SECOND DIVISION completion or abandonment of the Works as to the On July 28, 2003, the trial court issued the
as to the On July 28, 2003, the trial court issued the order directing
G.R. No. 174938, October 01, 2014
GERARDO LANUZA, JR. AND ANTONIO O. OLBES, PETITIONERS,
VS. BF CORPORATION, SHANGRI-LA PROPERTIES, INC., ALFREDO
C. RAMOS, RUFO B. COLAYCO, MAXIMO G. LICAUCO III, AND
BENJAMIN C. RAMOS, RESPONDENTS.
DECISION
LEONEN, J.:
Corporate representatives may be compelled to submit to
arbitration proceedings pursuant to a contract entered into by
the corporation they represent if there are allegations of bad
faith or malice in their acts representing the corporation.
This is a Rule 45 petition, assailing the Court of Appeals' May 11,
2006 decision and October 5, 2006 resolution. The Court of
Appeals affirmed the trial court's decision holding that
petitioners, as directors, should submit themselves as parties to
the arbitration proceedings between BF Corporation and
Shangri-La Properties, Inc. (Shangri-La).
In 1993, BF Corporation filed a collection complaint with the
Regional Trial Court against Shangri-La and the members of its
board of directors: Alfredo C. Ramos, Rufo B. Colayco, Antonio
O. Olbes, Gerardo Lanuza, Jr., Maximo G. Licauco III, and
Benjamin C. Ramos.[1]
BF Corporation alleged in its complaint that on December 11,
1989 and May 30, 1991, it entered into agreements with
Shangri-La wherein it undertook to construct for Shangri-La a
mall and a multilevel parking structure along EDSA.[2]
Shangri-La had been consistent in paying BF Corporation in
accordance with its progress billing statements.[3] However, by
October 1991, Shangri-La started defaulting in payment.[4]
BF Corporation alleged that Shangri-La induced BF Corporation
to continue with the construction of the buildings using its own
funds and credit despite Shangri-La's default.[5] According to BF
Corporation, Shangri-La misrepresented that it had funds to pay
for its obligations with BF Corporation, and the delay in
payment was simply a matter of delayed processing of BF
Corporation's progress billing statements.[6]
BF Corporation eventually completed the construction of the
buildings.[7] Shangri-La allegedly took possession of the buildings
while still owing BF Corporation an outstanding balance.[8]
BF Corporation alleged that despite repeated demands,
Shangri-La refused to pay the balance owed to it.[9] It also
alleged that the Shangri-La's directors were in bad faith in
directing Shangri-La's affairs. Therefore, they should be held
jointly and severally liable with Shangri-La for its obligations as
well as for the damages that BF Corporation incurred as a result
of Shangri-La's default.[10]
On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B.
Colayco, Maximo G. Licauco III, and Benjamin C. Ramos filed a
motion to suspend the proceedings in view of BF Corporation's
failure to submit its dispute to arbitration, in accordance with
the arbitration clause provided in its contract, quoted in the
motion as follows:[11]
35. Arbitration
(1) Provided always that in case any dispute or difference shall
arise between the Owner or the Project Manager on his behalf
and the Contractor, either during the progress or after the
between BF Corporation and Shangri-La.[40] Provisions including
construction of this Contract or as to any matter or thing of
whatsoever nature arising thereunder or in connection
therewith (including any matter or thing left by this Contract to
the discretion of the Project Manager or the withholding by the
Project Manager of any certificate to which the Contractor
may claim to be entitled or the measurement and valuation
mentioned in clause 30(5)(a) of these Conditions or the rights
and liabilities of the parties under clauses 25, 26, 32 or 33 of
these Conditions), the owner and the Contractor hereby agree
to exert all efforts to settle their differences or dispute amicably.
Failing these efforts then such dispute or difference shall be
referred to arbitration in accordance with the rules and
procedures of the Philippine Arbitration Law.
xxx xxx xxx
(6) The award of such Arbitrators shall be final and binding on
the parties. The decision of the Arbitrators shall be a condition
precedent to any right of legal action that either party may
have against the other. . . .[12] (Underscoring in the original)
On August 19, 1993, BF Corporation opposed the motion to
suspend proceedings.[13]
In the November 18, 1993 order, the Regional Trial Court denied
the motion to suspend proceedings.[14]
On December 8, 1993, petitioners filed an answer to BF
Corporation's complaint, with compulsory counterclaim against
BF Corporation and cross-claim against Shangri-La.[15] They
alleged that they had resigned as members of Shangri-La's
board of directors as of July 15, 1991.[16]
After the Regional Trial Court denied on February 11, 1994 the
motion for reconsideration of its November 18, 1993 order,
Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo G.
Licauco III, and Benjamin Ramos filed a petition for certiorari
with the Court of Appeals.[17]
On April 28, 1995, the Court of Appeals granted the petition for
certiorari and ordered the submission of the dispute to
arbitration.[18]
Aggrieved by the Court of Appeals' decision, BF Corporation
filed a petition for review on certiorari with this court.[19] On
March 27, 1998, this court affirmed the Court of Appeals'
decision, directing that the dispute be submitted for
arbitration.[20]
Another issue arose after BF Corporation had initiated
arbitration proceedings. BF Corporation and Shangri-La failed
to agree as to the law that should govern the arbitration
proceedings.[21] On October 27, 1998, the trial court issued the
order directing the parties to conduct the proceedings in
accordance with Republic Act No. 876.[22]
Shangri-La filed an omnibus motion and BF Corporation an
urgent motion for clarification, both seeking to clarify the term,
"parties," and whether Shangri-La's directors should be included
in the arbitration proceedings and served with separate
demands for arbitration.[23]
Petitioners filed their comment on Shangri-La's and BF
Corporation's motions, praying that they be excluded from the
arbitration proceedings for being non-parties to Shangri-La's
and BF Corporation's agreement.[24]
service of demands for arbitration upon all defendants in BF
Corporation's complaint.[25] According to the trial court,
Shangri-La's directors were interested parties who "must also be
served with a demand for arbitration to give them the
opportunity to ventilate their side of the controversy, safeguard
their interest and fend off their respective positions."[26]
Petitioners' motion for reconsideration of this order was denied
by the trial court on January 19, 2005.[27]
Petitioners filed a petition for certiorari with the Court of
Appeals, alleging grave abuse of discretion in the issuance of
orders compelling them to submit to arbitration proceedings
despite being third parties to the contract between Shangri-La
and BF Corporation.[28]
In its May 11, 2006 decision,[29] the Court of Appeals dismissed
petitioners' petition for certiorari. The Court of Appeals ruled
that Shangri-La's directors were necessary parties in the
arbitration proceedings.[30] According to the Court of Appeals:
[They were] deemed not third-parties to the contract as they
[were] sued for their acts in representation of the party to the
contract pursuant to Art. 31 of the Corporation Code, and that
as directors of the defendant corporation, [they], in
accordance with Art. 1217 of the Civil Code, stand to be
benefited or injured by the result of the arbitration proceedings,
hence, being necessary parties, they must be joined in order to
have complete adjudication of the controversy. Consequently,
if [they were] excluded as parties in the arbitration proceedings
and an arbitral award is rendered, holding [Shangri-La] and its
board of directors jointly and solidarity liable to private
respondent BF Corporation, a problem will arise, i.e., whether
petitioners will be bound by such arbitral award, and this will
prevent complete determination of the issues and resolution of
the controversy.[31]
The Court of Appeals further ruled that "excluding petitioners in
the arbitration proceedings . . . would be contrary to the policy
against multiplicity of suits."[32]
The dispositive portion of the Court of Appeals' decision reads:
WHEREFORE, the petition is DISMISSED. The assailed orders dated
July 28, 2003 and January 19, 2005 of public respondent RTC,
Branch 157, Pasig City, in Civil Case No. 63400, are AFFIRMED.[33]
The Court of Appeals denied petitioners' motion for
reconsideration in the October 5, 2006 resolution.[34]
On November 24, 2006, petitioners filed a petition for review of
the May 11, 2006 Court of Appeals decision and the October 5,
2006 Court of Appeals resolution.[35]
The issue in this case is whether petitioners should be made
parties to the arbitration proceedings, pursuant to the
arbitration clause provided in the contract between BF
Corporation and Shangri-La.
Petitioners argue that they cannot be held personally liable for
corporate acts or obligations.[36] The corporation is a separate
being, and nothing justifies BF Corporation's allegation that they
are solidarity liable with Shangri-La.[37] Neither did they bind
themselves personally nor did they undertake to shoulder
Shangri-La's obligations should it fail in its obligations.[38] BF
Corporation also failed to establish fraud or bad faith on their
part.[39]
Petitioners also argue that they are third parties to the contract
arbitration stipulations should bind only the parties.[41] Based on
our arbitration laws, parties who are strangers to an agreement
cannot be compelled to arbitrate.[42]
Petitioners point out that our arbitration laws were enacted to
promote the autonomy of parties in resolving their disputes.[43]
Compelling them to submit to arbitration is against this purpose
and may be tantamount to stipulating for the parties.[44]
Separate comments on the petition were filed by BF
Corporation, and Maximo G. Licauco III, Alfredo C. Ramos and
Benjamin C. Ramos.[45]
Maximo G. Licauco III Alfredo C. Ramos, and Benjamin C.
Ramos agreed with petitioners that Shangri-La's directors, being
non-parties to the contract, should not be made personally
liable for Shangri-La's acts.[46] Since the contract was executed
only by BF Corporation and Shangri-La, only they should be
affected by the contract's stipulation.[47] BF Corporation also
failed to specifically allege the unlawful acts of the directors
that should make them solidarity liable with Shangri-La for its
obligations.[48]
Meanwhile, in its comment, BF Corporation argued that the
courts' ruling that the parties should undergo arbitration "clearly
contemplated the inclusion of the directors of the
corporation[.]"[49]
BF Corporation also argued that while petitioners were not
parties to the agreement, they were still impleaded under
Section 31 of the Corporation Code.[50] Section 31 makes
directors solidarity liable for fraud, gross negligence, and bad
faith.[51] Petitioners are not really third parties to the agreement
because they are being sued as Shangri-La's representatives,
under Section 31 of the Corporation Code.[52]
BF Corporation further argued that because petitioners were
impleaded for their solidary liability, they are necessary parties
to the arbitration proceedings.[53] The full resolution of all
disputes in the arbitration proceedings should also be done in
the interest of justice.[54]
In the manifestation dated September 6, 2007, petitioners
informed the court that the Arbitral Tribunal had already
promulgated its decision on July 31, 2007.[55] The Arbitral Tribunal
denied BF Corporation's claims against them.[56] Petitioners
stated that "[they] were included by the Arbitral Tribunal in the
proceedings conducted . . . notwithstanding [their] continuing
objection thereto. . . ."[57] They also stated that "[their] unwilling
participation in the arbitration case was done ex abundante
ad cautela, as manifested therein on several occasions."[58]
Petitioners informed the court that they already manifested
with the trial court that "any action taken on [the Arbitral
Tribunal's decision] should be without prejudice to the resolution
of [this] case."[59]
Upon the court's order, petitioners and Shangri-La filed their
respective memoranda. Petitioners and Maximo G. Licauco III,
Alfredo C. Ramos, and Benjamin C. Ramos reiterated their
arguments that they should not be held liable for Shangri-La's
default and made parties to the arbitration proceedings
because only BF Corporation and Shangri-La were parties to
the contract.
In its memorandum, Shangri-La argued that petitioners were
impleaded for their solidary liability under Section 31 of the
Corporation Code. Shangri-La added that their exclusion from
the arbitration proceedings will result in multiplicity of suits,
which "is not favored in this jurisdiction."[60] It pointed out that
the case had already been mooted by the termination of the
arbitration proceedings, which petitioners actively participated
in.[61] Moreover, BF Corporation assailed only the correctness of
the Arbitral Tribunal's award and not the part absolving Shangri-
La's directors from liability.[62]
BF Corporation filed a counter-manifestation with motion to
dismiss[63] in lieu of the required memorandum.
In its counter-manifestation, BF Corporation pointed out that
since "petitioners' counterclaims were already dismissed with
finality, and the claims against them were likewise dismissed
with finality, they no longer have any interest or personality in
the arbitration case. Thus, there is no longer any need to
resolve the present Petition, which mainly questions the
inclusion of petitioners in the arbitration proceedings."[64] The
court's decision in this case will no longer have any effect on
the issue of petitioners' inclusion in the arbitration
proceedings.[65]
The petition must fail.
The Arbitral Tribunal's decision, absolving petitioners from
liability, and its binding effect on BF Corporation, have
rendered this case moot and academic.
The mootness of the case, however, had not precluded us from
resolving issues so that principles may be established for the
guidance of the bench, bar, and the public. In De la Camara
v. Hon. Enage,[66] this court disregarded the fact that petitioner
in that case already escaped from prison and ruled on the
issue of excessive bails:
While under the circumstances a ruling on the merits of the
petition for certiorari is not warranted, still, as set forth at the
opening of this opinion, the fact that this case is moot and
academic should not preclude this Tribunal from setting forth in
language clear and unmistakable, the obligation of fidelity on
the part of lower court judges to the unequivocal command of
the Constitution that excessive bail shall not be required.[67]
This principle was repeated in subsequent cases when this court
deemed it proper to clarify important matters for guidance.[68]
Thus, we rule that petitioners may be compelled to submit to
the arbitration proceedings in accordance with Shangri-La and
BF Corporation's agreement, in order to determine if the
distinction between Shangri-La's personality and their
personalities should be disregarded.
This jurisdiction adopts a policy in favor of arbitration. Arbitration
allows the parties to avoid litigation and settle disputes
amicably and more expeditiously by themselves and through
their choice of arbitrators.
The policy in favor of arbitration has been affirmed in our Civil
Code,[69] which was approved as early as 1949. It was later
institutionalized by the approval of Republic Act No. 876, [70]
which expressly authorized, made valid, enforceable, and
irrevocable parties' decision to submit their controversies,
including incidental issues, to arbitration. This court recognized
this policy in Eastboard Navigation, Ltd. v. Ysmael and
Company, Inc.:[71]
As a corollary to the question regarding the existence of an
arbitration agreement, defendant raises the issue that, even if it
be granted that it agreed to submit its dispute with plaintiff to
arbitration, said agreement is void and without effect for it
amounts to removing said dispute from the jurisdiction of the
courts in which the parties are domiciled or where the dispute
occurred. It is true that there are authorities which hold that "a
clause in a contract providing that all matters in dispute
between the parties shall be referred to arbitrators and to them
alone, is contrary to public policy and cannot oust the courts of
jurisdiction" (Manila Electric Co. vs. Pasay Transportation Co., 57
Phil., 600, 603), however, there are authorities which favor "the
more intelligent view that arbitration, as an inexpensive,
speedy and amicable method of settling disputes, and as a
means of avoiding litigation, should receive every
encouragement from the courts which may be extended
without contravening sound public policy or settled law" (3 Am.
Jur., p. 835). Congress has officially adopted the modern view
when it reproduced in the new Civil Code the provisions of the
old Code on Arbitration. And only recently it approved
Republic Act No. 876 expressly authorizing arbitration of future
disputes.[72] (Emphasis supplied)
In view of our policy to adopt arbitration as a manner of settling
disputes, arbitration clauses are liberally construed to favor
arbitration. Thus, in LM Power Engineering Corporation v.
Capitol Industrial Construction Groups, Inc.,[73] this court said:
Being an inexpensive, speedy and amicable method of settling
disputes, arbitration — along with mediation, conciliation and
negotiation — is encouraged by the Supreme Court. Aside
from unclogging judicial dockets, arbitration also hastens the
resolution of disputes, especially of the commercial kind. It is
thus regarded as the "wave of the future" in international civil
and commercial disputes. Brushing aside a contractual
agreement calling for arbitration between the parties would be
a step backward.
Consistent with the above-mentioned policy of encouraging
alternative dispute resolution methods, courts should liberally
construe arbitration clauses. Provided such clause is
susceptible of an interpretation that covers the asserted
dispute, an order to arbitrate should be granted. Any doubt
should be resolved in favor of arbitration.[74] (Emphasis supplied)
A more clear-cut statement of the state policy to encourage
arbitration and to favor interpretations that would render
effective an arbitration clause was later expressed in Republic
Act No. 9285:[75]
SEC. 2. Declaration of Policy. - It is hereby declared the policy
of the State to actively promote party autonomy in the
resolution of disputes, or the freedom of the party to make their
own arrangements to resolve their disputes. Towards this end,
the State shall encourage and actively promote the use of
Alternative Dispute Resolution (ADR) as an important means to
achieve speedy and impartial justice and declog court
dockets. As such, the State shall provide means for the use of
ADR as an efficient tool and an alternative procedure for the
resolution of appropriate cases. Likewise, the State shall enlist
active private sector participation in the settlement of disputes
through ADR. This Act shall be without prejudice to the
adoption by the Supreme Court of any ADR system, such as
mediation, conciliation, arbitration, or any combination thereof
as a means of achieving speedy and efficient means of
resolving cases pending before all courts in the Philippines
which shall be governed by such rules as the Supreme Court
may approve from time to time.
....
SEC. 25. Interpretation of the Act. - In interpreting the Act, the
court shall have due regard to the policy of the law in favor of
arbitration. Where action is commenced by or against multiple
parties, one or more of whom are parties who are bound by
the arbitration agreement although the civil action may
continue as to those who are not bound by such arbitration
agreement. (Emphasis supplied)
Thus, if there is an interpretation that would render effective an
arbitration clause for purposes of avoiding litigation and
expediting resolution of the dispute, that interpretation shall be
adopted.
Petitioners' main argument arises from the separate personality
given to juridical persons vis-a-vis their directors, officers,
stockholders, and agents. Since they did not sign the arbitration
agreement in any capacity, they cannot be forced to submit
to the jurisdiction of the Arbitration Tribunal in accordance with
the arbitration agreement. Moreover, they had already
resigned as directors of Shangri-La at the time of the alleged
default.
Indeed, as petitioners point out, their personalities as directors
of Shangri-La are separate and distinct from Shangri-La.
A corporation is an artificial entity created by fiction of law.[76]
This means that while it is not a person, naturally, the law gives it
a distinct personality and treats it as such. A corporation, in the
legal sense, is an individual with a personality that is distinct and
separate from other persons including its stockholders, officers,
directors, representatives,[77] and other juridical entities.
The law vests in corporations rights, powers, and attributes as if
they were natural persons with physical existence and
capabilities to act on their own.[78] For instance, they have the
power to sue and enter into transactions or contracts. Section
36 of the Corporation Code enumerates some of a
corporation's powers, thus:
Section 36. Corporate powers and capacity. - Every
corporation incorporated under this Code has the power and
capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time
stated in the articles of incorporation and the certificate of
incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the
provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public
policy, and to amend or repeal the same in accordance with
this Code;
6. In case of stock corporations, to issue or sell stocks to
subscribers and to sell treasury stocks in accordance with the
provisions of this Code; and to admit members to the
corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage and otherwise deal with such real and
personal property, including securities and bonds of other
corporations, as the transaction of the lawful business of the
corporation may reasonably and necessarily require,
subject to the limitations prescribed by law and the
Constitution;
8. To enter into merger or consolidation with other corporations
as provided in this Code;
9. To make reasonable donations, including those for the public
welfare or for hospital, charitable, cultural, scientific, civic, or
similar purposes: Provided, That no corporation, domestic or
foreign, shall give donations in aid of any political party or
candidate or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the
benefit of its directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or
necessary to carry out its purpose or purposes as stated in its
articles of incorporation. (13a)
Because a corporation's existence is only by fiction of law, it
can only exercise its rights and powers through its directors,
officers, or agents, who are all natural persons. A corporation
cannot sue or enter into contracts without them.
A consequence of a corporation's separate personality is that
consent by a corporation through its representatives is not
consent of the representative, personally. Its obligations,
incurred through official acts of its representatives, are its own.
A stockholder, director, or representative does not become a
party to a contract just because a corporation executed a )C
contract through that stockholder, director or representative.
Hence, a corporation's representatives are generally not bound
by the terms of the contract executed by the corporation. They
are not personally liable for obligations and liabilities incurred
on or in behalf of the corporation.
Petitioners are also correct that arbitration promotes the
parties' autonomy in resolving their disputes. This court
recognized in Heirs of Augusto Salas, Jr. v. Laperal Realty
Corporation[79] that an arbitration clause shall not apply to
persons who were neither parties to the contract nor assignees
of previous parties, thus:
A submission to arbitration is a contract. As such, the
Agreement, containing the stipulation on arbitration, binds the
parties thereto, as well as their assigns and heirs. But only
they.[80] (Citations omitted)
Similarly, in Del Monte Corporation-USA v. Court of Appeals,[81]
this court ruled:
The provision to submit to arbitration any dispute arising
therefrom and the relationship of the parties is part of that
contract and is itself a contract. As a rule, contracts are
respected as the law between the contracting parties and
produce effect as between them, their assigns and heirs.
Clearly, only parties to the Agreement . . . are bound by the
Agreement and its arbitration clause as they are the only
signatories thereto.[82] (Citation omitted)
This court incorporated these rulings in Agan, Jr. v. Philippine
International Air Terminals Co., Inc.[83] and Stanfilco Employees
v. DOLE Philippines, Inc., et al.[84]
As a general rule, therefore, a corporation's representative who
did not personally bind himself or herself to an arbitration
agreement cannot be forced to participate in arbitration
proceedings made pursuant to an agreement entered into by
the corporation. He or she is generally not considered a party
to that agreement.
However, there are instances when the distinction between
personalities of directors, officers, and representatives, and of
the corporation, are disregarded. We call this piercing the veil
of corporate fiction.
Piercing the corporate veil is warranted when "[the separate
personality of a corporation] is used as a means to perpetrate
fraud or an illegal act, or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, or to confuse
legitimate issues."[85] It is also warranted in alter ego cases
"where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is
so organized and controlled and its affairs are so conducted as
to make it merely an instrumentality, agency, conduit or
adjunct of another corporation."[86]
When corporate veil is pierced, the corporation and persons
who are normally treated as distinct from the corporation are
treated as one person, such that when the corporation is
adjudged liable, these persons, too, become liable as if they
were the corporation.
Among the persons who may be treated as the corporation
itself under certain circumstances are its directors and officers.
Section 31 of the Corporation Code provides the instances
when directors, trustees, or officers may become liable for
corporate acts:
Sec. 31. Liability of directors, trustees or officers. - Directors or
trustees who willfully and knowingly vote for or assent to
patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith in directing the affairs of the
corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees shall be
liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and
other persons.
When a director, trustee or officer attempts to acquire or
acquires, in violation of his duty, any interest adverse to the
corporation in respect of any matter which has been reposed
in him in confidence, as to which equity imposes a disability
upon him to deal in his own behalf, he shall be liable as a
trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation, (n)
Based on the above provision, a director, trustee, or officer of a
corporation may be made solidarily liable with it for all
damages suffered by the corporation, its stockholders or
members, and other persons in any of the following cases:
a) The director or trustee willfully and knowingly voted for or
assented to a patently unlawful corporate act;
b) The director or trustee was guilty of gross negligence or
bad faith in directing corporate affairs; and
c) The director or trustee acquired personal or pecuniary
interest in conflict with his or her duties as director or
trustee.
Solidary liability with the corporation will also attach in the
following instances:
a) "When a director or officer has consented to the
issuance of watered stocks or who, having knowledge
thereof, did not forthwith file with the corporate secretary
his written objection thereto";[87]
b) "When a director, trustee or officer has contractually
agreed or stipulated to hold himself personally and
solidarity liable with the corporation";[88] and
c) "When a director, trustee or officer is made, by specific
provision of law, personally liable for his corporate
action."[89]
When there are allegations of bad faith or malice against
corporate directors or representatives, it becomes the duty of
courts or tribunals to determine if these persons and the
corporation should be treated as one. Without a trial, courts
and tribunals have no basis for determining whether the veil of
corporate fiction should be pierced. Courts or tribunals do not
have such prior knowledge. Thus, the courts or tribunals must
first determine whether circumstances exist to warrant the
courts or tribunals to disregard the distinction between the
corporation and the persons representing it. The determination
of these circumstances must be made by one tribunal or court
in a proceeding participated in by all parties involved,
including current representatives of the corporation, and those
persons whose personalities are impliedly the same as the
corporation. This is because when the court or tribunal finds
that circumstances exist warranting the piercing of the
corporate veil, the corporate representatives are treated as the
corporation itself and should be held liable for corporate acts.
The corporation's distinct personality is disregarded, and the
corporation is seen as a mere aggregation of persons
undertaking a business under the collective name of the
corporation.
Hence, when the directors, as in this case, are impleaded in a
case against a corporation, alleging malice or bad faith on
their part in directing the affairs of the corporation,
complainants are effectively alleging that the directors and the
corporation are not acting as separate entities. They are
alleging that the acts or omissions by the corporation that
violated their rights are also the directors' acts or omissions. [90]
They are alleging that contracts executed by the corporation
are contracts executed by the directors. Complainants
effectively pray that the corporate veil be pierced because
the cause of action between the corporation and the directors
is the same.
In that case, complainants have no choice but to institute only
one proceeding against the parties. Under the Rules of Court,
filing of multiple suits for a single cause of action is prohibited.
Institution of more than one suit for the same cause of action
constitutes splitting the cause of action, which is a ground for
the dismissal of the others. Thus, in Rule 2:
Section 3. One suit for a single cause of action. — A party may
not institute more than one suit for a single cause of action. (3a)
Section 4. Splitting a single cause of action; effect of. — If two
or more suits are instituted on the basis of the same cause of
action, the filing of one or a judgment upon the merits in any
one is available as a ground for the dismissal of the others. (4a)
It is because the personalities of petitioners and the corporation
may later be found to be indistinct that we rule that petitioners
may be compelled to submit to arbitration.
However, in ruling that petitioners may be compelled to submit
to the arbitration proceedings, we are not overturning Heirs of
Angus to Salas wherein this court affirmed the basic arbitration
principle that only parties to an arbitration agreement may be
compelled to submit to arbitration.
In that case, this court recognized that persons other than the
main party may be compelled to submit to arbitration, e.g.,
assignees and heirs. Assignees and heirs may be considered
parties to an arbitration agreement entered into by their
assignor because the assignor's rights and obligations are
transferred to them upon assignment. In other words, the
assignor's rights and obligations become their own rights and
obligations. In the same way, the corporation's obligations are
treated as the representative's obligations when the corporate
veil is pierced.
Moreover, in Heirs of Angus to Salas, this court affirmed its policy
against multiplicity of suits and unnecessary delay. This court
said that "to split the proceeding into arbitration for some
parties and trial for other parties would "result in multiplicity of
suits, duplicitous procedure and unnecessary delay."[91] This
court also intimated that the interest of justice would be best
observed if it adjudicated rights in a single proceeding.[92] While
the facts of that case prompted this court to direct the trial
court to proceed to determine the issues of that case, it did not
prohibit' courts from allowing the case to proceed to
arbitration, when circumstances warrant.
Hence, the issue of whether the corporation's acts in violation
of complainant's rights, and the incidental issue of whether
piercing of the corporate veil is warranted, should be
determined in a single proceeding. Such finding would
determine if the corporation is merely an aggregation of
persons whose liabilities must be treated as one with the
corporation.
However, when the courts disregard the corporation's distinct
and separate personality from its directors or officers, the courts
do not say that the corporation, in all instances and for all
purposes, is the same as its directors, stockholders, officers, and
agents. It does not result in an absolute confusion of
personalities of the corporation and the persons composing or
representing it. Courts merely discount the distinction and treat
them as one, in relation to a specific act, in order to extend the
terms of the contract and the liabilities for all damages to erring
corporate officials who participated in the corporation's illegal
acts. This is done so that the legal fiction cannot be used to
perpetrate illegalities and injustices.
Thus, in cases alleging solidary liability with the corporation or
praying for the piercing of the corporate veil, parties who are
normally treated as distinct individuals should be made to
participate in the arbitration proceedings in order to determine
if such distinction should indeed be disregarded and, if so, to
determine the extent of their liabilities.
In this case, the Arbitral Tribunal rendered a decision, finding
that BF Corporation failed to prove the existence of
circumstances that render petitioners and the other directors
solidarity liable. It ruled that petitioners and Shangri-La's other
directors were not liable for the contractual obligations of
Shangri-La to BF Corporation. The Arbitral Tribunal's decision was
made with the participation of petitioners, albeit with their
continuing objection. In view of our discussion above, we rule
that petitioners are bound by such decision.
WHEREFORE, the petition is DENIED. The Court of Appeals'
decision of May 11, 2006 and resolution of October 5, 2006 are
AFFIRMED.
SO ORDERED.
THIRD DIVISION
G.R. No. 167560, September 17, 2008
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS.
DOMINADOR MENGUITO, RESPONDENT.
DECISION
AUSTRIA-MARTINEZ, J.:
Before the Court is a Petition for Review on Certiorari under Rule
45 of the Rules of Court, assailing the March 31, 2005 Decision[1]
of the Court of Appeals (CA) which reversed and set aside the
Court of Tax Appeals (CTA) April 2, 2002 Decision[2] and
October 10, 2002 Resolution[3] ordering Dominador Menguito
(respondent) to pay the Commissioner of Internal Revenue
(petitioner) deficiency income and percentage taxes and
delinquency interest.
Based on the Joint Stipulation of Facts and Admissions [4] of the
parties, the CTA summarized the factual and procedural
antecedents of the case, the relevant portions of which read:
Petitioner Dominador Menguito [herein respondent] is a Filipino
citizen, of legal age, married to Jeanne Menguito and is
engaged in the restaurant and/or cafeteria business. For the
years 1991, 1992 and 1993, its principal place of business was at
Gloriamaris, CCP Complex, Pasay City and later transferred to
Kalayaan Bar (Copper Kettle Cafeteria Specialist or CKCS),
Departure Area, Ninoy Aquino International Airport, Pasay City.
During the same years, he also operated a branch at Club
John Hay, Baguio City carrying the business name of Copper
Kettle Cafeteria Specialist (Joint Stipulation of Facts and
Admissions, p. 133, CTA records).
xxxx
Subsequently, BIR Baguio received information that Petitioner
[herein respondent] has undeclared income from Texas
Instruments and Club John Hay, prompting the BIR to conduct
another investigation. Through a letter dated July 28, 1997,
Spouses Dominador Menguito and Jeanne Menguito (Spouses
Menguito) were informed by the Assessment Division of the said
office that they have underdeclared sales totaling
P48,721,555.96 (Exhibit 11, p. 83, BIR records). This was followed
by a Preliminary Ten (10) Day Letter dated August 11, 1997,
informing Petitioner [herein respondent] that in the investigation
of his 1991, 1992 and 1993 income, business and withholding
tax case, it was found out that there is still due from him the
total sum of P34,193,041.55 as deficiency income and
percentage tax.
On September 2, 1997, the assessment notices subject of the
instant petition were issued. These were protested by Ms.
Jeanne Menguito, through a letter dated September 28, 1997
(Exhibit 14, p. 112, BIR Records), on the ground that the 40%
deduction allowed on their computed gross revenue, is
unrealistic. Ms. Jeanne Menguito requested for a period of thirty
(30) days within which to coordinate with the BIR regarding the
contested assessment.
On October 10, 1997, BIR Baguio replied, informing the Spouses
Menguito that the source of assessment was not through the
disallowance of claimed expenses but on data received from
Club John Hay and Texas Instruments Phils., Inc. Said letter gave
the spouses ten (10) days to present evidence (Exhibit 15, p.
110, BIR Records).
In an effort to clear an alleged confusion regarding Copper
Kettle Cafeteria Specialist (CKCS) being a sole proprietorship
owned by the Spouses, and Copper Kettle Catering Services,
Inc. (CKCS, Inc.) being a corporation with whom Texas
Instruments and Club John Hay entered into a contract,
Petitioner [respondent] submitted to BIR Baguio a photocopy of
the SEC Registration of Copper Kettle Catering Services, Inc. on
March 23, 1999 (pp. 134-141, BIR Records).
On April 12, 1999, BIR Baguio wrote a letter to Spouses
Menguito, informing the latter that a reinvestigation or
reconsideration cannot be given due course by the mere
submission of an uncertified photocopy of the Certificate of
Incorporation. Thus, it avers that the amendment issued is still
valid and enforceable.
On May 26, 1999, Petitioner [respondent] filed the present case,
praying for the cancellation and withdrawal of the deficiency
income tax and percentage tax assessments on account of
prescription, whimsical factual findings, violation of procedural
due process on the issuance of assessment notices, erroneous
address of notices and multiple credit/ investigation by the
Respondent [petitioner] of Petitioner's [respondent's] books of
accounts and other related records for the same tax year.
Instead of filing an Answer, Respondent [herein petitioner]
moved to dismiss the instant petition on July 1, 1999, on the
ground of lack of jurisdiction. According to Respondent
[petitioner], the assessment had long become final and
executory when Petitioner [respondent] failed to comply with
the letter dated October 10, 1997.
Petitioner opposed said motion on July 21, 1999, claiming that
the final decision on Petitioner's [respondent's] protest is the
April 12, 1999 letter of the Baguio Regional Office; therefore, the
filing of the action within thirty (30) days from receipt of the said
letter was seasonably filed. Moreover, Petitioner [respondent]
asserted that granting that the April 12, 1999 letter in question
could not be construed to mean as a denial or final decision of
the protest, still Petitioner's [respondent's] appeal was timely
filed since Respondent [petitioner] issued a Warrant of Distraint
and/or Levy against the Petitioner [respondent] on May 3, 1999,
which warrant constituted a final decision of the Respondent
[petitioner] on the protest of the taxpayer.
On September 3, 1999, this Court denied Respondent's
[petitioner's] 'Motion to Dismiss' for lack of merit.
Respondent [petitioner] filed his Answer on September 24, 1999,
raising the following Special and Affirmative Defenses:
xxxx
5. Investigation disclosed that for taxable years 1991,
1992 and 1993, petitioner [respondent] filed false or
fraudulent income and percentage tax returns with
intent to evade tax by under declaring his sales.
6. The alleged duplication of investigation of petitioner
[respondent] by the BIR Regional Office in Baguio
City and by the Revenue District Office in Pasay City
is justified by the finding of fraud on the part of the
petitioner [respondent], which is an exception to the
provision in the Tax Code that the examination and
inspection of books and records shall be made only
once in a taxable year (Section 235, Tax Code). At
any rate, petitioner [respondent], in a letter dated
July 18, 1994, waived his right to the consolidation of
said investigation.
7. The aforementioned falsity or fraud was discovered
on August 5, 1997. The assessments were issued on
September 2, 1997, or within ten (10) years from the
discovery of such falsity or fraud (Section 223, Tax
Code). Hence, the assessments have not prescribed.
8. Petitioner's [respondent's] allegation that the
assessments were not properly addressed is
rendered moot and academic by his
acknowledgment in his protest letter dated
September 28, 1997 that he received the
assessments.
9. Respondent [petitioner] complied with the provisions
of Revenue Regulations No. 12-85 by informing
petitioner [respondent] of the findings of the
investigation in letters dated July 28, 1997 and
August 11, 1997 prior to the issuance of the
assessments.
10. Petitioner [respondent] did not allege in his
administrative protest that there was a duplication of
investigation, that the assessments have prescribed,
that they were not properly addressed, or that the
provisions of Revenue Regulations No. 12-85 were
not observed. Not having raised them in the
administrative level, petitioner [respondent] cannot
raise the same for the first time on appeal (Aguinaldo
Industries Corp. vs. Commissioner of Internal
Revenue, 112 SCRA 136).
11. The assessments were issued in accordance with law
and regulations.
12. All presumptions are in favor of the correctness of tax
assessments (CIR vs. Construction Resources of Asia,
Inc., 145 SCRA 67), and the burden to prove
otherwise is upon petitioner [respondent].[5]
(Emphasis supplied)
On April 2, 2002, the CTA rendered a Decision, the dispositive
portion of which reads:
Accordingly, Petitioner [herein respondent] is ORDERED to PAY
the Respondent [herein petitioner] the amount of
P11,333,233.94 and P2,573,655.82 as deficiency income and
percentage tax liabilities, respectively for taxable years 1991,
1992 and 1993 plus 20% delinquency interest from October 2,
1997 until full payment thereof.
SO ORDERED.[6]
Respondent filed a motion for reconsideration but the CTA
denied the same in its Resolution of October 10, 2002.[7]
Through a Petition for Review[8] filed with the CA, respondent
questioned the CTA Decision and Resolution mainly on the
ground that Copper Kettle Catering Services, Inc. (CKCS, Inc.)
was a separate and distinct entity from Copper Kettle
Cafeteria Specialist (CKCS); the sales and revenues of CKCS,
Inc. could not be ascribed to CKCS; neither may the taxes due
from one, charged to the other; nor the notices to be served
on the former, coursed through the latter.[9] Respondent cited
the Joint Stipulation in which petitioner acknowledged that its
(respondent's) business was called Copper Kettle Cafeteria
Specialist, not Copper Kettle Catering Services, Inc.[10]
Based on the unrefuted[11] CTA summary, the CA rendered the
Decision assailed herein, the dispositive portion of which reads:
WHEREFORE, the instant petition is GRANTED. Reversing the
assailed Decision dated April 2, 2002 and Resolution dated
October 10, 2002, the deficiency income tax and percentage
income tax assessments against petitioner in the amounts of
P11,333,233.94 and P2,573,655.82 for taxable years 1991, 1992
and 1993 plus the 20% delinquency interest thereon are
annulled.
SO ORDERED.[12]
Petitioner filed a motion for reconsideration but the CA denied
the same in its October 10, 2002 Resolution.[13]
Hence, herein recourse to the Court for the reversal of the CA
decision and resolution on the following grounds:
I
The Court of Appeals erred in reversing the decision of the
Court of Tax Appeals and in holding that Copper Kettle
Cafeteria Specialist owned by respondent and Copper Kettle
Catering Services, Inc. owned and managed by respondent's
wife are not one and the same.
II
The Court of Appeals erred in holding that respondent was
denied due process for failure of petitioner to validly serve
respondent with the post-reporting and pre-assessment notices
as required by law.
On the first issue, the CTA has ruled that CKCS, Inc. and CKCS
are one and the same corporation because "[t]he contract
between Texas Instruments and Copper Kettle was signed by
petitioner's [respondent's] wife, Jeanne Menguito as
proprietress."[14]
However, the CA reversed the CTA on these grounds:
Respondent's [herein petitioner's] allegation that Copper Kettle
Catering Services, Inc. and Copper Kettle Cafeteria Specialists
are not distinct entities and that the under-declared
sales/revenues of Copper Kettle Catering Services, Inc. pertain
to Copper Kettle Cafeteria Specialist are belied by the
evidence on record. In the Joint Stipulation of Facts submitted
before the tax court, respondent [petitioner] admitted "that
petitioner's [herein respondent's] business name is Copper
Kettle Cafeteria Specialist."
Also, the Certification of Club John Hay and Letter dated July 9,
1997 of Texas Instruments both addressed to respondent
indicate that these companies transacted with Copper Kettle
Catering Services, Inc., owned and managed by JEANNE G.
MENGUITO, NOT petitioner Dominador Menguito. The alleged
under-declared sales income subject of the present
assessments were shown to have been earned by Copper
Kettle Catering Services, Inc. in its commercial transaction with
Texas Instruments and Camp John Hay; NOT by petitioner's
dealing with these companies. In fact, there is nothing on
record which shows that Texas Instruments and Camp John Hay
conducted business relations with Copper Kettle Cafeteria
Specialist, owned by herein petitioner Dominador Menguito. In
the absence, therefore, of clear and convincing evidence
showing that Copper Kettle Cafeteria Specialist and Copper
Kettle Catering Services, Inc. are one and the same,
respondent can NOT validly impute alleged underdeclared
sales income earned by Copper Kettle Catering Services, Inc.
as sales income of Copper Kettle Cafeteria Specialist.[15]
(Emphasis supplied)
Respondent is adamant that the CA is correct. Many times in
the past, the BIR had treated CKCS separately from CKCS, Inc.:
from May 1994 to June 1995, the BIR sent audit teams to
examine the books of account and other accounting records
of CKCS, and based on said audits, respondent was held liable
for deficiency taxes, all of which he had paid.[16] Moreover, the
certifications[17] issued by Club John Hay and Texas Instruments
identify the concessionaire operating therein as CKCS, Inc.,
owned and managed by his spouse Jeanne Menguito, and not
CKCS.[18]
Petitioner impugns the findings of the CA, claiming that these
are contradicted by evidence on record consisting of a reply
to the September 2, 1997 assessment notice of BIR Baguio
which Jeanne Menguito wrote on September 28, 1997, to wit:
We are in receipt of the assessment notice you have sent us,
dated September 2, 1997. Having taken hold of the same only
now following our travel overseas, we were not able to respond
immediately and manifest our protest. Also, with the impending
termination of our businesses at 19th Tee, Club John Hay and at
Texas Instruments, Loakan, Baguio City, we have already
started the transfer of our records and books in Baguio City to
Manila that we will need more time to review and sort the
records that may have to be presented relative to the
assessment x x x.[19] (Emphasis supplied)
Petitioner insists that said reply confirms that the assessment
notice is directed against the businesses which she and her
husband, respondent herein, own and operate at Club John
Hay and Texas Instruments, and establishes that she is
protesting said notice not just for herself but also for
respondent.[20]
Moreover, petitioner argues that if it were true that CKCS, Inc.
and CKCS are separate and distinct entities, respondent could
have easily produced the articles of incorporation of CKCS,
Inc.; instead, what respondent presented was merely a
photocopy of the incorporation articles.[21] Worse, petitioner
adds, said document was not offered in evidence before the
CTA, but was presented only before the CA.[22]
Petitioner further insists that CKCS, Inc. and CKCS are merely
employing the fiction of their separate corporate existence to
evade payment of proper taxes; that the CTA saw through their
ploy and rightly disregarded their corporate individuality,
treating them instead as one taxable entity with the same tax
base and liability;[23] and that the CA should have sustained the
CTA.[24]
In effect, petitioner would have the Court resolve a purely
factual issue[25] of whether or not there is substantial evidence
that CKCS, Inc. and CKCS are one and the same taxable
entity.
As a general rule, the Court does not venture into a trial of facts
in proceedings under Rule 45 of the Rules of Courts, for its only
function is to review errors of law.[26] The Court declines to
inquire into errors in the factual assessment of the CA, for the
latter's findings are conclusive, especially when these are
synonymous to those of the CTA.[27] But when the CA
contradicts the factual findings of the CTA, the Court deems it
necessary to determine whether the CA was justified in doing
so, for one basic rule in taxation is that the factual findings of
the CTA, when supported by substantial evidence, will not be
disturbed on appeal unless it is shown that the CTA committed
gross error in its appreciation of facts.[28]
The Court finds that the CA gravely erred when it ignored the
substantial evidence on record and reversed the CTA.
In a number of cases, the Court has shredded the veil of
corporate identity and ruled that where a corporation is merely
an adjunct, business conduit or alter ego of another
corporation or when they practice fraud on our internal
revenue laws,[29] the fiction of their separate and distinct
corporate identities shall be disregarded, and both entities
treated as one taxable person, subject to assessment for the
same taxable transaction.
The Court considers the presence of the following
circumstances, to wit: when the owner of one directs and
controls the operations of the other, and the payments
effected or received by one are for the accounts due from or
payable to the other;[30] or when the properties or products of
one are all sold to the other, which in turn immediately sells
them to the public,[31] as substantial evidence in support of the
finding that the two are actually one juridical taxable
personality.
In the present case, overwhelming evidence supports the CTA
in disregarding the separate identity of CKCS, Inc. from CKCS
and in treating them as one taxable entity.
First, in respondent's Petition for Review before the CTA, he
expressly admitted that he "is engaged in restaurant and/or
cafeteria business" and that "[i]n 1991, 1992 and 1993, he also
operated a branch at Club John Hay, Baguio Citywith a
business name of Copper Kettle Cafeteria Specialist."[32]
Respondent repeated such admission in the Joint Stipulation. [33]
And then in Exhibit "1"[34] for petitioner, a July 18, 1994 letter sent
by Jeanne Menguito to BIR, Baguio City, she stated thus:
"in connection with the investigation of Copper Kettle Cafeteria
Specialist which is located at 19th Tee Club John Hay, Baguio
City under letter of authority nos. 0392897, 0392898, and
0392690 dated May 16, 1994, investigating my income,
business, and withholding taxes for the years 1991, 1992, and
1993."[35] (Emphasis supplied)
Jeanne Menguito signed the letter as proprietor of Copper
Kettle Cafeteria Specialist.[36]
Related to Exhibit "1" is petitioner's Exhibit "14," which is another
letter dated September 28, 1997, in which Jeanne Menguito
protested the September 2, 1997 assessment notices directed
at Copper Kettle Cafeteria Specialist and referred to the latter
as "our business at 19th Tee Club John Hay and at Texas
Instruments."[37] Taken along with the Joint Stipulation, Exhibits
"A" through "C" and the August 3, 1993 Certification of Camp
John Hay, Exhibits "1" and "14," confirm that respondent,
together with his spouse Jeanne Menguito, own, operate and
manage a branch of Copper Kettle Cafeteria Specialist, also
called Copper Kettle Catering Services at Camp John Hay.
Moreover, in Exhibits "A" to "A-1,"[38] Exhibits "B" to "B-1"[39] and
Exhibits "C" to "C-1"[40] which are lists of concessionaires that
operated in Club John Hay in 1992, 1993 and 1991,
respectively,[41] it appears that there is no outlet with the name
"Copper Kettle Cafeteria Specialist" as claimed by respondent.
The name that appears in the lists is "19th TEE CAFETERIA
(Copper Kettle, Inc.)." However, in the light of the express
admission of respondent that in 1991, 1992 and 1993, he
operated a branch called Copper Kettle Cafeteria Specialist in
Club John Hay, the entries in Exhibits "A" through "C" could only
mean that said branch refers to "19th Tee Cafeteria (Copper
Kettle, Inc.)." There is no evidence presented by respondent
that contradicts this conclusion.
In addition, the August 9, 1993 Certification issued by Club John
Hay that "COPPER KETTLE CATERING SERVICES owned and
managed by MS. JEANNE G. MENGUITO is a concessionaire in
John Hay since July 1991 up to the present and is operating the
outlet 19TH TEE CAFETERIA AND THE TEE BAR"[42] convincingly
establishes that respondent's branch which he refers to as
Copper Kettle Cafeteria Specialist at Club John Hay also
appears in the latter's records as "Copper Kettle Catering
Services" with an outlet called "19th Tee Cafeteria and The Tee
Bar."
Second, in Exhibit "8"[43] and Exhibit "E,"[44] Texas Instruments
identified the concessionaire operating its canteen as "Copper
Kettle Catering Services, Inc."[45] and/or "COPPER KETTLE
CAFETERIA SPECIALIST SVCS."[46] It being settled that
respondent's "Copper Kettle Cafeteria Specialist" is also known
as "Copper Kettle Catering Services," and that respondent and
Jeanne Menguito both own, manage and act as proprietors of
the business, Exhibit "8" and Exhibit "E" further establish that,
through said business, respondent also had taxable
transactions with Texas Instruments.
In view of the foregoing facts and circumstances, the Articles of
Incorporation of CKCS, Inc. -- a certified true copy of which
respondent attached only to his Reply filed with the CA[47] --
cannot insulate it from scrutiny of its real identity in relation to
CKCS. It is noted that said Articles of Incorporation of CKCS, Inc.
was issued in 1989, but documentary evidence indicate that
after said date, CKCS, Inc. has also assumed the name CKCS,
and vice-versa. The most concrete indication of this practice is
the 1991 Quarterly Percentage Tax Returns covering the
business name/trade "19th Tee Camp John Hay." In said returns,
the taxpayer is identified as "Copper Kettle Cafeteria
Specialist"[48] or CKCS, not CKCS, Inc. Yet, in several documents
already cited, the purported owner of 19th Tee Bar at Club John
Hay is CKCS, Inc.
All these pieces of evidence buttress the finding of the CTA that
in 1991, 1992 and 1993, respondent, together with his spouse
Jeanne Menguito, owned and operated outlets in Club John
Hay and Texas Instruments under the names Copper Kettle
Cafeteria Specialist or CKCS and Copper Kettle Catering
Services or Copper Kettle Catering Services, Inc..
Turning now to the second issue.
In respondent's Petition for Review with the CTA, he questioned
the validity of the Assessment Notices,[49] all dated September
2, 1997, issued by BIR, Baguio City against him on the following
grounds:
1. The assessment notices, based on income and
percentage tax returns filed for 1991, 1992 and 1993,
were issued beyond the three-year prescriptive
period under Section 203 of the Tax Code;[50]
2. The assessment notices were addressed to Copper
Kettle Specialist, Club John Hay, Baguio City, despite
notice to petitioner that respondent's principal place
of business was at the CCP Complex, Pasay City.[51]
3. The assessment notices were issued in violation of the
requirement of Revenue Regulations No. 12-85,
dated November 27, 1985, that the taxpayer be
issued a post-reporting notice and pre-assessment
notice before the preliminary findings of deficiency
may ripen into a formal assessment;[52] and
4. The assessment notices did not give respondent a
15-day period to reply to the findings of
deficiency.[53]
The Court notes that nowhere in his Petition for Review did
respondent deny that he received the September 2, 1997
assessment notices. Instead, during the trial, respondent's
witness, Ma. Theresa Nalda (Nalda), testified that she informed
the BIR, Baguio City "that there was no Notice or letter, that we
did not receive, perhaps, because they were not addressed to
Mr. Menguito's head office."[54]
The CTA correctly upheld the validity of the assessment notices.
Citing Section 223 of the Tax Code which provides that the
prescriptive period for the issuance of assessment notices
based on fraud is 10 years, the CTA ruled that the assessment
notices issued against respondent on September 2, 1997 were
timely because petitioner discovered the falsity in respondent's
tax returns for 1991, 1992 and 1993 only on February 19, 1997.[55]
Moreover, in accordance with Section 2 of Revenue Regulation
No. 12-85, which requires that assessment notices be sent to the
address indicated in the taxpayer's return, unless the latter gives
a notice of change of address, the assessment notices in the
present case were sent by petitioner to Camp John Hay, for this
was the address respondent indicated in his tax returns.[56] As to
whether said assessment notices were actually received, the
CTA correctly held that since respondent did not testify that he
did not receive said notices, it can be presumed that the same
were actually sent to and received by the latter. The Court
agrees with the CTA in considering as hearsay the testimony of
Nalda that respondent did not receive the notices, because
Nalda was not competent to testify on the matter, as she was
employed by respondent only in June 1998, whereas the
assessment notices were sent on September 2, 1997.[57]
Anent compliance with the requirements of Revenue
Regulation No. 12-85, the CTA held:
BIR records show that on July 28, 1997, a letter was issued by BIR
Baguio to Spouses Menguito, informing the latter of their
supposed underdeclaration of sales totaling P48,721,555.96 and
giving them 5 days to communicate any objection to the
results of the investigation (Exhibit 11, p. 83, BIR Records).
Records likewise reveal the issuance of a Preliminary Ten (10)
Day Letter on August 11, 1997, informing Petitioner [respondent
herein] that the sum of P34,193,041.55 is due from him as
deficiency income and percentage tax (Exhibit 13, p. 173, BIR
Records). Said letter gave the Petitioner [respondent herein] a
period of ten (10) days to submit his objection to the proposed
assessment, either personally or in writing, together with any
evidence he may want to present.
xxxx
As to Petitioner's allegation that he was given only ten (10) days
to reply to the findings of deficiency instead of fifteen (15) days
granted to a taxpayer under Revenue Regulations No. 12-85,
this Court believes that when Respondent [petitioner herein]
gave the Petitioner [respondent herein] on October 10, 1997 an
additional period of ten (10) days to present documentary
evidence or a total of twenty (20) days, there was compliance
with Revenue Regulations No. 12-85 and the latter was amply
given opportunity to present his side x x x.[58]
The CTA further held that respondent was estopped from
raising procedural issues against the assessment notices,
because these were not cited in the September 28, 1997 letter-
protest which his spouse Jeanne Menguito filed with
petitioner.[59]
On appeal by respondent,[60] the CA resolved the issue, thus:
Moreover, if the taxpayer denies ever having received an
assessment from the BIR, it is incumbent upon the latter to prove
by competent evidence that such notice was indeed received
by the addressee. Here, respondent [petitioner herein] merely
alleged that it "forwarded" the assessment notices to petitioner
[respondent herein]. The respondent did not show any proof of
mailing, registry receipt or acknowledgment receipt signed by
the petitioner [respondent herein]. Since respondent [petitioner
herein] has not adduced sufficient evidence that petitioner
[respondent herein] had in fact received the pre-assessment
notice and post-reporting notice required by law, it cannot be
assumed that petitioner [respondent herein] had been served
said notices.[61]
No other ground was cited by the CA for the reversal of the
finding of the CTA on the issue.
The CA is gravely mistaken.
In their Petition for Review with the CTA, respondent expressly
stated that "[s]ometime in September 1997, petitioner
[respondent herein] received various assessment notices, all
dated 02 September 1997, issued by BIR-Baguio for alleged
deficiency income and percentage taxes for taxable years
ending 31 December 1991, 1992 and 1993 x x x."[62] In their
September 28, 1997 protest to the September 2, 1997
assessment notices, respondent, through his spouses Jeanne
Menguito, acknowledged that "[they] are in receipt of the
assessment notice you have sent us, dated September 2, 1997 x
x x."[63]
Respondent is therefore estopped from denying actual receipt
of the September 2, 1997 assessment notices, notwithstanding
the denial of his witness Nalda.
As to the address indicated on the assessment notices,
respondent cannot question the same for it is the said address
which appears in its percentage tax returns.[64] While
respondent claims that he had earlier notified petitioner of a
change in his business address, no evidence of such written
notice was presented. Under Section 11 of Revenue Regulation
No. 12-85, respondent's failure to give written notice of change
of address bound him to whatever communications were sent
to the address appearing in the tax returns for the period
involved in the investigation.[65]
Thus, what remain in question now are: whether petitioner
issued and mailed a post-reporting notice and a pre-
assessment notice; and whether respondent actually received
them.
assessment notice have been served on the taxpayer, [70]
applies only to formal assessments prescribed under Section
228 of the National Internal Revenue Code, but not to post-
reporting notices or pre-assessment notices. The issuance of a
valid formal assessment is a substantive prerequisite to tax
collection,[71] for it contains not only a computation of tax
liabilities but also a demand for payment within a prescribed
period, thereby signaling the time when penalties and interests
begin to accrue against the taxpayer and enabling the latter
to determine his remedies therefor. Due process requires that it
must be served on and received by the taxpayer.[72]
A post-reporting notice and pre-assessment notice do not bear
the gravity of a formal assessment notice. The post-reporting
notice and pre-assessment notice merely hint at the initial
findings of the BIR against a taxpayer and invites the latter to
an "informal" conference or clarificatory meeting. Neither
notice contains a declaration of the tax liability of the taxpayer
or a demand for payment thereof. Hence, the lack of such
notices inflicts no prejudice on the taxpayer for as long as the
latter is properly served a formal assessment notice. In the case
of respondent, a formal assessment notice was received by him
as acknowledged in his Petition for Review and Joint
Stipulation; and, on the basis thereof, he filed a protest with the
BIR, Baguio City and eventually a petition with the CTA.
WHEREFORE, the petition is GRANTED. The March 31, 2005
Decision of the Court of Appeals is REVERSED and SET ASIDE and
the April 2, 2002 Decision and October 10, 2002 Resolution of
the Court of Tax Appeals are REINSTATED.
SO ORDERED.

There is no doubt that petitioner failed to prove that it served

on respondent a post-reporting notice and a pre-assessment
notice. Exhibit "11"[66] of petitioner is a mere photocopy of a July
28, 1997 letter it sent to respondent, informing him of the initial
outcome of the investigation into his sales, and the release of a
preliminary assessment upon completion of the investigation,
with notice for the latter to file any objection within five days
from receipt of the letter. "Exhibit "13"[67] of petitioner is also a
mere photocopy of an August 11, 1997 Preliminary Ten (10) Day
Letter to respondent, informing him that he had been found to
be liable for deficiency income and percentage tax and
inviting him to submit a written objection to the proposed
assessment within 10 days from receipt of notice. But nowhere
on the face of said documents can be found evidence that
these were sent to and received by respondent. Nor is there
separate evidence, such as a registry receipt of the notices or
a certification from the Bureau of Posts, that petitioner actually
mailed said notices.

However, while the lack of a post-reporting notice and pre-

assessment notice is a deviation from the requirements under
Section 1[68] and Section 2[69] of Revenue Regulation No. 12-85,
the same cannot detract from the fact that formal assessments
were issued to and actually received by respondents in
accordance with Section 228 of the National Internal Revenue
Code which was in effect at the time of assessment.

It should be emphasized that the stringent requirement that an

assessment notice be satisfactorily proven to have been issued
and released or, if receipt thereof is denied, that said