stage in 1995.120During
that period, respondent "imported equipment and distributed them for market testing in the Philippines without
earning any profit."121 He also confirmed that the Final Assessment Notice and its attachments failed to substantiate
the Commissioner's allegations of fraud against respondent, thus:

More than three (3) years from the time petitioner filed its 1995 annual income tax return on April 11, 1996,
respondent issued to petitioner a [Final Assessment Notice] dated March 17, 2004 for the year 1995, pursuant to the
Letter of Authority No. 00002953 dated May 13, 2002. The attached Details of discrepancy containing the
assessment for income tax (IT), value-added tax (VAT) and documentary stamp tax (DST) as well as the Audit
Result/ Assessment Notice do not impute fraud on the part of petitioner. Moreover, it was obtained on information
and documents illegally obtained by a [Bureau of Internal Revenue] informant from petitioner's accountant Elnora
Carpio in 1996.122 (Emphasis supplied)

Petitioner did not refute respondent's allegations. For its defense, it presented Socrates Regala (Regala), the Group
Supervisor of the team, who examined respondent's tax liabilities.123 Regala confirmed that the investigation was
prompted by a tip from an informant who provided them with respondent's list of sales.124 He admitted125 that the
gathered information did not show that respondent deliberately failed to reflect its true income in 1995.126

IV

The issuance of a valid formal assessment is a substantive prerequisite for collection of taxes.127 Neither the National
Internal Revenue Code nor the revenue regulations provide for a "specific definition or form of an assessment."
However, the National Internal Revenue Code defines its explicit functions and effects."128 An assessment does not
only include a computation of tax liabilities; it also includes a demand for payment within a period prescribed.129 Its
main purpose is to determine the amount that a taxpayer is liable to pay.130

A pre-assessment notice "do[es] not bear the gravity of a formal assessment notice."131 A pre-assessment notice
merely gives a tip regarding the Bureau of Internal Revenue's findings against a taxpayer for an informal conference
or a clarificatory meeting.132

A final assessment is a notice "to the effect that the amount therein stated is due as tax and a demand for payment
thereof."133 This demand for payment signals the time "when penalties and interests begin to accrue against the
taxpayer and enabling the latter to determine his remedies[.]"134 Thus, it must be "sent to and received by the
taxpayer, and must demand payment of the taxes described therein within a specific period."135

The disputed Final Assessment Notice is not a valid assessment.

First, it lacks the definite amount of tax liability for which respondent is accountable. It does not purport to be a
demand for payment of tax due, which a final assessment notice should supposedly be. An assessment, in the
context of the National Internal Revenue Code, is a "written notice and demand made by the [Bureau of Internal
Revenue] on the taxpayer for the settlement of a due tax liability that is there: definitely set and fixed."136 Although
the disputed notice provides for the computations of respondent's tax liability, the amount remains indefinite. It only
provides that the tax due is still subject to modification, depending on the date of payment. Thus:

The complete details covering the aforementioned discrepancies established during the investigation of this case
are shown in the accompanying Annex 1 of this Notice. The 50% surcharge and 20% interest have been imposed
pursuant to Sections 248 and 249 (B) of the [National Internal Revenue Code], as amended. Please note, however,
that the interest and the total amount due will have to be adjusted if prior or beyond April 15, 2004.137 (Emphasis
Supplied)

Second, there are no due dates in the Final Assessment Notice. This negates petitioner's demand for
payment.138Petitioner's contention that April 15, 2004 should be regarded as the actual due date cannot be accepted.
The last paragraph of the Final Assessment Notice states that the due dates for payment were supposedly reflected
in the attached assessment:

In view thereof, you are requested to pay your aforesaid deficiency internal revenue tax liabilities through the duly
authorized agent bank in which you are enrolled within the time shown in the enclosed assessment
notice.139 (Emphasis in the original)

However, based on the findings of the Court of Tax Appeals First Division, the enclosed assessment pertained to
remained unaccomplished.140

Contrary to petitioner's view, April 15, 2004 was the reckoning date of accrual of penalties and surcharges and not
the due date for payment of tax liabilities. The total amount depended upon when respondent decides to pay. The
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notice, therefore, did not contain a definite and actual demand to pay.

Compliance with Section 228 of the National Internal Revenue Code is a substantative requirement.141 It is not a
mere formality.142 Providing the taxpayer with the factual and legal bases for the assessment is crucial before
proceeding with tax collection. Tax collection should be premised on a valid assessment, which would allow the
taxpayer to present his or her case and produce evidence for substantiation.143

The Court of Tax Appeals did not err in cancelling the Final Assessment Notice as well as the Audit
Result/Assessment Notice issued by petitioner to respondent for the year 1995 covering the "alleged deficiency
income tax, value-added tax and documentary stamp tax amounting to ₱10,647,529.69, inclusive of surcharges and
interest"144 for lack of due process. Thus, the Warrant of Distraint and/or Levy is void since an invalid assessment
bears no valid effect.145

Taxes are the lifeblood of government and should be collected without hindrance.146 However, the collection of taxes
should be exercised "reasonably and in accordance with the prescribed procedure."147

The essential nature of taxes for the existence of the State grants government with vast remedies to ensure its
collection. However, taxpayers are guaranteed their fundamental right to due process of law, as articulated in
various ways in the process of tax assessment. After all, the State's purpose is to ensure the well-being of its
citizens, not simply to deprive them of their fundamental rights.

WHEREFORE, the Petition is DENIED. The Decision of the Court of Tax Appeals En Banc dated July 14, 2014 and
Resolution dated December 16, 2014 in CTA EB Case No. 970 (CTA Case No. 7160) are hereby AFFIRMED.

SO ORDERED.