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Republic of the Philippines reinvestigation.

It also wrote the Solicitor General on October 8, 1957 requesting that it be


SUPREME COURT allowed to present its explanation together with supporting papers relative to its income tax
Manila liability. The Solicitor General transmitted the letter to the Collection of Internal Revenue.
Thereupon, the Deputy Collector of Internal Revenue, by his letter dated October 16, 1957,
EN BANC informed the taxpayer that its request for reinvestigation would be granted provided it
executed within ten days a waiver of the statute of limitations as required in General Circular V-
258 dated August 20, 1957. In his letter dated December 10, 1957, the Deputy Collector of
G.R. No. L-21731 March 31, 1966 Internal Revenue extended the period within which to execute and file with him the waiver of
the statute of limitations to December 31, 1957, but advised that if no waiver is forthcoming on
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant, or before said date, judicial action for collection would be instituted without further notice.
vs. Receipt of this letter is denied by appellant company.
LIM TIAN TENG SONS and CO., INC., defendant-appellant.
As Lim Tian Teng Sons & Co., Inc. failed to file a waiver of the statute of limitations, the Collector
Office of the Solicitor General for the plaintiff-appellant. of Internal Revenue instituted eight months after, specifically on September 2, 1958, an action
P. B. Uy Calderon for the defendant-appellee. in the Court of First Instance of Cebu for the collection of deficiency income tax.

BENGZON, J.P., J.: After hearing the parties, the court below rendered the following judgment.

Lim Tian Teng Sons & Co., Inc., a domestic corporation with principal office in Cebu City, IN VIEW OF THE FOREGOING, judgment is hereby rendered, declaring the assessment
engaged in 1951 and 1952, among others, in the exportation of copra. The copra was weighed (Exh. D, D-1) of income tax in the sum of P15,111.00 due from the defendant to the
before shipment in the port of departure and upon arrival in the port of destination. The weight plaintiff for the year 1952 valid, final and executory; condemning the defendant to pay
before shipment was called copra outturn. To allow for lose in weight due to shrinkage, said the same to the plaintiff with interest at one (1) per centum monthly from October 28,
exporter collected only 95% of the amount appearing in the letter of credit covering every 1957 until fully paid.
copra outturn. The 5% balance remained outstanding until final liquidation and adjustment.
With costs against the defendant.
On March 30, 1953 Lim Tian Teng Sons & Co., Inc. filed its income tax return for 1952 based on
accrued income and expenses. Its return showed a loss of P56,109.98. It took up as part of the IT IS SO ORDERED.
beginning inventory for 1952 the copra outturn shipped in 1951 in the sum of P95,500.00
already partially collected, as part of its outstanding stock as of December 31, 1951.
Not satisfied with the decision, the Collector of Internal Revenue moved for its reconsideration
on the ground that it did not include the 5% surcharge for late payment of tax. The motion was
In the audit and examination of taxpayer's 1952 income tax return, the Collector of Internal denied for the reason that the taxpayer has already been ordered to pay a surcharge of 50%.
Revenue eliminated the P95,500.00 outturn from the beginning inventory for 1952 and
considered it as accrued income for 1951. This increased taxpayer's 1952 net income by
P95,500.00 which, considering disallowances in the sum of P9,980.85, raised the taxpayer's net Both parties appealed, raising only questions of law.
taxable income for 1952 to P50,370.87. Accordingly, in a letter dated January 16, 1957 (Exhibit
C), received by Lim Tian Teng Sons & Co., Inc. on January 30, 1957, the Collector of Internal Plaintiff cites as errors the non-imposition of the 5% surcharge for the late payment of tax and
Revenue assessed a deficiency income tax of P10,074.00 and 50% surcharge thereon the computation of delinquency interest from October 8, 1957.
amounting to P5,037.00 and demanded payment thereof not later than February 15, 1957.
Defendant, on the other hand, assails the jurisdiction of the lower court, its finding that the
On January 31, 1957 Lim Tian Teng Sons & Co., Inc. requested reinvestigation of its 1952 assessment in question has become final and executory, the correctness of the assessment and
income tax liability. The Collector of Internal Revenue did not reply; instead, he referred the the imposition of the 50% surcharge.1äwphï1.ñët
case to the Solicitor General for collection by judicial action.
We will discuss first the taxpayer's appeal. It maintains that the lower court has no jurisdiction
On September 20, 1957 the Solicitor General demanded from Lim Tian Teng Sons & Co., Inc. the to entertain this case on the ground that the Collector of Internal Revenue has not yet issued
payment of P15,111.50 within five days, stating that otherwise judicial action would be his final decision on its requests for reinvestigation. The taxpayer's stand is that final decision of
instituted without further notice. In a letter dated October 5, 1957, received by the Collector of the Collector of Internal Revenue on the disputed assessment is a condition precedent to the
Internal Revenue on October 7, 1957, Lim Tian Teng Sons & Co., Inc. reiterated its request for filing of an action in the Court of First Instance for the collection of a tax. This argument has no
merit. The Collector of Internal Revenue is authorized to collect delinquent internal revenue Said court, to our mind, committed no error. For what is more indicative of the Collector's
taxes either by distraint and levy or by judicial action or both simultaneously. 1 The only decision against reinvestigation than his insistence to collect the tax? This decision was
requisite before he can collect the tax is that he must first assess the same within the time fixed communicated to defendant in a letter dated September 20, 1957 of the office of the Solicitor
by law.2 And in the case of a false or fraudulent return with intent to evade the tax or of a failure General which must have been received by defendant not later than October 8, 1957 for on said
to file a return, a proceeding in court for the collection of such tax may be begun without date it acknowledged receipt thereof. It had thirty days from October 8, 1957 within which to
assessment.3 appeal to the Court of Tax Appeals pursuant to Section 11 of Republic Act 1125. 6 Instead of
appealing to the Tax Court, however, the defendant herein in a letter dated October 8, 1957
Nowhere in the Tax Code is the Collector of Internal Revenue required to rule first on a reiterated its request for reinvestigation.
taxpayer's request for reinvestigation before he can go to court for the purpose of collecting the
tax assessed. On the contrary, Section 305 of the same Code withholds from all courts, except On October 15, 1957 the Collector of Internal Revenue wrote defendant that its "request for a
the Court of Tax Appeals under Section 11 of Republic Act 1125, the authority to restrain the reinvestigation will be granted only upon compliance with General Circular No. V-258 dated
collection of any national internal-revenue tax, fee or charge, thereby indicating the legislative August 20, 1957, which requires as a prerequisite to the grant of a reinvestigation the execution
policy to allow the Collector of Internal Revenue much latitude in the speedy and prompt of a waiver of the statute of limitations". In a subsequent letter, he extended the period within
collection of taxes. The reason is obvious. It is upon taxation that the government chiefly relies which to submit the aforesaid waiver to December 31, 1957.
to obtain the means the carry on its operations, and it is of the utmost importance that the
modes adopted to enforce collection of taxes levied should be summary and interfered with as In effect, the Collector of Internal Revenue placed in the hands of the defendant the holding of a
little as possible. No government could exist if all litigants were permitted to delay the reinvestigation. However, no such reinvestigation was made inasmuch as taxpayer failed to
collection of its taxes.4 submit a written waiver of the statute of limitations on or before December 31, 1957. Such
omission automatically brought about the denial of the request for reinvestigation.
Moreover, before the creation of the Court of Tax Appeals the remedy of a taxpayer who
desired to contest an assessment issued, by the Collector of Internal Revenue was to pay the tax Taxpayer however questions the legality of requiring waiver of the statute of limitations before
and bring an action in the ordinary courts for its recovery pursuant to Section 306 of the the grant of reinvestigation as provided for in General Circular No.
Code.5 Collection or payment of the tax was not made, to, wait until after the Collector of V-258. This question was not raised in the Bureau of Internal Revenue. Suffice it to say in this
Internal Revenue has resolved all issues raised by the taxpayer against an assessment. Republic connection that General Circular No. V-258 was promulgated pursuant to Section 338 of the
Act 1125 creating the Court of Appeals allows the taxpayer to dispute the correctness legality of Tax Code. The authority thereunder of the Secretary of Finance to issue rules and regulations
an assessment both in the purely administrative level and in said court, but it does not stop the for the effective enforcement of the provisions of the Tax Code has been sustained by this Court
Collector of Internal Revenue from collecting the tax through any of the means provided for in in previous cases.7
Section 316 of the Tax Code, except when enjoined by said Court of Tax Appeals. Section 11 of
Republic Act 1125 states in part:
Even if we do not count the period from October 8, 1957 (the date when taxpayer received
notice of the denial of its request for reinvestigation) to December 31, 1957 (the deadline for
No appeal taken to the Court of Tax Appeals from the decision of the Collector of the submission of the written waiver of the statute of limitations) in reckoning the 30-day
Internal Revenue ... shall suspend the payment, levy, distraint, and/or sale of any period within which the taxpayer may appeal to the Court of Tax Appeals, said period had long
property of the taxpayer for the satisfaction of his tax liability as provided by existing lapsed when the Collector of Internal Revenue filed the complaint in this case on September 2,
law: Provided, however, That when in the opinion of the Court the collection by the 1958.
Bureau of Internal Revenue or the Commissioner of Customs may jeopardize the
interest of the Government and/or the taxpayer the Court at any stage of the
proceeding may suspend the said collection and require the taxpayer either to deposit Taxpayer failure to appeal to the Court of Tax Appeals in due time made the assessment in
the amount claimed or to file a surety bond for not more than double the amount with question final, executory and demandable.8 And when the action was instituted on September
the Court. 2, 1958 to enforce the deficiency assessment in question, it was already barred from disputing
the correctness of the assessment or invoking any defense that would reopen the question of
his tax liability on merits.9 Otherwise, the period of thirty days for appeal to the Court of Tax
We will now resolve the issue of whether or not the court a quo erred in considering as final Appeals would make little sense. 10
and executory the assessment contained in the letter of the Collector of Internal Revenue dated
January 16, 1957. As stated, defendant received said assessment on January 30, 1957 and on
the following day requested reinvestigation of its tax liability. The Collector of Internal Revenue In a proceeding like this the taxpayer's defenses are similar to those of the defendant in a case
however did not reply to the request for reinvestigation. Instead, he referred the case to the for the enforcement of a judgment by judicial action under Section 6 of Rule 39 of the Rules of
Solicitor General for collection of the tax. The lower court interpreted this action of the Court. No inquiry can be made therein as to the merits of the original case or the justness of the
Collector of Internal Revenue as a denial of defendant's request for reinvestigation. judgment relied upon, other than by evidence of want of jurisdiction, of collusion between the
parties, or of fraud in the party offering the record with respect to the proceedings. 11 As held
by this Court in Insular Government vs. (c) Surcharge and interest in case of delinquency. - To any sum or sums due and
Nico 12 the taxpayer may raise only the questions whether or not the Collector of Internal unpaid after the dates prescribed in subsections (b), (c) and (d) for the payment of the
Revenue had jurisdiction to do the particular act, and whether any fraud was committed in the same, there shall be added the sum of five per centum on the amount of tax unpaid
doing of the act. In that case, Doroteo Nico was fined by the Collector of Internal Revenue for and interest at the rate of one per centum a month upon said tax from the time the
violation of subparagraphs (d), (e) and (g) of Section 28 as well as Sections 36, 101 and 107 of same became due . . . . (Emphasis supplied)
Act 1189. Under Section 54 of the same Act the taxpayer was given the right to appeal from the
decision of the Collector of Internal Revenue to the Court of First Instance within a period of ten As may be gleaned from the above-quoted provision, the 5% surcharge is mandatory and
days from notice of imposition of the fine. Nico did not appeal, neither did he pay the fine. automatically due, once the tax is not paid on time. "Shall" is the word that law uses a word
Pursuant to Section 33 of the Act, the Collector of Internal Revenue filed an action in the Court normally imperative and a "language of demand". 13 Applicable herein is what has been said of a
of First Instance to enforce his decision and collect the fine. The decision of the Collector of similar provision — the present Section 183 of the Tax Code — stating that:
Internal Revenue having become final, this Court, on appeal, allowed no further inquiry into the
merits of the same.
If the percentage tax on any business is not paid within the time prescribed above the
amount of the tax shall be increased by twenty-five per centum, the increment to be
For the satisfaction of defendant, however, it may be worth stating that on its merits, the part of the tax. (Emphasis supplied)
assessment in question is correct. It is not controverted that, as appearing from its 1952 income
tax return Lim Tian Teng Sons & Co., Inc. employs the "accrual" method of accounting.
Following such accounting method the copra outturn in the amount of P95,500.00 outstanding Said this Court in Lim Co Chui vs. Posadas 14:
as of December 31, 1951, should have been treated as accrued income for 1951, instead of as
stock on hand on January 1, 1952. This provision is mandatory. It provides a plan which works out automatically. It
confers no discretion on the Collector of Internal Revenue. That, official may not
Defendant took up the copra outturn in question as copra on hand in the beginning inventory disregard the law and substitute therefor his own personal judgment.
for 1952. Said beginning inventory, together with expenses, copra purchased during the year
and copra on hand as of December 31, 1952 were deducted as "cost of goods sold" from the Finally, the Government questions the computation of the delinquency interest, due on the
total gross sales for the purpose of determining the net sales. Since the P95,500.00 copra deficiency tax, from October 8, 1957. It insists that payment of such interest should commence
outturn formed part of the "cost of goods sold", it diminished the net sales by P95,500.00, from February 15, 1957. Such contention is well-founded. Pursuant to Section 51(d), "the
thereby also decreasing defendant's net taxable income by the same amount. This procedure of assessment made by the Collector of Internal Revenue shall be paid ... immediately upon
treating the copra outturn in question is inconsistent with defendants accounting method. notification of the amount of such assessment." Now, the income tax assessment notice gave
defendant up to February 15, 1957 to pay the deficiency tax in question. No payment was made.
From the record, then, there is every indication that taxpayer's 1952 income tax return is Hence, pursuant to Section 51 (e), quoted earlier, interest on the unpaid tax fell due starting
fraudulent, as alleged in paragraph (7) of the complaint in this case. Firstly, taxpayer's February 16, 1957 and continues to accrue until full payment of the tax.
beginning inventory for 1952 did not state the truth in considering the copra outturn as copra
on hand, for on December 31, 1951 such copra was not any more in taxpayer's bodega. It was in Wherefore, the decision appealed from is modified. Lim Tian Teng Sons & Co., Inc. is hereby
transit to a foreign port. And the taxpayer no longer owned the copra. As a matter of fact, it ordered to pay the sum of P10,074.00 as deficiency income tax for 1952 plus 50% and 5%
already received payment for the same. Secondly, by observing regularly its own system of surcharges thereon for fraud and late payment, respectively, and 1% monthly interest upon
accounting, taxpayer had no choice but to account the copra outturn as accrued income. This it said tax of P10,074.00, computed from February 16, 1957 until the tax is fully paid. With costs
did not do. For such deviation, we see no other purpose than to lessen, if not obliterate as in fact against defendant-appellant. So ordered.
it did, its income tax liability per its return. The lower court therefore did not err in imposing
the 50% surcharge.

We now come to the appeal of the Government. It maintains that the lower court erred in not
imposing on defendant's tax liability a surcharge of 5% for late payment. Subsection (c), Section
51 of the Tax Code states:

SEC. 51. Assessment and payment of income tax. —

xxx xxx xxx


G.R. No. L-25289 June 28, 1974 Commissioner, however, in a letter dated June 28, 1963 (received by the petitioner on July 16,
1963), denied the request for recomputation.
SURIGAO ELECTRIC CO., INC., petitioner,
vs. On August 1, 1963 the petitioner appealed to the Court of Tax Appeals. The tax court dismissed
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL the appeal on October 1, 1965 on the ground that the appeal was filed beyond the thirty-day
REVENUE, respondents. period of appeal provided by section 11 of Republic Act 1125.

David G. Nitafan for petitioner. Hence, the present recourse.

Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete The case at bar raises only one issue: whether or not the petitioner's appeal to the Court of Tax
and Special Attorney Franciso J. Malate, Jr. for respondents. Appeals was time-barred. The parties disagree on which letter of the Commissioner embodies
the decision or ruling appealable to the tax court.

A close reading of the numerous letters exchanged between the petitioner and the
CASTRO, J.:p Commissioner clearly discloses that the letter of demand issued by the Commissioner on April
29, 1963 and received by the petitioner on May 8, 1963 constitutes the definite determination
of the petitioner's deficiency franchise tax liability or the decision on the disputed assessment
The Court denies the present petition for review of the decision of the Court of Appeals dated and, therefore, the decision appealable to the tax court. This letter of April 29, 1963 was in
October 1, 1965 in its CTA Case No. 1438, which dismissed the appeal filed by the petitioner response to the communications of the petitioner, particularly the letter of August 2, 1962
Surigao Electric Company, Inc. with the tax court on August 1, 1963 on the ground that it was wherein it assailed the 4th Indorsement's data and findings on its deficiency, franchise tax
time-barred. liability computed at 5% (on the ground that its franchise precludes the imposition of a rate
higher than the 2% fixed in its legislative franchise), and the letter of April 24, 1963 wherein it
In November 1961 the petitioner Surigao Electric Co., Inc., grantee of a legislative electric again questioned the assessment and requested for a recomputation (on the ground that the
franchise, received a warrant of distraint and levy to enforce the collection from "Mainit Government could make an assessment only for the period from May 29, 1956 to June 30,
Electric" of a deficiency franchise tax plus surcharge in the total amount of P718.59. In a letter 1959). Thus, as early as August 2, 1962, the petitioner already disputed the assessment made
to the Commissioner of Internal Revenue, the petitioner contested this warrant, stating that it by the Commissioner.
did not have a franchise in Mainit, Surigao.
Moreover, the letter of demand dated April 29, 1963 unquestionably constitutes the final
Thereafter the Commissioner, by letter dated April 2, 1961, advised the petitioner to take up action taken by the Commissioner on the petitioner's several requests for reconsideration and
the matter with the General Auditing Office, enclosing a copy of the 4th Indorsement of the recomputation. In this letter, the Commissioner not only in effect demanded that the petitioner
Auditor General dated November 23, 1960. This indorsement indicated that the petitioner's pay the amount of P11,533.53 but also gave warning that in the event it failed to pay, the said
liability for deficiency franchise tax for the period from September 1947 to June 1959 was Commissioner would be constrained to enforce the collection thereof by means of the remedies
P21,156.06, excluding surcharge. Subsequently, in a letter to the Auditor General dated August provided by law. The tenor of the letter, specifically, the statement regarding the resort to legal
2, 1962, the petitioner asked for reconsideration of the assessment, admitting liability only for remedies, unmistakably indicates the final nature of the determination made by the
the 2% franchise tax in accordance with its legislative franchise and not at the higher rate of 5% Commissioner of the petitioner's deficiency franchise tax liability.
imposed by section 259 of the National Internal Revenue Code, as amended, which latter rate
the Auditor General used as basis in computing the petitioner's deficiency franchise tax. The foregoing-view accords with settled jurisprudence — and this despite the fact that nothing
in Republic Act 1125,1 as amended, even remotely suggests the element truly determinative of
An exchange of correspondence between the petitioner, on the one hand, and the the appealability to the Court of Appeals of a ruling of the Commissioner of Internal Revenue.
Commissioner and the Auditor General, on the other, ensued, all on the matter of the Thus, this Court has considered the following communications sent by the Commissioner to
petitioner's liability for deficiency franchise tax. taxpayers as embodying rulings appealable to the tax court: (a) a letter which stated the result
of the investigation requested by the taxpayer and the consequent modification of the
The controversy culminated in a revised assessment dated April 29, 1963 (received by the assessment;2 (b) letter which denied the request of the taxpayer for the reconsideration
petitioner on May 8, 1963) in the amount of P11,533.53, representing the petitioner's cancellation, or withdrawal of the original assessment;3 (c) a letter which contained a demand
deficiency franchise-tax and surcharges thereon for the period from April 1, 1956 to June 30, on the taxpayer for the payment of the revised or reduced assessment; 4 and (d) a letter which
1959. The petitioner then requested a recomputation of the revised assessment in a letter to notified the taxpayer of a revision of previous assessments.5
the Commissioner dated June 6, 1963 (sent by registered mail on June 7, 1963). The
To sustain the petitioner's contention that the Commissioner's letter of June 28, 1963 denying ACCORDINGLY, the decision of the Court of Tax Appeals dated October 1, 1965 is affirmed, at
its request for further amendment of the revised assessment constitutes the ruling appealable petitioner's cost.
to the tax court and that the thirty-day period should, therefore, be counted from July 16, 1963,
the day it received the June 28, 1963 letter, would, in effect, leave solely to the petitioner's will Makalintal, C.J, Makasiar, Esguerra and Muñoz Palma, JJ., concur.
the determination of the commencement of the statutory thirty-day period, and place the
petitioner — and for that matter, any taxpayer — in a position, to delay at will and on
convenience the finality of a tax assessment. This absurd interpretation espoused by the
petitioner would result in grave detriment to the interests of the Government, considering that
taxes constitute its life-blood and their prompt and certain availability is an imperative need.6 Separate Opinions

The revised assessment embodied in the Commissioner's letter dated April 29, 1963 being, in
legal contemplation, the final ruling reviewable by the tax court, the thirty-day appeal period
should be counted from May 8, 1963 (the day the petitioner received a copy of the said letter). TEEHANKEE, J., concurring:
From May 8, 1963 to June 7, 1963 (the day the petitioner, by registered mail, sent to the
Commissioner its letter of June 6, 1963 requesting for further recomputation of the amount
demanded from it) saw the lapse of thirty days. The June 6, 1963 request for further I concur in the disposition of the case affirming the tax court's dismissal of the appeal on the
recomputation, partaking of a motion for reconsideration, tolled the running of the thirty-day ground of its having been filed beyond the statutory thirty-day period1 and in the main
period from June 7, 1963 (the day the petitioner sent its letter by registered mail) to July 16, opinion's admonition that the internal revenue commissioner (and other officials concerned 2)
1963 (the day the petitioner received the letter of the Commissioner dated June 28, 1963 should clearly and unequivocably state in their letter-decision — or ruling that the same
turning down its request). The prescriptive period commenced to run again on July 16, 1963. constitutes his final determination on the disputed assessment and that the tax-payer's next
The petitioner filed its petition for review with the tax court on August 1, 1963 — after the recourse (if he wishes to avail thereof) is to file an appeal with the tax court "within thirty days
lapse of an additional sixteen days. The petition for review having been filed beyond the thirty- after the receipt of such decision or ruling"3 ) as provided by law.
day period, we rule that the Court of Tax Appeals correctly dismissed the same.
Ordinarily, since petitioner's representation prior to the revised assessment dated April 29,
The thirty-day period prescribed by section 11 of Republic Act 1125, as amended, within which 1963 had resulted in the revision and reduction of the original assessment from P21,156.06 to
a taxpayer adversely affected by a decision of the Commissioner of Internal Revenue should file P11,533.53, petitioner would have been entitled to further request a reconsideration or
his appeal with the tax court, is a jurisdictional requirement,7 and the failure of a taxpayer to revision of such revised assessment based on new facts or arguments arising therefrom or
lodge his appeal within the prescribed period bars his appeal and renders the questioned calling attention to such facts or arguments, which although not new, might have been wrongly
decision final and executory.8 appreciated or disregarded in the revised assessment and the thirty-day period for appeal
would be counted only from the receipt of the commissioner's denial dated June 28, 1963 (and
received on July 16, 1963).
Prescinding from all the foregoing, we deem it appropriate to state that the Commissioner of
Internal Revenue should always indicate to the taxpayer in clear and unequivocal language
whenever his action on an assessment questioned by a taxpayer constitutes his final But since it appears that petitioner's request for recomputation dated June 6, 1963 of the
determination on the disputed assessment, as contemplated by sections 7 and 11 of Republic revised assessment was but a pro forma request of the revised assessment of April 9, 1963, I
Act 1125, as amended. On the basis of this indicium indubitably showing that the concur with the main opinion's affirmance of the dismissal of the appeal on the strength
Commissioner's communicated action is his final decision on the contested assessment, the of Filipinas Investment and Finance Corp. vs. Commissioner of Internal Revenue4 wherein the
aggrieved taxpayer would then be able to take recourse to the tax court at the opportune time. Court likewise upheld a similar dismissal by the tax court on the ground that the request for
Without needless difficulty, the taxpayer would be able to determine when his right to appeal reconsideration of the disputed revised assessment was "a mere pro-forma request for
to the tax court accrues. This rule of conduct would also obviate all desire and opportunity on reconsideration .... and did not adduce new facts or arguments" and that "a taxpayer may not
the part of the taxpayer to continually delay the finality of the assessment — and, consequently, delay indefinitely a tax assessment by reiterating his original defenses over and over again,
the collection of the amount demanded as taxes — by repeated requests for recomputation and without substantial variation."
reconsideration. On the part of the Commissioner, this would encourage his office to conduct a
careful and thorough study of every questioned assessment and render a correct and definite
decision thereon in the first instance. This would also deter the Commissioner from unfairly
making the taxpayer grope in the dark and speculate as to which action constitutes the decision
appealable to the tax court. Of greater import, this rule of conduct would meet a pressing need
for fair play, regularity, and orderliness in administrative action.
Separate Opinions
TEEHANKEE, J., concurring:

I concur in the disposition of the case affirming the tax court's dismissal of the appeal on the
ground of its having been filed beyond the statutory thirty-day period1 and in the main
opinion's admonition that the internal revenue commissioner (and other officials concerned 2)
should clearly and unequivocably state in their letter-decision — or ruling that the same
constitutes his final determination on the disputed assessment and that the tax-payer's next
recourse (if he wishes to avail thereof) is to file an appeal with the tax court "within thirty days
after the receipt of such decision or ruling"3 ) as provided by law.

Ordinarily, since petitioner's representation prior to the revised assessment dated April 29,
1963 had resulted in the revision and reduction of the original assessment from P21,156.06 to
P11,533.53, petitioner would have been entitled to further request a reconsideration or
revision of such revised assessment based on new facts or arguments arising therefrom or
calling attention to such facts or arguments, which although not new, might have been wrongly
appreciated or disregarded in the revised assessment and the thirty-day period for appeal
would be counted only from the receipt of the commissioner's denial dated June 28, 1963 (and
received on July 16, 1963).

But since it appears that petitioner's request for recomputation dated June 6, 1963 of the
revised assessment was but a pro forma request of the revised assessment of April 9, 1963, I
concur with the main opinion's affirmance of the dismissal of the appeal on the strength
of Filipinas Investment and Finance Corp. vs. Commissioner of Internal Revenue4 wherein the
Court likewise upheld a similar dismissal by the tax court on the ground that the request for
reconsideration of the disputed revised assessment was "a mere pro-forma request for
reconsideration .... and did not adduce new facts or arguments" and that "a taxpayer may not
delay indefinitely a tax assessment by reiterating his original defenses over and over again,
without substantial variation."
[G.R. No. L-29485. March 31, 1976.] a denial of the reconsideration or protest of the respondent corporation on the assessment
made by the petitioner, considering that the said letter was in itself a reiteration of the demand
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. AYALA SECURITIES CORPORATION by the Bureau of Internal Revenue for the settlement of the assessment already made, and for
and THE HONORABLE COURT OF TAX APPEALS, Respondents. the immediate payment of the sum of P758,687.04 in spite of the vehement protest of the
respondent corporation on April 21, 1961. This was a clear indication of the disputed
Solicitor General Felix V . Makasiar, Assistant Solicitor General Isidro C . Borromeo, assessment, in view of the continued refusal of the respondent corporation to execute the
Solicitor Lolita O. Gal-lang and Special Attorney Salvador D. David for Petitioner. waiver of the period of limitation upon the assessment in question. This being so, the letter
amounted to a decision on a disputed or protested assessment and, therefore, the respondent
B. V . Abela, M. C . Gutierrez, J . U . Ong and F . J . Malate, Jr. for Respondents. court did not err in taking cognizance of the case.

SYNOPSIS 3. TAXATION; INCOME ASSESSMENT AND COLLECTION; SECTION 331 OF THE NATIONAL
INTERNAL REVENUE CODE APPLICABLE TO INSTANT CASE. — Under Section 46(d) of the Tax
On November 29, 1955, respondent corporation filed its income tax returns for the fiscal year Code, the respondent corporation designated September 30, 1955 as the last day of the closing
which ended September 30, 1955, attaching therewith its audited financial statements showing of its fiscal year, and under Section 46(b) the income tax returns for the said corporation shall
a surplus of P2,758,442.37. The tax due thereon was paid within the time prescribed by law. be filed on or before the fifteenth day of the fourth month following the close of its fiscal year.
Subsequently however, it was advised of an assessment of P758,687.04 on its accumulated Respondent corporation could, therefore, file its income tax returns on or before January 15,
surplus after which, in a letter dated April 19, 1961, it protested against the same and sought 1956. The assessment by the Commissioner of Internal Revenue shall be made within five years
reconsideration thereof claiming that the accumulation was for a bona fide business purpose from January 15, 1956, or not later than January 15, 1956, in accordance with Section 331 of
and not to avoid the imposition of income tax on the individual shareholders, and that the said the Tax Code. As the assessment issued on February 21, 1961 which was received by the
assessment was issued beyond the five-year prescriptive period. In a letter dated February 18, respondent corporation on May 22, 1961, was made beyond the five-year period prescribed
1963, received by respondent corporation three days later, the Chief, Manila Examiners, of the under Section 331 of said Code, the same was made after the prescriptive period had expired
Office of petitioner Commissioner of Internal Revenue called attention to its outstanding and and, therefore was no longer binding on the respondent corporation.
unpaid tax and requested payment of the amount within five days from receipt of the letter.
Believing that the same constituted a denial of its protest the respondent corporation filed with 4. ID.; ID.; ID.; NO RULING ON THE REASONABLENESS OR UNREASONABLENESS OF
the Court of Tax Appeals a petition for review of the assessment. The Court of Tax Appeals ACCUMULATED PROFITS OR SURPLUS NECESSARY WHERE RIGHT TO ASSESS SURTAX HAS
rendered a decision cancelling and declaring of no force and effect the assessment of petitioner. ALREADY PRESCRIBED. — Where the right of the Commissioner of Internal Revenue to assess
the 25% surtax has already prescribed under Section 331 of the National Internal Revenue
The Supreme Court held that the tax court did not err in taking cognizance of the case; that the Code, to delve further into the reasonableness or unreasonableness of the accumulated profits
assessment is not binding on respondent corporation as it was made after the prescriptive or surplus of the respondent corporation for the fiscal year ending September 30, 1955, will
period therefor had expired; and that consequently, a ruling on the reasonableness or only be an exercise in futility.
unreasonableness of respondent corporation’s accumulated profits or surplus was
unnecessary.
DECISION
Judgment affirmed.

ESGUERRA, J.:
SYLLABUS

Appeal from the decision of the Court of Tax Appeals dated June 20, 1968, in its CTA No. 1346,
1. COURT OF TAX APPEALS; JURISDICTION. — The Court of Tax Appeals is a court of special cancelling and declaring of no force and effect the assessment made by the petitioner,
appellate jurisdiction created under R.A. No. 1125. Under Section 7(1) thereof, it exercises Commissioner of Internal Revenue, against the accumulated surplus of the respondent, Ayala
exclusive appellate jurisdiction to review by appeal "decisions of the Collector of Internal Securities Corporation.chanroblesvirtuallawlibrary
Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or
other charges, penalties imposed in relation there to, or other matters arising under the The factual background of the case is as follows:chanrob1es virtual 1aw library
National Internal Revenue Code or other law or part of law administered by the Bureau of
Internal Revenue."cralaw virtua1aw library On November 29, 1955, respondent Ayala Securities Corporation, a domestic corporation
organized and existing under the laws of the Philippines, filed its income tax returns with the
2. ID.; ID.; REVIEW OF DECISIONS ON DISPUTED ASSESSMENTS; INSTANT CASE WITHIN office of the petitioner for its fiscal year which ended on September 30, 1955. Attached to its
JURISDICTION OF RESPONDENT COURT. — The letter of February 18, 1963 was tantamount to income tax return was the audited financial statements of the respondent corporation as of
September 30, 1955, showing a surplus of P2,758,442.37. The income tax due on the return of "WHEREFORE, the decision of the respondent Commissioner of Internal Revenue assessing
the respondent corporation was duly paid for within the time prescribed by law. petitioner the amount of P758,687.04 as 25% surtax and interest is reversed. Accordingly, said
assessment of respondent for 1955 is hereby cancelled and declared of no force and effect.
In a letter dated February 21, 1961, petitioner advised the respondent corporation of the Without pronouncement as to costs."cralaw virtua1aw library
assessment of P758,687.04 on its accumulated surplus reflected on its income tax return for the
fiscal year which ended September 30, 1955 (Exh. D). The respondent corporation, on the other From this decision, the Commissioner of Internal Revenue interposed this appeal.
hand, in a letter dated April 19, 1961, protested against the assessment on its retained and
accumulated surplus pertaining to the taxable year 1955 and sought reconsideration thereof Petitioner maintains that respondent Court of Tax Appeals erred in holding that the letter dated
for the reasons (1) that the accumulation of the surplus was for a bona fide business purpose February 18, 1963, (Exh. G) is a denial of the private respondent corporation’s protest against
and not to avoid the imposition of income tax on the individual shareholders, and (2) that the the assessment, and as such, is a decision contemplated under the provisions of Sections 7 and
said assessment was issued beyond the five-year prescriptive period (Exh. E). 11 of Republic Act No. 1125. Petitioner contends that the letter dated February 18, 1963, is
merely an ordinary office letter designed to remind delinquent taxpayers of their obligations to
On May 30, 1961, petitioner wrote respondent corporation’s auditing and accounting firm with pay their taxes to the Government and, certainly not a decision on a disputed or protested
the "advise that your request for reconsideration will be the subject matter of further assessment contemplated under Section 7(1) of RA. 1125.chanroblesvirtuallawlibrary
reinvestigation and a thorough analysis of the issues involved conditioned, however, upon the
execution of your client of the enclosed form for waiver of the defense of prescription." (Exh. F) Petitioner likewise maintains that the respondent Court of Tax Appeals erred in holding that
However, respondent corporation did not execute the requested waiver of the statute of the assessment of P758,687.04 as surtax on private respondent corporation’s unreasonably
limitations, considering its claim that the assessment in question had already prescribed. accumulated profits or surplus had already prescribed. Petitioner further contends that the
applicable provision of law to this case is Section 332(a) of the National Internal Revenue Code
On February 21, 1963, respondent corporation received a letter dated February 18, 1963, from which provides for a ten (10) year prescriptive period of assessment, and not Section 331
the Chief, Manila Examiners, of the Office of the herein petitioner, calling the attention of the thereof as held by the Tax Court which provides a period of limitation of assessment for five (5)
respondent corporation to its outstanding and unpaid tax in the amount of P758,687.04 and years only after the filing of the return. Petitioner’s theory, therefore, is to the effect that since
thereby requesting for the payment of the said amount within five (5) days from receipt of the the corporate income tax return in question was filed on November 29, 1955, and the
said letter (Exh. G). Believing the aforesaid letter to be a denial of its protest, the herein assessment thereto was issued on February 21, 1961, said assessment is not barred by
respondent corporation filed with the Court of Tax Appeals a Petition for Review of the prescription as the same was made very well within the ten (10) year period allowed by law.
assessment, docketed as CTA Case No. 1346.
Petitioner also maintains that the respondent Court of Tax Appeals erred in not deciding the
Respondent corporation in its Petition for Review alleges that the assessment made by issue as to whether or not the accumulated profits or surplus is indispensable to the business
petitioner Commissioner of Internal Revenue is illegal and invalid considering that (1) the operations of the private respondent corporation. It is the contention of the petitioner that the
assessment in question, having been issued only on February 21, 1961, and received by the accumulation of profits or surplus was resorted to by the respondent corporation in order to
respondent corporation on March 22, 1961, the same was issued beyond the five-year period avoid the payment of taxes by its stockholders or members, and was not availed of in order to
from the date of the filing of respondent corporation’s income tax return on November 29, meet the reasonable needs of its business operations.
1955, and, therefore, petitioner’s right to make the assessment has already prescribed,
pursuant to the provision of Section 331 of the National Internal Revenue Code; and (2) the The legal issues for resolution by this Court in this case are: (1) Whether or not the instant case
respondent corporation’s accumulation of surplus for the taxable year 1955 was not improper, falls within the jurisdiction of the respondent Court of Tax Appeals; (2) Whether or not the
considering that the retention of such surplus was intended for legitimate business purposes applicable provision of law to this case is Section 331 of the National Internal Revenue Code,
and was not availed of by the corporation to prevent the imposition of the income tax upon its which provides for a five-year period of prescription of assessment from the filing of the return,
shareholders. or Section 332(a) of the same Code which provides for a ten-year period of limitation for the
same purpose; and (3) Whether or not the respondent Court of Tax Appeals committed a
Petitioner in his answer alleged that the assessment made by his office on the accumulated reversible error in not making any ruling on the reasonableness or unreasonableness of the
surplus of the corporation as reflected on its income tax return for the taxable year 1955 has accumulated profits or surplus in question of the private respondent corporation.
not as yet prescribed and, further, that the respondent corporation’s accumulation of surplus
for the taxable year 1955 was improper as the retention of such surplus was availed of by the I
corporation to prevent the imposition of the income tax upon the individual shareholders or
members of the said corporation.
It is to be noted that the respondent Court of Tax Appeals is a court of special appellate
After trial the Court of Tax Appeals rendered its decision of June 20, 1968, the dispositive jurisdiction created under R.A. No. 1125. Thus under Section 7(1), R.A. 1125, the Court of Tax
portion of which is as follows:jgc:chanrobles.com.ph Appeals exercises exclusive appellate jurisdiction to review by appeal "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 designated September 30, 1955, as the last day of the closing of its fiscal year, and under
arising under the National Internal Revenue Code or other law or part of law administered by Section 46(b) the income tax returns for the said corporation shall be filed on or before the
the Bureau of Internal Revenue." fifteenth (15th) day of the fourth (4th) month following the close of its fiscal year. The Ayala
Securities Corporation could, therefore, file its income tax returns on or before January 15,
The letter of February 18, 1963 (Exh. G), in the view of the Court, is tantamount to a denial of 1956. The assessment by the Commissioner of Internal Revenue shall be made within five (5)
the reconsideration or protest of the respondent corporation on the assessment made by the years from January 15, 1956, or not later than January 15, 1961, in accordance with Section 331
petitioner, considering that the said letter is in itself a reiteration of the demand by the Bureau of the National Internal Revenue Code herein above-quoted. As the assessment issued on
of Internal Revenue for the settlement of the assessment already made, and for the immediate February 21, 1961, which was received by the Ayala Securities Corporation on March 22, 1961,
payment of the sum of P758,687.04 in spite of the vehement protest of the respondent was made beyond the five-year period prescribed under Section 331 of said Code, the same was
corporation on April 21, 1961. This certainly is a clear indication of the firm stand of petitioner made after the prescriptive period had expired and, therefore, was no longer binding on the
against the reconsideration of the disputed assessment, in view of the continued refusal of the Ayala Securities Corporation.
respondent corporation to execute the waiver of the period of limitation upon the assessment
in question. This Court is of the opinion that the respondent court committed no reversible error in not
making any ruling on the reasonableness or unreasonableness of the accumulated profits or
This being so, the said letter amounts to a decision on a disputed or protested assessment and, surplus of the respondent corporation. For this reason, We are of the view that, after reaching
therefore, the court a quo did not err in taking cognizance of this case. the conclusion that the right of the Commissioner of Internal Revenue to assess the 25% surtax
had already prescribed under Section 331 of the National Internal Revenue Code, to delve
II further into the reasonableness or unreasonableness of the accumulated profits or surplus of
the respondent corporation for the fiscal year ending September 30, 1955, will only be all
exercise in futility.chanroblesvirtualawlibrary:red
On the issue of whether Sec. 331 or Sec. 332(a) of the National Internal Revenue Code should
apply to this case, there is no iota of evidence presented by the petitioner as to any fraud or WHEREFORE, the decision appealed from is hereby affirmed in toto.
falsity on the return with intent to evade payment of tax, not even in the income tax assessment
(Exh. 5) nor in the letter-decision of February 18, 1963 (Exh. G), nor in his answer to the Without special pronouncement as to costs.
petition for review. Petitioner merely relies on the provisions of Section 25 of the National
Internal Revenue Code, violation of which, according to petitioner, presupposes the existence of SO ORDERED.
fraud. But this is begging the question and We do not subscribe to the view of the petitioner.

Fraud is a question of fact and the circumstances constituting fraud must be alleged and proved
in the court below. The finding of the trial court as to its existence and non-existence is final
and cannot be reviewed here unless clearly shown to be erroneous (Republic of the Philippines
v. Ker & Company, Ltd., L-21609, Sept. 29, 1966, 18 SCRA 207; Commissioner of Internal
Revenue v. Lilia Yusay Gonzales and the Court of Tax Appeals, L-19495, Nov. 24, 1966, 18 SCRA
757). Fraud is never lightly to be presumed because it is a serious charge (Yutivo Sons
Hardware Company v. Court of Tax Appeals and Collector of Internal Revenue, L-13203,
January 28, 1961, 1 SCRA 160).

The applicable provision of law in this case is Section 331 of the National Internal Revenue
Code, to wit:jgc:chanrobles.com.ph

"SEC. 331. Period of limitation upon assessment and collection. — Except as provided in the
succeeding section, internal revenue taxes shall be assessed within five years after the return
was filed, and no proceeding in court without assessment for the collection of such taxes shall
be begun after the expiration of such period. For the purposes of this section, a return filed
before the last day prescribed by law for the filing thereof shall be considered as filed on such
last day: Provided, That this limitation shall not apply to cases already investigated prior to the
approval of this Code." cdi

Under Section 46(d) of the National Internal Revenue Code, the Ayala Securities Corporation
Republic of the Philippines Undisputed facts of record are as follows:
SUPREME COURT
Manila (1) Doroteo Yabes of Calamaniugan Cagayan, who was for sometime an
exclusive dealer of products of the International Harvester Macleod, Inc.,
SECOND DIVISION received on or about May 1, 1962, a letter from the Commissioner of Internal
Revenue dated March 27, 1962, demanding payment of the amount of
G.R. No. L-46954 July 20, 1982 P15,976.81, as commercial broker's fixed and percentage taxes plus
surcharges and the sum of P2,530 as compromise penalty alledgely due from
Yabes for the years 1956-1960; 7
ELPIDIO YABES and SEVERINO YABES, petitioners,
vs.
THE HON. NAPOLEON FLOJO, in his capacity as Presiding Judge of Branch II, Court of First (2) On May 11, 1962, Doroteo Yabes, through his counsel, filed with the
Instance of Cagayan and THE REPUBLIC OF THE PHILIPPINES, respondents. Commissioner's Office his letter dated May 10, 1962, protesting the
assessment of commercial broker's fixed and percentage taxes plus penalties
against him on the ground that his agreements with the International
Bito, Misa & Lozada & Associates for petitioners. Harvester Macleod, Inc. were of purchase and sale, and not of agency, hence
he claimed he was not able to pay such kind of taxes; 8
Solicitor General Estelito P. Mendoza, Asst. Solicitor General Ruben E. Agpolo and Solicitor
Deusdedit B. Quinano for respondents. (3) Thereafter, there ensued an exchange of correspondence between the
lawyers of Doroteo Yabes and the Commissioner; the Commissioner in a
letter dated August 3, 1962, informed Doroteo Yabes that he acted as a
commercial broker "in accordance with the ruling of this Office in the case of
CONCEPCION JR., J.: Cirilo D. Constantino;" 9 in turn, Doroteo Yabes, in a letter dated August 22,
1962, requested for the reinvestigation, or review of the case by the
appellate division of the Bureau of Internal Revenue in accordance with
The lone issue raised in this petition for certiorari and prohibition, which seeks to annul the standing rules, regulations or practice on the matter; 10 Yabes also wrote the
Order dated June 22, 1971 issued by the Court of First Instance of Cagayan in Civil Case No. II-7, Commissioner on August 24, 1962, requesting that the appeal be held in
which denied the motion to dismiss said case dated March 25, 1971, filed by petitioner; 1 the abeyance pending final decision of the Case of Cirilo D. Constantino; 11 in
Order dated June 7, 1977 of the respondent District Judge of said Court in the same civil case reply, the Commissioner informed Doroteo Yabes in a letter dated
denying petitioners' motion for reconsideration of the said Order of denial dated June 22, September 18, 1962, that the latter's request for reinvestigation was denied
1971; 2 and the Order dated July 21, 1977, issued by the said respondent Judge of said Court in on the ground that he has "not submitted any evidence to offset the findings
the same civil case denying petitioners' motion for leave to file a second motion for of this Office as to warrant a reinvestigation thereof"; 12 but eight days later
reconsideration of the aforesaid order of denials; 3 is whether or not respondent Court of First or on September 26, 1962, the Commissioner wrote a letter advising
Instance can lawfully acquire jurisdiction over a contested assessment made by the Doroteo Yabes that "the administrative appeal ... will be held in abeyance
Commissioner of Internal Revenue against the deceased taxpayer Doroteo Yabes, which has not pending the resolution of the issues in a similar case (obviously referring to
yet become final, executory and incontestable, and which assessment is being contested by the aforesaid Constantino case)";
petitioners in the Court of Tax Appeals, Case No. 2216, and still pending consideration.
(4) To give time for the Commissioner to study the case and several other
After this Court required respondents to comment on the petition and issued a temporary cases similar thereto, the lawyers of Doroteo Yabes agreed to file, and their
restraining order in the Resolution dated September 28, 1977, 4 the Solicitor General, in his client, Doroteo Yabes did file a tax waiver on October 20, 1962, extending the
Comment dated November 21, 1977, submitted that the petition be given due course, and period of prescription to December 31, 1967; 13
thereafter judgment be rendered setting aside the questioned orders issued by the respondent
Court of First Instance of Cagayan in Civil Case No. II-7, directing said lower Court to hold in
abeyance any action or proceeding in Civil Case No. II-7, until after the Court of Tax Appeals (5) Doroteo Yabes died on March 13, 1963 and no estate proceedings were
shall have finally decided CTA Case No. 2216. 5 The Solicitor General also filed a Manifestation instituted for the settlement of his estate; his widow also died during the
dated November 22, 1977, stating that "in their Comment dated November 21, 1977, they have pendency of the case; the petitioners are the children of the deceased
limited their appearance as counsel only for the Republic of the Philippines and not for the taxpayer; 14
respondent Judge on the ground that they do not agree with the latter's orders which are being
questioned in the instant petition." 6
(6) On March 14, 1966, the Court of Tax Appeals decided the Constantino (11) On March 25, 1971, petitioners filed a formal motion to dismiss Civil
"test" case. The Court of Tax Appeals ruled that agreements entered into by Case No. II-7 with the Court of First Instance of Cagayan on the grounds that
Constantino with the International Harvester Macleod, Inc. were of purchase said Court has no jurisdiction over the case and that there is another action
and sale, and not of agency, hence no commercial broker's fixed and pending between the same parties for the same cause before a competent
percentage fees could be collected from the said taxpayer; however this court; 20
Court on February 27, 1970, in G.R. No. L-25926 reversed the Court of Tax
Appeals and ruled in favor of the Commissioner of Internal Revenue; 15 (12) On June 22, 1971, the respondent Court of First Instance of Cagayan,
through its former presiding judge issued the questioned order in Civil Case
(7) After a lapse of about five years, the heirs of the deceased Doroteo Yabes, No. II-7, which is the main subject of the instant petition, denying the
through their lawyers, received on August 4, 1967, a letter from the petitioners' motion to dismiss on the ground that the petitioners "have
Commissioner dated July 27, 1967, requesting that they "waive anew the already made a previous answer wherein they categorically admitted the
Statute of Limitations" and further confirming the previous understanding jurisdiction of the court over the subject matter and the Court believes that,
that the final resolution of the protest of the deceased Doroteo Yabes was granting for the sake of argument, there is a pending action between the
"being held in abeyance until the Supreme Court renders its decision on a same parties for the same cause yet the judgment which may be rendered in
similar case involving the same factual and legal issues brought to it on the first cited case does not necessarily bar the present action"; 21
appeal" (referring to the Constantino "test" case); 16 conformably with the
request of the Commissioner, the heirs of Doroteo Yabes filed a revised (13) On September 1, 1972, the respondent Court of First Instance of
waiver further extending the period of prescription to December 31, 1970; 17 Cagayan issued an order holding the trial of Civil Case No. I I-7, in abeyance
upon the joint motion of the parties; 22
(8) Thereafter, no word was received by the petitioners or their lawyers
during the interim of more than three (3) years, but on January 20, 1971, (14) On September 29, 1974, the Court of Tax Appeals denied the
petitioners as heirs of the deceased Doroteo Yabes received the summons Commissioner's motion to dismiss CTA Case No. 2216. 23 Accordingly, on
and a copy of the complaint filed by the Commissioner on December 4, 1970 October 30, 1975, the Commissioner filed his Answer to the petition for
with the Court of First Instance of Cagayan which seeks to collect from the review. 24
petitioners the sum of P 15,976.82, as deficiency commercial broker's fixed
and percentage taxes, including surcharges and interest thereon, due from
their predecessor-in-interest, Doroteo Yabes, by reason of the latter's (15) On December 17, 1976, however, the Court of First Instance of Cagayan,
income derived from transactions as dealer of the products of the this time presided by the respondent Judge Napoleon Flojo, upon motion of
International Harvester Macleod, Inc.; counsel for the plaintiff therein, set Civil Case No. II-7 for trial on January 27
and 28, 1977. 25
(9) Taking the complaint as the final decision of the Commissioner on the
disputed assessment against the deceased taxpayer Doroteo Yabes, (16) On February 9, 1977, the respondent Judge Flojo denied the petitioners'
petitioners filed on February 12, 1971, a petition for review of said disputed motion to suspend further proceedings and set the trial of the case for March
assessment with the Court of Tax Appeals; 18 later on the same day, February 5, 1977. 26
12, 1971, petitioners filed their answer to the complaint of the
Commissioner before the Court of First Instance of Cagayan; 19 and alleged (17) On May 3, 1977, the herein petitioners filed a motion for the
therein, by way of special defense, that the Court of Tax Appeals has reconsideration of the order issued on June 22, 1971 and for a ruling on their
exclusive jurisdiction of the action and that there is another action of the affirmative defense that the Court of First Instance of Cagayan has no
same nature between the parties relating to the same assessment pending jurisdiction over the case. 27
before the Court of Tax Appeals;
(18) On June 7, 1977, the respondent Judge denied the aforementioned
(10) On the other hand, the Commissioner filed a motion to dismiss dated motion for reconsideration for lack of merit, and set the trial of the case for
March 24, 1971, with the Court of Tax Appeals in CTA Case No. 2216, and June 23, 1977. 28
subsequently filed a memorandum in support of said motion to dismiss, on
the ground that the assessment against Doroteo Yabes had already become (19) On July 8, 1977, the petitioners filed a motion seeking leave to file a
final, executory and incontestable, and the Court of Tax Appeals had no second motion for reconsideration of the order issued on June 7,
jurisdiction over the case; 1977, 29 attaching thereto a copy of their motion for reconsideration. 30 The
motions were denied on July 21, 1977, and trial was set for August 18, and summons in Civil Case No. II-7 of the respondent Court of First Instance of Cagayan on January
19, 1977 31 which was postponed to September 23, 1977. 32 20, 1971, and petitioners filed their appeal with the Court of Tax Appeals in CTA Case No. 2216,
on February 12, 1971, well within the thirty-day prescriptive period under Section 11 of
Hence, the present recourse. As prayed for, a temporary restraining order was issued on Republic Act No. 1125. The Court of Tax Appeals has exclusive appellate jurisdiction to review
September 28, 1977. 33 on appeal any decision of the Collector of Internal Revenue in cases involving disputed
assessments and other matters arising under the National Internal Revenue Code. 37
As to the issue of whether or not the assessment made by the Commissioner of Internal
Revenue against the deceased taxpayer Doroteo Yabes, as contained in the letter dated March For want of jurisdiction over the case, the Court of First Instance of Cagayan should have
27, 1962, has become final, executory and incontestable, after Doroteo Yabes had received the dismissed the complaint filed in Civil Case No. II-7.
Commissioner's letter dated August 3, 1962, denying the latter's protest against the said
assessment on September 18, 1962 and his failure to appeal therefrom within the 30-day The recommendation of the Solicitor General that the lower court hold in abeyance any action
period contemplated under Section 11, of Republic Act 1125, We are constrained to agree with or proceeding in Civil Case No. II-7 until after the Court of Tax Appeals shall have finally
the Court of Tax Appeals, when it denied the Commissioner's motion to dismiss CTA Case No. decided CTA Case No. 2216, is untenable since the lower court has no jurisdiction over the case.
2216, that: Jurisdiction over an action includes jurisdiction over all interlocutory matters incidental to the
case and deemed necessary to preserve the subject matter of the suit or protect interests of the
the period for appeal to this Court should not be counted from September parties. Absent jurisdiction over the case, it would be improper for the Court of First Instance of
18, 1962. In a letter of July 27, 1967, respondent informed petitioners that a Cagayan to take cognizance over the case and act upon interlocutory matters of the case, as
resolution of their protest was being held in abeyance until the Supreme well.
Court renders a decision on a similar case "involving the same factual and
legal issues". As a matter of fact, in an earlier letter dated September 26, The dismissal of the complaint, however, is not sufficient. The ends of justice would best be
1962, respondent also informed petitioners' counsel that "administrative served by considering the complaint filed in Civil Case No. II-7 not only as a final notice of
appeal for and in behalf of their clients win be held in abeyance pending assessment but also as a counterclaim in CTA Case No. 2216, in order to avoid mutiplicity of
resolution of the issues on a similar case which was appealed by you to the suits, as well as to expedite the settlement of the controversy between the parties. After all, the
Court of Tax Appeals". It is thus clear in these letters that respondent two cases involve the same parties, the same subject matter, and the same issue, which is the
reconsidered the finality of his decision of August 3, 1962, liability of the heirs of the deceased Doroteo Yabes for commercial broker's fixed and
assuming arguendo that the letter had a tenor of finality. 34 percentage taxes due from the said deceased.

The Court of Tax Appeals in CTA Case No. 2216, stated further: WHEREFORE, the petition is granted and the writs prayed for are hereby issued. The
questioned orders dated June 22, 1971, June 7, 1977 and July 21, 1977 are hereby annulled and
The records show that a warrant of distraint and levy was issued on October set aside and the complaint filed in Civil Case No. II-7 of the Court of First Instance of Cagayan,
2, 1970. Had this been served on Doroteo Yabes, it would have been entitled: "Republic of the Philippines, plaintiff, versus Nicolasa Jurado Yabes, et al., defendants,"
equivalent to a final decision, ... There is, however, nothing to show that it should be, as it is hereby, dismissed, the same to be transferred to the Court of Tax Appeals to
was ever served on Yabes. Neither is there anything in the record to show be considered therein as a counterclaim in CTA Case No. 2216. The temporary restraining order
that a formal decision of denial was made after respondent's letter of July 27, heretofore issued is hereby made permanent. Without costs.
1967. 35
SO ORDERED.
There is no reason for Us to disagree from or reverse the Court of Tax Appeals' conclusion that
under the circumstances of this case, what may be considered as final decision or assessment of Barredo (Chairman), Guerrero, Abad Santos and Escolin, JJ., concur.
the Commissioner is the filing of the complaint for collection in the respondent Court of First
Instance of Cagayan, the summons of which was served on petitioners on January 20, 1971, and
that therefore the appeal with the Court of Tax Appeals in CTA Case No. 2216 was filed on
time. 36 The respondent Court of First Instance of Cagayan can only acquire jurisdiction over
this case filed against the heirs of the taxpayer if the assessment made by the Commissioner of
Internal Revenue had become final and incontestable. If the contrary is established, as this
Court holds it to be, considering the aforementioned conclusion of the Court of Tax Appeals on
the finality and incontestability of the assessment made by the Commissioner is correct, then
the Court of Tax Appeals has exclusive jurisdiction over this case. Petitioners received the
Separate Opinions That may be a novel and unprecedented solution but we have to be practical and should avoid
duplicity of suits. Since it now appears that the Government erroneously assumed in filing Civil
AQUINO, J., concurring: Case No. II-7 in the Court of First Instance that the tax assessment is uncontested when actually
it is contested, then that case should be consolidated with the case in the Tax Court which is the
proper forum for deciding contested tax assessments.
In 1970, the Government sued the heirs of Doroteo Yabes (he died in 1963), namely, his widow,
Nicolasa, and his three children named, Elpidio, Severina and Julita, for the recovery of the sum
of P15,976.82 as commercial broker's fixed and percentage taxes for the period from 1956 to DE CASTRO, J., dissenting:
1960 (Civil Case No. II-7 of the CFI of Cagayan).
I vote to dismiss the complaint filed in the CFI, as well or to set aside all the questioned orders
The suit, which was brought to stop the running of the prescriptive period, was filed on the of said Court.
theory that the tax assessment was uncontested. If contested, it should have been filed in the
Court of Tax Appeals. Separate Opinions

Ordinarily, such an action is not maintainable against the heirs because the remedy for AQUINO, J., concurring:
asserting money claims against the deceased is to file a claim in the administration proceeding
for the settlement of his estate, as indicated in Rule 86 of the Rules of Court. In 1970, the Government sued the heirs of Doroteo Yabes (he died in 1963), namely, his widow,
Nicolasa, and his three children named, Elpidio, Severina and Julita, for the recovery of the sum
However, the estate of the deceased is not under administration and his heirs had settled it of P15,976.82 as commercial broker's fixed and percentage taxes for the period from 1956 to
extrajudicially. Hence, Solicitor General Felix Q. Antonio and his assistants deemed it proper to 1960 (Civil Case No. II-7 of the CFI of Cagayan).
sue directly the decedent's heirs.
The suit, which was brought to stop the running of the prescriptive period, was filed on the
The taxes in question were assessed during the taxpayer's lifetime. The prescriptive period was theory that the tax assessment was uncontested. If contested, it should have been filed in the
extended and the enforcement of the taxes was held in abeyance by the Commissioner of Court of Tax Appeals.
Internal Revenue upon agreement with the Yabes heirs to await the outcome of a test case,
the Constantino case, regarding the same kind of tax liability which was pending in this Court. Ordinarily, such an action is not maintainable against the heirs because the remedy for
After the Constantino case was decided in the Government's favor (Commissioner of Internal asserting money claims against the deceased is to file a claim in the administration proceeding
Revenue vs. Constantino, L-25926, February 27, 1970, 31 SCRA 779), the State filed the for the settlement of his estate, as indicated in Rule 86 of the Rules of Court.
aforementioned collection case, Civil Case No. II-7.
However, the estate of the deceased is not under administration and his heirs had settled it
The Yabes heirs considered the filing of the collection suit as the Commissioner's decision extrajudicially. Hence, Solicitor General Felix Q. Antonio and his assistants deemed it proper to
which they could contest in the Tax Court (a view which was later sustained by the Tax Court). sue directly the decedent's heirs.
Hence, on February 12, 1971, the Yabes heirs filed a petition for review with the Tax Court.
They contended that Doroteo Yabes was not a commercial broker. They asked for the
cancellation of the tax assessment (CTA Case No. 2216). The taxes in question were assessed during the taxpayer's lifetime. The prescriptive period was
extended and the enforcement of the taxes was held in abeyance by the Commissioner of
Internal Revenue upon agreement with the Yabes heirs to await the outcome of a test case,
Respondent judge erred in setting Civil Case No. II-7 for trial. In my opinion, Civil Case No. II-7 the Constantino case, regarding the same kind of tax liability which was pending in this Court.
should be transferred to the Tax Court. No rule allows the transfer to the Tax Court of a tax case After the Constantino case was decided in the Government's favor (Commissioner of Internal
pending in the Court of First Instance and vice-versa. Revenue vs. Constantino, L-25926, February 27, 1970, 31 SCRA 779), the State filed the
aforementioned collection case, Civil Case No. II-7.
But under the peculiar situation in this case, the pragmatic, expedient and sensible thing to do
is to transfer Civil Case No. II-7 to the Tax Court and to consider it as a counterclaim to CTA Case The Yabes heirs considered the filing of the collection suit as the Commissioner's decision
No. 2216. The two cases involve the same parties, the same subject-matter and the same issue: which they could contest in the Tax Court (a view which was later sustained by the Tax Court).
the liability of the Yabes heirs for the commercial broker's fixed and percentage taxes allegedly Hence, on February 12, 1971, the Yabes heirs filed a petition for review with the Tax Court.
due from Doroteo Yabes. They contended that Doroteo Yabes was not a commercial broker. They asked for the
cancellation of the tax assessment (CTA Case No. 2216).
Respondent judge erred in setting Civil Case No. II-7 for trial. In my opinion, Civil Case No. II-7
should be transferred to the Tax Court. No rule allows the transfer to the Tax Court of a tax case
pending in the Court of First Instance and vice-versa.

But under the peculiar situation in this case, the pragmatic, expedient and sensible thing to do
is to transfer Civil Case No. II-7 to the Tax Court and to consider it as a counterclaim to CTA Case
No. 2216. The two cases involve the same parties, the same subject-matter and the same issue:
the liability of the Yabes heirs for the commercial broker's fixed and percentage taxes allegedly
due from Doroteo Yabes.

That may be a novel and unprecedented solution but we have to be practical and should avoid
duplicity of suits. Since it now appears that the Government erroneously assumed in filing Civil
Case No. II-7 in the Court of First Instance that the tax assessment is uncontested when actually
it is contested, then that case should be consolidated with the case in the Tax Court which is the
proper forum for deciding contested tax assessments.

DE CASTRO, J., dissenting:

I vote to dismiss the complaint filed in the CFI, as well or to set aside all the questioned orders
of said Court.
[G.R. No. 59758. December 26, 1984.] the 25% surcharge should be eliminated (C. M. Hoskins & Co., Inc. v. Commissioner of Internal
Revenue, L-28383, June 22, 1976, 71 SCRA 511.519; Imus Electric Co., Inc. v. Commissioner of
ADVERTISING ASSOCIATES, INC., Petitioner, v. COURT OF APPEALS and COMMISSIONER Internal Revenue 125 Phil. 1084).
OF INTERNAL REVENUE, Respondents.
4. ID.; COLLECTION OF TAX PRESCRIBES WITH FIVE YEARS AFTER THE ASSESSMENT; CASE
Bito, Misa & Lozada Law Office for Petitioner. AT BAR. — Section 332 of the 1939 Tax Code, now Section 319 of the 1977 Tax Code,
Presidential Decree No. 1158, effective on June 3, 1977, provides that the tax may be collected
The Solicitor General for Respondents. by distraint or levy or by a judicial proceeding begun "within five years after the assessment of
the tax." The taxpayer received on June 18, 1973 and March 5, 1974 the deficiency assessments
herein. The warrants of distraint were served upon it on April 18 and May 25, 1978 or within
SYLLABUS five years after the assessment of the tax. The warrants were issued to interrupt the five-year
prescriptive period. Its enforcement was not implemented because of the pending protests of
the taxpayer and its requests for withdrawal of the warrants which were eventually resolved in
1. TAXATION; TAX CODE; INDEPENDENT CONTRACTOR AND BUSINESS AGENT DEFINED. — Commissioner Plana’s letter of May 23, 1979.
Section 191 defines an independent contractor as including all persons whose activity consists
essentially of the sale of all kinds of services for a fee. Section 194(v) of the Tax Code defines a
business agent as including persons who conduct advertising agencies. DECISION

2. ID.; ID.; COMMISSIONER’S LETTER IS THE REVIEWABLE DECISION NOT THE WARRANTS OF
DISTRAINT; CASE AT BAR. — The reviewable decision is that contained in Commissioner AQUINO, J.:
Plana’s letter of May 23, 1979 and not the warrants of distraint which were served upon the
taxpayer on April 18 and May 25, 1978. No amount of quibbling or sophistry can blink the fact
that said letter embodies the Commissioner s final decision within the meaning of section 7 of This case is about the liability of Advertising Associates, Inc. for P382,700.16 as 3% contractor’s
Republic Act No. 1125. The Commissioner said so. He even directed the taxpayer to appeal it to percentage tax on its rental income from the lease of neon signs and billboards imposed by
the Tax Court. That was the same situation in St. Stephen’s Association and St. Stephen’s section 191 of the Tax Code (as amended by Republic Acts Nos. 1612 and 6110) on business
Chinese Girl’s School v. Collector of Internal Revenue, 104 Phil. 314, 317-318. The directive is in agents and independent contractors. Parenthetically, it may be noted that Presidential Decree
consonance with the Supreme Court’s dictum that the Commissioner should always indicate to No. 69, effective November 24, 1972, added paragraph 17 to section 191 by taxing lessors of
the taxpayer in clear and unequivocal language what constitutes his final determination of the personal property.chanrobles lawlibrary : rednad
disputed assessment. That procedure is demanded by the pressing need for fair play, regularity
and orderliness in administrative action (Surigao Electric Co., Inc. v. Court of Tax Appeals, L- Section 191 defines an independent contractor as including all persons whose activity consists
25289, June 28, 1974, 57 SCRA 523). essentially of the sale of all kinds of services for a fee. Section 194(v) of the Tax Code defines a
business agent as including persons who conduct advertising agencies.
3. ID.; ID.; DEFICIENCY ASSESSMENTS; TAXPAYER IN CASE AT BAR CONSIDERED A BUSINESS
AGENT AND AN INDEPENDENT CONTRACTOR; 25% SURCHARGE ELIMINATED DUE TO THE It should be noted that in Advertising Associates, Inc. v. Collector of Internal Revenue, 97 Phil.
CONTROVERSIAL NATURE OF THE ASSESSMENTS. — The Commissioner required Advertising 636, the taxpayer was held liable as a manufacturer for the 30% sales tax on its sales of neon-
Associates to pay P297,927.06 and P84,773.10 as contractor’s tax for 1967-1971 and 1972, tube signs under section 185(k) of the Tax Code as amended. It paid P11,986.18 as sales tax for
respectively, including 25% surcharge (the latter amount includes interest) on its income from the 4th quarter of 1948 to 1951.
billboards and neon signs. The basis of the assessment is the fact that the taxpayer’s articles of
incorporation provide that its primary purpose is to engage in general advertising business. Its This Court rejected the taxpayer’s contention that it was only a contractor of neon-tube signs
income tax returns indicate that its business was advertising. Advertising Associates contested and that it should pay only the 3% contractor’s tax under section 191 of the Tax Code.
that assessments since it considers itself a media company, like a newspaper or a radio
broadcasting company. but not an advertising agency in spite of the purpose stated in its In the instant case, Advertising Associates alleged that it sold in 1949 its advertising agency
articles of incorporation. It argues that its act of leasing its neon signs and billboards does not business to Philippine Advertising Counsellors, that its business is limited to the making,
make it a business agent or an independent contractor. It stresses that it is a mere lessor of construction and installation of billboards and electric signs and making and printing of
neon signs and billboards and does not perform advertising services. But the undeniable fact is posters, signs, handbills, etc. (101) tsn). It contends that it is a media company, not an
that neon signs and billboards are primarily designed for advertising. The petitioner is a advertising company.
business agent and an independent contractor as contemplated in Sections 191 and 194(v).
However, in view of the prior rulings that the taxpayer is not a business agent nor an It paid sales taxes for selling billboards, electric signs, calendars, posters, etc., realty dealer’s tax
independent contractor and in view of the controversial nature of the deficiency assessments, for leasing billboards and electric signs and 3% contractor’s tax for repairing electric
signs.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph otherwise, the Bureau would enforce the warrants of distraint. He closed his demand letter
with this paragraph:jgc:chanrobles.com.ph
The billboards and electric signs manufactured by it are either sold or leased. As already stated,
the Commissioner of Internal Revenue subjected to 3% contractor’s tax its rental income from "This constitutes our final decision on the matter. If you are not agreeable, you may appeal to
billboards and electric signs (p. 10, Appellant’s brief). the Court of Tax Appeals within 30 days from receipt of this letter."cralaw virtua1aw library

The Commissioner required Advertising Associates to pay P297,927.06 and P84,773.10 as Advertising Associates received that letter on June 18, 1979. Nineteen days later or on July 7, it
contractor’s tax for 1967-1971 and 1972, respectively, including 25% surcharge (the latter filed its petition for review. In its resolution of August 28, 1979, the Tax Court enjoined the
amount includes interest) on its income from billboards and neon signs. enforcement of the warrants of distraint.

The basis of the assessment is the fact that the taxpayer’s articles of incorporation provide that The Tax Court did not resolve the case on the merits. It ruled that the warrants of distraint were
its primary purpose is to engage in general advertising business. Its income tax returns indicate the Commissioner’s appealable decisions. Since Advertising Associates appealed from the
that its business was advertising (Exh. 14 and 15, etc.). decision of May 23, 1979, the petition for review was filed out of time. It was dismissed. The
taxpayer appealed to this Court.
It is supposed "to conduct a general advertising business, both as principal and agent, including
the preparation and arrangements of advertising devices and novelties; to erect, construct, We hold that the petition for review was filed on time. The reviewable decision is that
purchase, lease or otherwise acquire fences, billboards, signboards, buildings and other contained in Commissioner Plana’s letter of May 23, 1979 and not the warrants of distraint.
structures suitable for advertising purposes; to carry on the business of printers, publishers,
binders, and decorators in connection with advertising business and to make and carry out No amount of quibbling or sophistry can blink the fact that said letter, as its tenor shows,
contracts of every kind and character that may be necessary or conducive to the embodies the Commissioner’s final decision within the meaning of section 7 of Republic Act No.
accomplishment of any of the purposes of the company; to engage in and carry on a general 1125. The Commissioner said so. He even directed the taxpayer to appeal it to the Tax Court.
advertising business by the circulation and distribution and the display of cards, signs, posters, That was the same situation in St. Stephen’s Association and St. Stephen’s Chinese Girl’s School
dodgers, handbills, programs, banners and flags to be placed in and on railroad cars, street cars, v. Collector of Internal Revenue, 104 Phil. 314, 317-318.
steam boats, cabs, hacks, omnibuses, stages and any and all kinds of conveyances used for
passengers or for any other purposes; to display moveable or changeable signs, cards, pictures, The directive is in consonance with this Court’s dictum that the Commissioner should always
designs, mottoes, etc., operated by clockwork, electricity or any other power; to use, place and indicate to the taxpayer in clear and unequivocal language what constitutes his final
display the same in depots, hotels, halls, and other public places, to advertise in the air by determination of the disputed assessment. That procedure is demanded by the pressing need
airplanes, steamers, skywriting and other similar or dissimilar operation." (Exh. 14-A, pp. 48- for fair play, regularity and orderliness in administrative action (Surigao Electric Co., Inc. v.
49, BIR Records, Vol. I). Court of Tax Appeals, L-25289, June 28, 1974, 57 SCRA 523).

Advertising Associates contested the assessments in its letters of June 25, 1973 (for the 1967- On the merits of the case, the petitioner relies on the Collector’s rulings dated September 12,
71 deficiency taxes) and March 7, 1974 (for the 1972 deficiency). The Commissioner reiterated 1960 and June 20, 1967 that it is neither an independent contractor nor a business agent (Exh.
the assessments in his letters of July 12 and September 16, 1974 (p. 3, Rollo). G and H).

The taxpayer requested the cancellation of the assessments in its letters of September 13 and As already stated, it considers itself a media company, like a newspaper or a radio broadcasting
November 21, 1974 (p. 3, Rollo). Inexplicably, for about four years there was no movement in company, but not an advertising agency in spite of the purpose stated in its articles of
the case. Then, on March 31, 1978, the Commissioner resorted to the summary remedy of incorporation. It argues that its act of leasing its neon signs and billboards does not make it a
issuing two warrants of distraint, directing the collection enforcement division to levy on the business agent or an independent contractor. It stresses that it is a mere lessor of neon signs
taxpayer’s personal properties as would be sufficient to satisfy the deficiency taxes (pp. 4, 29 and billboards and does not perform advertising services.
and 30, Rollo). The warrants were served upon the taxpayer on April 18 and May 25, 1978.
But the undeniable fact is that neon signs and billboards are primarily designed for advertising.
More than a year later, Acting Commissioner Efren I. Plana wrote a letter dated May 23, 1979 in We hold that the petitioner is a business agent and an independent contractor as contemplated
answer to the requests of the taxpayer for the cancellation of the assessments and the in sections 191 and 194(v).
withdrawal of the warrants of distraint (Annex C of Petition, pp. 31-32, Rollo).chanrobles law
library : red However, in view of the prior rulings that the taxpayer is not a business agent nor an
independent contractor and in view of the controversial nature of the deficiency assessments,
He justified the assessments by stating that the rental income of Advertising Associates from the 25% surcharge should be eliminated (C. M. Hoskins & Co., Inc. v. Commissioner of Internal
billboards and neon signs constituted fees or compensation for its advertising services. He Revenue, L-28383, June 22, 1976, 71 SCRA 511, 519; Imus Electric Co., Inc. v. Commissioner of
requested the taxpayer to pay the deficiency taxes within ten days from receipt of the demand; Internal Revenue, 125 Phil. 1084).cralawnad
Petitioner’s last contention is that the collection of the tax had already prescribed. Section 332
of the 1939 Tax Code, now section 319 of the 1977 Tax Code, Presidential Decree No. 1158,
effective on June 3, 1977, provides that the tax may be collected by distraint or levy or by a
judicial proceeding begun "within five years after the assessment of the tax."

The taxpayer received on June 18, 1973 and March 5, 1974 the deficiency assessments herein.
The warrants of distraint were served upon it on April 18 and May 25, 1978 or within five years
after the assessment of the tax. Obviously, the warrants were issued to interrupt the five-year
prescriptive period. Its enforcement was not implemented because of the pending protests of
the taxpayer and its requests for withdrawal of the warrants which were eventually resolved in
Commissioner Plana’s letter of May 23, 1979.

It should be noted that the Commissioner did not institute any judicial proceeding to collect the
tax. He relied on the warrants of distraint to interrupt the running of the statute of limitations.
He gave the taxpayer ample opportunity to contest the assessments but at the same time
safeguarded the Government’s interest by means of the warrants of distraint.

WHEREFORE, the judgment of the Tax Court is reversed and set aside. The Commissioner’s
deficiency assessments are modified by requiring the petitioner to pay the tax proper and
eliminating the 25% surcharge, interest and penalty. In case of nonpayment, the warrants of
distrant should be implemented. The preliminary injunction issued by the Tax Court on August
28, 1979 restraining the enforcement of said warrants is lifted. No costs.

SO ORDERED.
G.R. No. L-28896 February 17, 1988 warrant of distraint and levy was issued; indeed, such protest could not be located in the office
of the petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was, if
COMMISSIONER OF INTERNAL REVENUE, petitioner, at all, considered by the tax authorities. During the intervening period, the warrant was
vs. premature and could therefore not be served.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was
CRUZ, J.: not pro forma and was based on strong legal considerations. It thus had the effect of suspending
on January 18, 1965, when it was filed, the reglementary period which started on the date the
assessment was received, viz., January 14, 1965. The period started running again only on April
Taxes are the lifeblood of the government and so should be collected without unnecessary 7, 1965, when the private respondent was definitely informed of the implied rejection of the
hindrance On the other hand, such collection should be made in accordance with law as any said protest and the warrant was finally served on it. Hence, when the appeal was filed on April
arbitrariness will negate the very reason for government itself. It is therefore necessary to 23, 1965, only 20 days of the reglementary period had been consumed.
reconcile the apparently conflicting interests of the authorities and the taxpayers so that the
real purpose of taxation, which is the promotion of the common good, may be achieved.
Now for the substantive question.
The main issue in this case is whether or not the Collector of Internal Revenue correctly
disallowed the P75,000.00 deduction claimed by private respondent Algue as legitimate The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed
business expenses in its income tax returns. The corollary issue is whether or not the appeal of because it was not an ordinary reasonable or necessary business expense. The Court of Tax
the private respondent from the decision of the Collector of Internal Revenue was made on time Appeals had seen it differently. Agreeing with Algue, it held that the said amount had been
and in accordance with law. legitimately paid by the private respondent for actual services rendered. The payment was in
the form of promotional fees. These were collected by the Payees for their work in the creation
of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of
We deal first with the procedural question. the properties of the Philippine Sugar Estate Development Company.

The record shows that on January 14, 1965, the private respondent, a domestic corporation Parenthetically, it may be observed that the petitioner had Originally claimed these
engaged in engineering, construction and other allied activities, received a letter from the promotional fees to be personal holding company income 12 but later conformed to the decision
petitioner assessing it in the total amount of P83,183.85 as delinquency income taxes for the of the respondent court rejecting this assertion.13 In fact, as the said court found, the amount
years 1958 and 1959.1 On January 18, 1965, Algue flied a letter of protest or request for was earned through the joint efforts of the persons among whom it was distributed It has been
reconsideration, which letter was stamp received on the same day in the office of the established that the Philippine Sugar Estate Development Company had earlier appointed
petitioner. 2 On March 12, 1965, a warrant of distraint and levy was presented to the private Algue as its agent, authorizing it to sell its land, factories and oil manufacturing process.
respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith,
ground of the pending protest. 3 A search of the protest in the dockets of the case proved O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil Investment
fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon Reyes, Corporation, inducing other persons to invest in it.14 Ultimately, after its incorporation largely
who deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that through the promotion of the said persons, this new corporation purchased the PSEDC
the BIR was not taking any action on the protest and it was only then that he accepted the properties.15 For this sale, Algue received as agent a commission of P126,000.00, and it was
warrant of distraint and levy earlier sought to be served.5 Sixteen days later, on April 23, 1965, from this commission that the P75,000.00 promotional fees were paid to the aforenamed
Algue filed a petition for review of the decision of the Commissioner of Internal Revenue with individuals.16
the Court of Tax Appeals.6
There is no dispute that the payees duly reported their respective shares of the fees in their
The above chronology shows that the petition was filed seasonably. According to Rep. Act No. income tax returns and paid the corresponding taxes thereon.17 The Court of Tax Appeals also
1125, the appeal may be made within thirty days after receipt of the decision or ruling found, after examining the evidence, that no distribution of dividends was involved.18
challenged.7 It is true that as a rule the warrant of distraint and levy is "proof of the finality of
the assessment" 8 and renders hopeless a request for reconsideration," 9 being "tantamount to
an outright denial thereof and makes the said request deemed rejected." 10 But there is a special The petitioner claims that these payments are fictitious because most of the payees are
circumstance in the case at bar that prevents application of this accepted doctrine. members of the same family in control of Algue. It is argued that no indication was made as to
how such payments were made, whether by check or in cash, and there is not enough
substantiation of such payments. In short, the petitioner suggests a tax dodge, an attempt to
The proven fact is that four days after the private respondent received the petitioner's notice of evade a legitimate assessment by involving an imaginary deduction.
assessment, it filed its letter of protest. This was apparently not taken into account before the
We find that these suspicions were adequately met by the private respondent when its or bear a close relationship to the stockholdings of the officers of employees,
President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments it would seem likely that the salaries are not paid wholly for services
were not made in one lump sum but periodically and in different amounts as each payee's need rendered, but the excessive payments are a distribution of earnings upon the
arose. 19 It should be remembered that this was a family corporation where strict business stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)
procedures were not applied and immediate issuance of receipts was not required. Even so, at
the end of the year, when the books were to be closed, each payee made an accounting of all of It is worth noting at this point that most of the payees were not in the regular employ of Algue
the fees received by him or her, to make up the total of P75,000.00. 20 Admittedly, everything nor were they its controlling stockholders. 23
seemed to be informal. This arrangement was understandable, however, in view of the close
relationship among the persons in the family corporation.
The Solicitor General is correct when he says that the burden is on the taxpayer to prove the
validity of the claimed deduction. In the present case, however, we find that the onus has been
We agree with the respondent court that the amount of the promotional fees was not excessive. discharged satisfactorily. The private respondent has proved that the payment of the fees was
The total commission paid by the Philippine Sugar Estate Development Co. to the private necessary and reasonable in the light of the efforts exerted by the payees in inducing investors
respondent was P125,000.00. 21After deducting the said fees, Algue still had a balance of and prominent businessmen to venture in an experimental enterprise and involve themselves
P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the total in a new business requiring millions of pesos. This was no mean feat and should be, as it was,
commission. This was a reasonable proportion, considering that it was the payees who did sufficiently recompensed.
practically everything, from the formation of the Vegetable Oil Investment Corporation to the
actual purchase by it of the Sugar Estate properties. This finding of the respondent court is in
accord with the following provision of the Tax Code: It is said that taxes are what we pay for civilization society. Without taxes, the government
would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the
natural reluctance to surrender part of one's hard earned income to the taxing authorities,
SEC. 30. Deductions from gross income.--In computing net income there shall every person who is able to must contribute his share in the running of the government. The
be allowed as deductions — government for its part, is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and material values. This
(a) Expenses: symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it
is an arbitrary method of exaction by those in the seat of power.
(1) In general.--All the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business, including a But even as we concede the inevitability and indispensability of taxation, it is a requirement in
reasonable allowance for salaries or other compensation for personal all democratic regimes that it be exercised reasonably and in accordance with the prescribed
services actually rendered; ... 22 procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to
his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks
and Revenue Regulations No. 2, Section 70 (1), reading as follows: if the taxpayer can demonstrate, as it has here, that the law has not been observed.

SEC. 70. Compensation for personal services.--Among the ordinary and We hold that the appeal of the private respondent from the decision of the petitioner was filed
necessary expenses paid or incurred in carrying on any trade or business on time with the respondent court in accordance with Rep. Act No. 1125. And we also find that
may be included a reasonable allowance for salaries or other compensation the claimed deduction by the private respondent was permitted under the Internal Revenue
for personal services actually rendered. The test of deductibility in the case Code and should therefore not have been disallowed by the petitioner.
of compensation payments is whether they are reasonable and are, in fact,
payments purely for service. This test and deductibility in the case of ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without
compensation payments is whether they are reasonable and are, in fact, costs.
payments purely for service. This test and its practical application may be
further stated and illustrated as follows: SO ORDERED.

Any amount paid in the form of compensation, but not in fact as the purchase
price of services, is not deductible. (a) An ostensible salary paid by a
corporation may be a distribution of a dividend on stock. This is likely to
occur in the case of a corporation having few stockholders, Practically all of
whom draw salaries. If in such a case the salaries are in excess of those
ordinarily paid for similar services, and the excessive payment correspond
G.R. No. L-66160 May 21, 1990 WHEREFORE, the decision of the Commissioner of Internal Revenue
appealed from, assessing against and demanding from petitioner the
COMMISSIONER OF INTERNAL REVENUE, petitioner, payment of deficiency income tax, inclusive of 50% surcharge, interest and
vs. compromise penalties, in the amounts of P73,958.76 and P583,155.22 for
UNION SHIPPING CORPORATION and THE COURT OF TAX APPEALS, respondents. the years 1971 and 1972, respectively, is reversed.

Artemio M. Lobrin for private respondent. Hence, the instant petition.

The Second Division of this Court, after the filing of the required pleadings, in a resolution dated
January 28, 1985, resolved to give due course to the petition, and directed petitioner therein, to
file his brief (Rollo, p. 145). In compliance, petitioner filed his brief on May 10, 1985 (Rollo, p.
PARAS, J.: 151). Respondents, on the other hand, filed their brief on June 6, 1985 (Rollo, p. 156).

This is a petition for review on certiorari of the December 9, 1983 decision * of the Court of Tax The main issues in this case are: (a) on the procedural aspect, whether or not the Court of Tax
Appeals in CTA Case No. 2989 reversing the Commissioner of Internal Revenue. Appeals has jurisdiction over this case and (b) on the merits, whether or not Union Shipping
Corporation acting as a mere "husbanding agent" of Yee Fong Hong Ltd. is liable for payment of
In a letter dated December 27, 1974 (Exhibit "A") herein petitioner Commissioner of Internal taxes on the gross receipts or earnings of the latter.
Revenue assessed against Yee Fong Hong, Ltd. and/or herein private respondent Union
Shipping Corporation, the total sum of P583,155.22 as deficiency income taxes due for the The main thrust of this petition is that the issuance of a warrant of distraint and levy is proof of
years 1971 and 1972. Said letter was received on January 4, 1975, and in a letter dated January the finality of an assessment because it is the most drastic action of all media of enforcing the
10, 1975 (Exhibit "B"), received by petitioner on January 13, 1975, private respondent collection of tax, and is tantamount to an outright denial of a motion for reconsideration of an
protested the assessment. assessment. Among others, petitioner contends that the warrant of distraint and levy was
issued after respondent corporation filed a request for reconsideration of subject assessment,
Petitioner, without ruling on the protest, issued a Warrant of Distraint and Levy (Exhibit "C"), thus constituting petitioner's final decision in the disputed assessments (Brief for petitioner,
which was served on private respondent's counsel, Clemente Celso, on November 25, 1976. pp. 9 and 12).

In a letter dated November 27, 1976 (Exhibit "D"), received by petitioner on November 29, Petitioner argues therefore that the period to appeal to the Court of Tax Appeals commenced to
1976 (Exhibit "D-1") private respondent reiterated its request for reinvestigation of the run from receipt of said warrant on November 25, 1976, so that on January 10, 1979 when
assessment and for the reconsideration of the summary collection thru the Warrant of Distraint respondent corporation sought redress from the Tax Court, petitioner's decision has long
and Levy. become final and executory.

Petitioner, again, without acting on the request for reinvestigation and reconsideration of the On this issue, this Court had already laid down the dictum that the Commissioner should always
Warrant of Distraint and Levy, filed a collection suit before Branch XXI of the then Court of First indicate to the taxpayer in clear and unequivocal language what constitutes his final
Instance of Manila and docketed as Civil Case No. 120459 against private respondent. Summons determination of the disputed assessment.
(Exhibit "E") in the said collection case was issued to private respondent on December 28,
1978. Specifically, this Court ruled:

On January 10, 1979, private respondent filed with respondent court its Petition for Review of . . . we deem it appropriate to state that the Commissioner of Internal
the petitioner's assessment of its deficiency income taxes in a letter dated December 27, 1974, Revenue should always indicate to the taxpayer in clear and unequivocal
docketed therein as CTA Case No. 2989 (Rollo, pp. 44-49), wherein it prays that after hearing, language whenever his action on an assessment questioned by a taxpayer
judgment be rendered holding that it is not liable for the payment of the income tax herein constitutes his final determination on the disputed assessment, as
involved, or which may be due from foreign shipowner Yee Fong Hong, Ltd.; to which petitioner contemplated by sections 7 and 11 of Republic Act 1125, as amended. On the
filed his answer on March 29, 1979 (Rollo, pp. 50-53). basis of this statement indubitably showing that the Commissioner's
communicated action is his final decision on the contested assessment, the
Respondent Tax Court, in a decision dated December 9, 1983, ruled in favor of private aggrieved taxpayer would then be able to take recourse to the tax court at
respondent — the opportune time. Without needless difficulty, the taxpayer would be able
to determine when his right to appeal to the tax court accrues. This rule of Accountant, and Rodolfo C. Cabalquinto, President and General Manager, of
conduct would also obviate all desire and opportunity on the part of the petitioner that it is actually and legally the husbanding agent of the vessel of
taxpayer to continually delay the finality of the assessment — and, Yee Fong Hong, Ltd. as (1) it neither performed nor transacted any shipping
consequently, the collection of the amount demanded as taxes — by business, for and in representation, of Yee Fong Hong, Ltd. or its vessels or
repeated requests for recomputation and reconsideration. On the part of the otherwise negotiated or procured cargo to be loaded in the vessels of Yee
Commissioner, this would encourage his office to conduct a careful and Fong Hong, Ltd. (p. 21, t.s.n., July 16, 1980); (2) it never solicited or procured
thorough study of every questioned assessment and render a correct and cargo or freight in the Philippines or elsewhere for loading in said vessels of
definite decision thereon in the first instance. This would also deter the Yee Fong Hong, Ltd. (pp. 21 & 38, ibid.); (3) it had not collected any freight
Commissioner from unfairly making the taxpayer grope in the dark and income or receipts for the said Yee Fong Hong, Ltd. (pp. 22 & 38, ibid; pp. 46
speculate as to which action constitutes the decision appealable to the tax & 48, t.s.n., Nov. 14, 1980.); (4) it never had possession or control, actual or
court. Of greater import, this rule of conduct would meet a pressing need for constructive, over the funds representing payment by Philippine shippers
fair play, regularity, and orderliness in administrative action. (Surigao for cargo loaded on said vessels (pp. 21 & 38, ibid; p. 48, ibid); petitioner
Electric Co., Inc. v. C.T.A., 57 SCRA 523, 528, [1974]). never remitted to Yee Fong Hong, Ltd. any sum of money representing
freight incomes of Yee Fong Hong, Ltd. (p. 21, ibid.; p. 48, ibid); and (5) that
There appears to be no dispute that petitioner did not rule on private respondent's motion for the freight payments made for cargo loaded in the Philippines for foreign
reconsideration but contrary to the above ruling of this Court, left private respondent in the destination were actually paid directly by the shippers to the said Yee Fong
dark as to which action of the Commissioner is the decision appealable to the Court of Tax Hong, Ltd. upon arrival of the goods in the foreign ports. (Rollo, pp. 58-59).
Appeals. Had he categorically stated that he denies private respondent's motion for
reconsideration and that his action constitutes his final determination on the disputed On the same issue, the Commissioner of Internal Revenue Misael P. Vera, on query of
assessment, private respondent without needless difficulty would have been able to determine respondent's counsel, opined that respondent corporation being merely a husbanding agent is
when his right to appeal accrues and the resulting confusion would have been avoided. not liable for the payment of the income taxes due from the foreign ship owners loading
cargoes in the Philippines (Rollo, p. 63; Exhibit "I", Rollo, pp. 64-66).
Much later, this Court reiterated the above-mentioned dictum in a ruling applicable on all fours
to the issue in the case at bar, that the reviewable decision of the Bureau of Internal Revenue is Neither can private respondent be liable for withholding tax under Section 53 of the Internal
that contained in the letter of its Commissioner, that such constitutes the final decision on the Revenue Code since it is not in possession, custody or control of the funds received by and
matter which may be appealed to the Court of Tax Appeals and not the warrants of remitted to Yee Fong Hong, Ltd., a non-resident taxpayer. As correctly ruled by the Court of Tax
distraint (Advertising Associates, Inc. v. Court of Appeals, 133 SCRA 769 [1984] emphasis Appeals, "if an individual or corporation like the petitioner in this case, is not in the actual
supplied). It was likewise stressed that the procedure enunciated is demanded by the pressing possession, custody, or control of the funds, it can neither be physically nor legally liable or
need for fair play, regularity and orderliness in administrative action. obligated to pay the so-called withholding tax on income claimed by Yee Fong Hong, Ltd."
(Rollo, p. 67).
Under the circumstances, the Commissioner of Internal Revenue, not having clearly signified
his final action on the disputed assessment, legally the period to appeal has not commenced to Finally, it must be stated that factual findings of the Court of Tax Appeals are binding on this
run. Thus, it was only when private respondent received the summons on the civil suit for Court (Industrial Textiles Manufacturing Company of the Phil., Inc. (ITEMCOP) v. Commissioner
collection of deficiency income on December 28, 1978 that the period to appeal commenced to of Internal Revenue, et al. (136 SCRA 549 [1985]). It is well-settled that in passing upon
run. petitions for review of the decisions of the Court of Tax Appeals, this Court is generally confined
to questions of law. The findings of fact of said Court are not to be disturbed unless clearly
The request for reinvestigation and reconsideration was in effect considered denied by shown to be unsupported by substantial evidence (Commissioner of Internal Revenue v. Manila
petitioner when the latter filed a civil suit for collection of deficiency income. So. that on Machinery & Supply Company, 135 SCRA 8 [1985]).
January 10, 1979 when private respondent filed the appeal with the Court of Tax Appeals, it
consumed a total of only thirteen (13) days well within the thirty day period to appeal pursuant A careful scrutiny of the records reveals no cogent reason to disturb the findings of the Court of
to Section 11 of R.A. 1125. Tax Appeals.

On the merits, it was found fully substantiated by the Court of Tax Appeals that, respondent PREMISES CONSIDERED, the instant petition is hereby DISMISSED and the assailed decision of
corporation is the husbanding agent of the vessel Yee Fong Hong, Ltd. as follows: the Court of Tax Appeals is hereby AFFIRMED.

Coming to the second issue, petitioner contended and was substantiated by SO ORDERED.
satisfactory uncontradicted testimonies of Clemente Celso, Certified Public
G.R. No. 172231 February 12, 2007 On March 23, 1990, ICC sought a reconsideration of the subject assessments. On February 9,
1995, however, it received a final notice before seizure demanding payment of the amounts
COMMISSIONER OF INTERNAL REVENUE, Petitioner, stated in the said notices. Hence, it brought the case to the CTA which held that the petition is
vs. premature because the final notice of assessment cannot be considered as a final decision
ISABELA CULTURAL CORPORATION, Respondent. appealable to the tax court. This was reversed by the Court of Appeals holding that a demand
letter of the BIR reiterating the payment of deficiency tax, amounts to a final decision on the
protested assessment and may therefore be questioned before the CTA. This conclusion was
DECISION sustained by this Court on July 1, 2001, in G.R. No. 135210.8 The case was thus remanded to the
CTA for further proceedings.
YNARES-SANTIAGO, J.:
On February 26, 2003, the CTA rendered a decision canceling and setting aside the assessment
Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005 Decision 1 of notices issued against ICC. It held that the claimed deductions for professional and security
the Court of Appeals in CA-G.R. SP No. 78426 affirming the February 26, 2003 Decision2 of the services were properly claimed by ICC in 1986 because it was only in the said year when the
Court of Tax Appeals (CTA) in CTA Case No. 5211, which cancelled and set aside the bills demanding payment were sent to ICC. Hence, even if some of these professional services
Assessment Notices for deficiency income tax and expanded withholding tax issued by the were rendered to ICC in 1984 or 1985, it could not declare the same as deduction for the said
Bureau of Internal Revenue (BIR) against respondent Isabela Cultural Corporation (ICC). years as the amount thereof could not be determined at that time.

The facts show that on February 23, 1990, ICC, a domestic corporation, received from the BIR The CTA also held that ICC did not understate its interest income on the subject promissory
Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the amount of notes. It found that it was the BIR which made an overstatement of said income when it
P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded compounded the interest income receivable by ICC from the promissory notes of Realty
withholding tax in the amount of P4,897.79, inclusive of surcharges and interest, both for the Investment, Inc., despite the absence of a stipulation in the contract providing for a
taxable year 1986. compounded interest; nor of a circumstance, like delay in payment or breach of contract, that
would justify the application of compounded interest.
The deficiency income tax of P333,196.86, arose from:
Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its claimed
(1) The BIR’s disallowance of ICC’s claimed expense deductions for professional and deduction for security services as shown by the various payment orders and confirmation
security services billed to and paid by ICC in 1986, to wit: receipts it presented as evidence. The dispositive portion of the CTA’s Decision, reads:

(a) Expenses for the auditing services of SGV & Co.,3 for the year ending WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-000680 for
December 31, 1985;4 deficiency income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-
000681 for deficiency expanded withholding tax in the amount of P4,897.79, inclusive of
surcharges and interest, both for the taxable year 1986, are hereby CANCELLED and SET ASIDE.
(b) Expenses for the legal services [inclusive of retainer fees] of the law firm
Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson for the years
1984 and 1985.5 SO ORDERED.9

(c) Expense for security services of El Tigre Security & Investigation Agency Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA
for the months of April and May 1986.6 decision,10 holding that although the professional services (legal and auditing services) were
rendered to ICC in 1984 and 1985, the cost of the services was not yet determinable at that
time, hence, it could be considered as deductible expenses only in 1986 when ICC received the
(2) The alleged understatement of ICC’s interest income on the three promissory billing statements for said services. It further ruled that ICC did not understate its interest
notes due from Realty Investment, Inc. income from the promissory notes of Realty Investment, Inc., and that ICC properly withheld
and remitted taxes on the payments for security services for the taxable year 1986.
The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge)
was allegedly due to the failure of ICC to withhold 1% expanded withholding tax on its claimed Hence, petitioner, through the Office of the Solicitor General, filed the instant petition
P244,890.00 deduction for security services.7 contending that since ICC is using the accrual method of accounting, the expenses for the
professional services that accrued in 1984 and 1985, should have been declared as deductions
from income during the said years and the failure of ICC to do so bars it from claiming said
expenses as deduction for the taxable year 1986. As to the alleged deficiency interest income demand that the amount of income or liability be known absolutely, only that a taxpayer has at
and failure to withhold expanded withholding tax assessment, petitioner invoked the his disposal the information necessary to compute the amount with reasonable accuracy. The
presumption that the assessment notices issued by the BIR are valid. all-events test is satisfied where computation remains uncertain, if its basis is unchangeable;
the test is satisfied where a computation may be unknown, but is not as much as unknowable,
The issue for resolution is whether the Court of Appeals correctly: (1) sustained the deduction within the taxable year. The amount of liability does not have to be determined exactly; it
of the expenses for professional and security services from ICC’s gross income; and (2) held must be determined with "reasonable accuracy." Accordingly, the term "reasonable
that ICC did not understate its interest income from the promissory notes of Realty Investment, accuracy" implies something less than an exact or completely accurate amount.[15]
Inc; and that ICC withheld the required 1% withholding tax from the deductions for security
services. The propriety of an accrual must be judged by the facts that a taxpayer knew, or could
reasonably be expected to have known, at the closing of its books for the taxable
The requisites for the deductibility of ordinary and necessary trade, business, or professional year.[16] Accrual method of accounting presents largely a question of fact; such that the
expenses, like expenses paid for legal and auditing services, are: (a) the expense must be taxpayer bears the burden of proof of establishing the accrual of an item of income or
ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it deduction.17
must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it
must be supported by receipts, records or other pertinent papers.11 Corollarily, it is a governing principle in taxation that tax exemptions must be construed
in strictissimi juris against the taxpayer and liberally in favor of the taxing authority; and one
The requisite that it must have been paid or incurred during the taxable year is further who claims an exemption must be able to justify the same by the clearest grant of organic or
qualified by Section 45 of the National Internal Revenue Code (NIRC) which states that: "[t]he statute law. An exemption from the common burden cannot be permitted to exist upon vague
deduction provided for in this Title shall be taken for the taxable year in which ‘paid or accrued’ implications. And since a deduction for income tax purposes partakes of the nature of a tax
or ‘paid or incurred’, dependent upon the method of accounting upon the basis of which the net exemption, then it must also be strictly construed.18
income is computed x x x".
In the instant case, the expenses for professional fees consist of expenses for legal and auditing
Accounting methods for tax purposes comprise a set of rules for determining when and how to services. The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of
report income and deductions.12 In the instant case, the accounting method used by ICC is the the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for
accrual method. reimbursement of the expenses of said firm in connection with ICC’s tax problems for the year
1984. As testified by the Treasurer of ICC, the firm has been its counsel since the 1960’s.19 From
the nature of the claimed deductions and the span of time during which the firm was retained,
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of ICC can be expected to have reasonably known the retainer fees charged by the firm as well as
accounting, expenses not being claimed as deductions by a taxpayer in the current year when the compensation for its legal services. The failure to determine the exact amount of the
they are incurred cannot be claimed as deduction from income for the succeeding year. Thus, a expense during the taxable year when they could have been claimed as deductions cannot thus
taxpayer who is authorized to deduct certain expenses and other allowable deductions for the be attributed solely to the delayed billing of these liabilities by the firm. For one, ICC, in the
current year but failed to do so cannot deduct the same for the next year.13 exercise of due diligence could have inquired into the amount of their obligation to the firm,
especially so that it is using the accrual method of accounting. For another, it could have
The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay reasonably determined the amount of legal and retainer fees owing to its familiarity with the
them, in opposition to actual receipt or payment, which characterizes the cash method of rates charged by their long time legal consultant.
accounting. Amounts of income accrue where the right to receive them become fixed, where
there is created an enforceable liability. Similarly, liabilities are accrued when fixed and As previously stated, the accrual method presents largely a question of fact and that the
determinable in amount, without regard to indeterminacy merely of time of payment. 14 taxpayer bears the burden of establishing the accrual of an expense or income. However, ICC
failed to discharge this burden. As to when the firm’s performance of its services in connection
For a taxpayer using the accrual method, the determinative question is, when do the facts with the 1984 tax problems were completed, or whether ICC exercised reasonable diligence to
present themselves in such a manner that the taxpayer must recognize income or expense? The inquire about the amount of its liability, or whether it does or does not possess the information
accrual of income and expense is permitted when the all-events test has been met. This test necessary to compute the amount of said liability with reasonable accuracy, are questions of
requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the fact which ICC never established. It simply relied on the defense of delayed billing by the firm
reasonable accurate determination of such income or liability. and the company, which under the circumstances, is not sufficient to exempt it from being
charged with knowledge of the reasonable amount of the expenses for legal and auditing
The all-events test requires the right to income or liability be fixed, and the amount of such services.
income or liability be determined with reasonable accuracy. However, the test does not
In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICC
for the year 1985 cannot be validly claimed as expense deductions in 1986. This is so because
ICC failed to present evidence showing that even with only "reasonable accuracy," as the
standard to ascertain its liability to SGV & Co. in the year 1985, it cannot determine the
professional fees which said company would charge for its services.

ICC thus failed to discharge the burden of proving that the claimed expense deductions for the
professional services were allowable deductions for the taxable year 1986. Hence, per Revenue
Audit Memorandum Order No. 1-2000, they cannot be validly deducted from its gross income
for the said year and were therefore properly disallowed by the BIR.

As to the expenses for security services, the records show that these expenses were incurred by
ICC in 198620 and could therefore be properly claimed as deductions for the said year.

Anent the purported understatement of interest income from the promissory notes of Realty
Investment, Inc., we sustain the findings of the CTA and the Court of Appeals that no such
understatement exists and that only simple interest computation and not a compounded one
should have been applied by the BIR. There is indeed no stipulation between the latter and ICC
on the application of compounded interest.21 Under Article 1959 of the Civil Code, unless there
is a stipulation to the contrary, interest due should not further earn interest.

Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the required
withholding tax from its claimed deductions for security services and remitted the same to the
BIR is supported by payment order and confirmation receipts.22 Hence, the Assessment Notice
for deficiency expanded withholding tax was properly cancelled and set aside.

In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 for


deficiency income tax should be cancelled and set aside but only insofar as the claimed
deductions of ICC for security services. Said Assessment is valid as to the BIR’s disallowance of
ICC’s expenses for professional services. The Court of Appeal’s cancellation of Assessment
Notice No. FAS-1-86-90-000681 in the amount of P4,897.79 for deficiency expanded
withholding tax, is sustained.

WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005 Decision of the
Court of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the MODIFICATION that
Assessment Notice No. FAS-1-86-90-000680, which disallowed the expense deduction of
Isabela Cultural Corporation for professional and security services, is declared valid only
insofar as the expenses for the professional fees of SGV & Co. and of the law firm, Bengzon
Zarraga Narciso Cudala Pecson Azcuna & Bengson, are concerned. The decision is affirmed in all
other respects.

The case is remanded to the BIR for the computation of Isabela Cultural Corporation’s liability
under Assessment Notice No. FAS-1-86-90-000680.

SO ORDERED.
FIRST DIVISION
On March 17, 1988, petitioner received from the Bureau of Internal Revenue (BIR) deficiency

OCEANIC WIRELESS NETWORK, G.R. No. 148380 tax assessments for the taxable year 1984 in the total amount of P8,644,998.71, broken down
INC., Petitioner, Present:
as follows:
DAVIDE, JR., C.J. (Chairman),
QUISUMBING, Kind of Tax Assessment No. Amount
YNARES-SANTIAGO,
- versus - CARPIO, and Deficiency Income Tax FAR-4-1984-88-001130 P8,381,354.00
AZCUNA, JJ. Penalties for late payment FAR-4-1984-88-001131 3,000.00
of income and failure to
file quarterly returns
COMMISSIONER OF INTERNAL Promulgated: Deficiency Contractors FAR-4-1984-88-001132 29,849.06
REVENUE, THE COURT OF Tax
TAX APPEALS, and THE COURT December 9, 2005 Deficiency Fixed Tax FAR-4--88-001133 12,083.65
OF APPEALS, Deficiency Franchise Tax FAR-484-88-001134 ___227,712.00
Respondents. T o t a l -------- P8,644,998.71
x-----------------------------------------------------------------------------------------x

DECISION Petitioner filed its protest against the tax assessments and requested a reconsideration or

cancellation of the same in a letter to the BIR Commissioner dated April 12, 1988.
AZCUNA, J.:

Acting in behalf of the BIR Commissioner, then Chief of the BIR Accounts Receivable and Billing
This is a Petition for Review on Certiorari seeking to reverse and set aside the Decision of the Division, Mr. Severino B. Buot, reiterated the tax assessments while denying petitioners request
Court of Appeals dated October 31, 2000, and its Resolution dated May 3, 2001, in Oceanic for reinvestigation in a letter [1]dated January 24, 1991, thus:
Wireless Network, Inc. v. Commissioner of Internal Revenue docketed as CA-G.R. SP No. 35581,

upholding the Decision of the Court of Tax Appeals dismissing the Petition for Review in CTA Note: Your request for re-investigation has been denied for failure to submit
the necessary supporting papers as per endorsement letter from the office of
Case No. 4668 for lack of jurisdiction. the Special Operation Service dated 12-12-90.

Petitioner Oceanic Wireless Network, Inc. challenges the authority of the Chief of the Accounts

Receivable and Billing Division of the Bureau of Internal Revenue (BIR) National Office to Said letter likewise requested petitioner to pay the total amount of P8,644,998.71 within ten
decide and/or act with finality on behalf of the Commissioner of Internal Revenue (CIR) on
(10) days from receipt thereof, otherwise the case shall be referred to the Collection
protests against disputed tax deficiency assessments.
Enforcement Division of the BIR National Office for the issuance of a warrant of distraint and

The facts of the case are as follows: levy without further notice.
Upon petitioners failure to pay the subject tax assessments within the prescribed period, the suspended the running of the prescription period as expressly provided under the then Section
Assistant Commissioner for Collection, acting for the Commissioner of Internal Revenue, issued
224 of the Tax Code:
the corresponding warrants of distraint and/or levy and garnishment. These were served on

petitioner on October 10, 1991 and October 17, 1991, respectively.[2] SEC. 224. Suspension of Running of the Statute of
Limitations. The running of the Statute of Limitations provided in Section
203 and 223 on the making of assessment and the beginning of distraint or
levy or a proceeding in court for collection, in respect of any deficiency, shall
On November 8, 1991, petitioner filed a Petition for Review with the Court of Tax Appeals
be suspended for the period during which the Commissioner is prohibited
from making the assessment or beginning distraint or levy or a proceeding
(CTA) to contest the issuance of the warrants to enforce the collection of the tax assessments.
in court and for sixty (60) days thereafter; when the taxpayer requests for a
reinvestigation which is granted by the Commissioner; when the taxpayer
This was docketed as CTA Case No. 4668.
cannot be located in the address given by him in the return files upon which
a tax is being assessed or collected: Provided, That if the taxpayer inform the
The CTA dismissed the petition for lack of jurisdiction in a decision dated September 16, 1994,
Commissioner of any change of address, the running of the statute of
limitations will not be suspended; when the warrant of distraint and levy is
declaring that said petition was filed beyond the thirty (30)-day period reckoned from the time
duly served upon the taxpayer, his authorized representative, or a member
of his household with sufficient discretion, and no property could located;
when the demand letter of January 24, 1991 by the Chief of the BIR Accounts Receivable and
and when the taxpayer is out of the Philippines. [6] (Underscoring supplied.)
Billing Division was presumably received by petitioner, i.e., within a reasonable time from said

date in the regular course of mail pursuant to Section 2(v) of Rule 131 of the Rules of Court. [3]

Petitioner filed a Motion for Reconsideration arguing that the demand letter of January 24,
The decision cited Surigao Electric Co., Inc. v. Court of Tax Appeals[4] wherein this Court
1991 cannot be considered as the final decision of the Commissioner of Internal Revenue on its
considered a mere demand letter sent to the taxpayer after his protest of the assessment notice
protest because the same was signed by a mere subordinate and not by the Commissioner
as the final decision of the Commissioner of Internal Revenue on the protest. Hence, the filing of
himself.[7]
the petition on November 8, 1991 was held clearly beyond the reglementary period.[5]

With the denial of its motion for reconsideration, petitioner consequently filed a Petition for
The court a quo likewise stated that the finality of the denial of the protest by
Review with the Court of Appeals contending that there was no final decision to speak of
petitioner against the tax deficiency assessments was bolstered by the subsequent issuance of
because the Commissioner had yet to make a personal determination as regards the merits of
the warrants of distraint and/or levy and garnishment to enforce the collection of the
petitioners case.[8]
deficiency taxes. The issuance was not barred by prescription because the mere filing of the

letter of protest by petitioner which was given due course by the Bureau of Internal Revenue
The Court of Appeals denied the petition in a decision dated October 31, 2000, the

dispositive portion of which reads:


A demand letter for payment of delinquent taxes may be considered a decision on a disputed or

protested assessment. The determination on whether or not a demand letter is final is


WHEREFORE, the petition is DISMISSED for lack of merit.
conditioned upon the language used or the tenor of the letter being sent to the taxpayer.
SO ORDERED.

We laid down the rule that the Commissioner of Internal Revenue should always

Petitioners Motion for Reconsideration was likewise denied in a resolution dated May 3, 2001. indicate to the taxpayer in clear and unequivocal language what constitutes his final

determination of the disputed assessment, thus:

Hence, this petition with the following assignment of errors:[9]


. . . we deem it appropriate to state that the Commissioner of
Internal Revenue should always indicate to the taxpayer in clear and
I unequivocal language whenever his action on an assessment questioned by a
THE HONORABLE RESPONDENT CA ERRED IN FINDING THAT THE taxpayer constitutes his final determination on the disputed assessment, as
DEMAND LETTER ISSUED BY THE (THEN) ACCOUNTS contemplated by Sections 7 and 11 of Republic Act No. 1125, as amended. On
RECEIVABLE/BILLING DIVISION OF THE BIR NATIONAL OFFICE WAS THE the basis of his statement indubitably showing that the Commissioners
FINAL DECISION OF THE RESPONDENT CIR ON THE DISPUTED communicated action is his final decision on the contested assessment, the
ASSESSMENTS, AND HENCE CONSTITUTED THE DECISION APPEALABLE TO aggrieved taxpayer would then be able to take recourse to the tax court at
THE HONORABLE RESPONDENT CTA; AND, the opportune time. Without needless difficulty, the taxpayer would be able
to determine when his right to appeal to the tax court accrues.
II
THE HONORABLE RESPONDENT CA ERRED IN DECLARING THAT The rule of conduct would also obviate all desire and opportunity on the part
THE DENIAL OF THE PROTEST OF THE SUBJECT ALLEGED DEFICIENCY TAX of the taxpayer to continually delay the finality of the assessment and,
ASSESSMENTS HAD LONG BECOME FINAL AND EXECUTORY FOR FAILURE consequently, the collection of the amount demanded as taxes by repeated
OF THE PETITIONER TO INSTITUTE THE APPEAL FROM THE DEMAND requests for recomputation and reconsideration. On the part of the
LETTER OF THE CHIEF OF THE ACCOUNTS RECEIVABLE/BILLING Commissioner, this would encourage his office to conduct a careful and
DIVISION, BIR NATIONAL OFFICE, TO THE HONORABLE RESPONDENT CTA, thorough study of every questioned assessment and render a correct and
WITHIN THIRTY (30) DAYS FROM RECEIPT THEREOF. definite decision thereon in the first instance. This would also deter the
Commissioner from unfairly making the taxpayer grope in the dark and
speculate as to which action constitutes the decision appealable to the tax
court. Of greater import, this rule of conduct would meet a pressing need for
fair play, regularity, and orderliness in administrative action.[10]
Thus, the main issue is whether or not a demand letter for tax deficiency assessments issued

and signed by a subordinate officer who was acting in behalf of the Commissioner of Internal
In this case, the letter of demand dated January 24, 1991, unquestionably constitutes
Revenue, is deemed final and executory and subject to an appeal to the Court of Tax Appeals.
the final action taken by the Bureau of Internal Revenue on petitioners request for

reconsideration when it reiterated the tax deficiency assessments due from petitioner, and
We rule in the affirmative.
requested its payment. Failure to do so would result in the issuance of a warrant of distraint
and levy to enforce its collection without further notice.[11] In addition, the letter contained a in the said letter making reference to the protest filed by petitioner clearly shows the intention

notation indicating that petitioners request for reconsideration had been denied for lack of of the respondent to make it as [his] final decision.[15]

supporting documents.

This now brings us to the crux of the matter as to whether said demand letter indeed attained

The above conclusion finds support in Commissioner of Internal Revenue v. Ayala finality despite the fact that it was issued and signed by the Chief of the Accounts Receivable

Securities Corporation,[12]where we held: and Billing Division instead of the BIR Commissioner.

The letter of February 18, 1963 (Exh. G), in the view of the Court, is
tantamount to a denial of the reconsideration or respondent The general rule is that the Commissioner of Internal Revenue may delegate any
corporations protest o f the assessment made by the petitioner,
considering that the said letter was in itself a reiteration of the demand power vested upon him by law to Division Chiefs or to officials of higher rank. He cannot,
by the Bureau of Internal Revenue for the settlement of the assessment
already made, and for the immediate payment of the sum of P758,687.04 in however, delegate the four powers granted to him under the National Internal Revenue Code
spite of the vehement protest of the respondent corporation on April 21,
1961. This certainly is a clear indication of the firm stand of petitioner (NIRC) enumerated in Section 7.
against the reconsideration of the disputed assessmentThis being so, the
said letter amount ed to a decision on a disputed or protested assessment,
and, there, the court a quo did not err in taking cognizance of this case.
As amended by Republic Act No. 8424, Section 7 of the Code authorizes the BIR

Commissioner to delegate the powers vested in him under the pertinent provisions of the Code
Similarly, in Surigao Electric Co., Inc v. Court of Tax Appeals,[13] and in CIR v. Union Shipping
to any subordinate official with the rank equivalent to a division chief or higher, except the
Corporation,[14] we held:
. . . In this letter, the commissioner not only in effect demanded that following:
the petitioner pay the amount of P11,533.53 but also gave warning that in
the event it failed to pay, the said commissioner would be constrained to (a) The power to recommend the promulgation of rules and
enforce the collection thereof by means of the remedies provided by law. regulations by the Secretary of Finance;
The tenor of the letter, specifically the statement regarding the resort to
legal remedies, unmistakably indicate d the final nature of the (b) The power to issue rulings of first impression or to reverse,
determination made by the commissioner of the petitioners deficiency revoke or modify any existing ruling of the Bureau;
franchise tax liability.
(c) The power to compromise or abate under Section 204(A) and (B) of this
Code, any tax deficiency: Provided, however, that assessments
issued by the Regional Offices involving basic deficiency taxes of
five hundred thousand pesos (P500,000) or less, and minor
The demand letter received by petitioner verily signified a character of finality. Therefore, it criminal violations as may be determined by rules and regulations
to be promulgated by the Secretary of Finance, upon the
was tantamount to a rejection of the request for reconsideration. As correctly held by the Court recommendation of the Commissioner, discovered by regional and
district officials, may be compromised by a regional evaluation
of Tax Appeals, while the denial of the protest was in the form of a demand letter, the notation board which shall be composed of the Regional Director as
Chairman, the Assistant Regional Director, heads of the Legal,
Assessment and Collection Divisions and the Revenue District
Officer having jurisdiction over the taxpayer, as members; and and enforceable for failure of the taxpayer to assail the same as provided in Section 228 can no

(d) The power to assign or reassign internal revenue officers to longer be contested, thus:
establishments where articles subject to excise tax are produced or
kept.
SEC. 228. Protesting of Assessment. When the Commissioner or
his duly authorized representative finds that proper taxes should be
assessed, he shall first notify the taxpayer of his findingsSuch assessment
It is clear from the above provision that the act of issuance of the demand letter by the may be protested administratively by filing a request for reconsideration or
reinvestigation within thirty (30) days from receipt of the assessment in
Chief of the Accounts Receivable and Billing Division does not fall under any of the exceptions such form and manner as may be prescribed by implementing rules and
regulations. Within sixty (60) days from filing of the protest, all relevant
that have been mentioned as non-delegable. supporting documents shall have been submitted; otherwise, the assessment
shall become final.
Section 6 of the Code further provides:
If the protest is denied in whole or in part, or is not acted upon within one
hundred (180) days from submission of documents, the taxpayer adversely
SEC. 6. Power of the Commissioner to Make Assessments and affected by the decision or inaction may appeal to the Court of Tax Appeals
Prescribe Additional Requirements for Tax Administration and Enforcement. within thirty (30) days from receipt of the said decision, or from the lapse of
the one hundred eighty (180) - day period; otherwise, the decision shall
(A) Examination of Returns and Determination of Tax become final, executory and demandable.
Due. - After a return has been filed as required under the provisions of this
Code, the Commissioner or his duly authorized representative may
authorize the examination of any taxpayer and the assessment of the correct
amount of tax; Provided, however, That failure to file a return shall not Here, petitioner failed to avail of its right to bring the matter before the Court of Tax
prevent the Commissioner from authorizing the examination of any
taxpayer. Appeals within the reglementary period upon the receipt of the demand letter reiterating the

The tax or any deficiency tax so assessed shall be paid upon notice assessed delinquent taxes and denying its request for reconsideration which constituted the
and demand from the Commissioner or from his duly authorized
representative. . . . (Emphasis supplied) final determination by the Bureau of Internal Revenue on petitioners protest. Being a final

disposition by said agency, the same would have been a proper subject for appeal to the Court
Thus, the authority to make tax assessments may be delegated to subordinate officers. Said
of Tax Appeals.
assessment has the same force and effect as that issued by the Commissioner himself, if not

reviewed or revised by the latter such as in this case.[16]


The rule is that for the Court of Tax Appeals to acquire jurisdiction, an assessment

must first be disputed by the taxpayer and ruled upon by the Commissioner of Internal
A request for reconsideration must be made within thirty (30) days from the
Revenue to warrant a decision from which a petition for review may be taken to the Court of
taxpayers receipt of the tax deficiency assessment, otherwise, the decision becomes final,
Tax Appeals. Where an adverse ruling has been rendered by the Commissioner of Internal
unappealable and therefore, demandable. A tax assessment that has become final, executory
Revenue with reference to a disputed assessment or a claim for refund or credit, the taxpayer

may appeal the same within thirty (30) days after receipt thereof. [17]

We agree with the factual findings of the Court of Tax Appeals that the demand letter

may be presumed to have been duly directed, mailed and was received by petitioner in the

regular course of the mail in the absence of evidence to the contrary. This is in accordance with

Section 2(v), Rule 131 of the Rules of Court, and in this case, since the period to appeal has

commenced to run from the time the letter of demand was presumably received by petitioner

within a reasonable time after January 24, 1991, the period of thirty (30) days to appeal the

adverse decision on the request for reconsideration had already lapsed when the petition was

filed with the Court of Tax Appeals only on November 8, 1991. Hence, the Court of Tax Appeals

properly dismissed the petition as the tax delinquency assessment had long become final and

executory.

WHEREFORE, premises considered, the Decision of the Court of Appeals dated October 31,

2000 and its Resolution dated May 3, 2001 in CA-G.R. SP No. 35581 are hereby AFFIRMED. The

petition is accordingly DENIED for lack of merit.

SO ORDERED.
Republic of the Philippines
Supreme Court Factual Antecedents
Manila

On April 30, 2004, the Bureau of Internal Revenue (BIR) issued a Preliminary Assessment
SECOND DIVISION
Notice (PAN) to petitioner Allied Banking Corporation for deficiency Documentary Stamp Tax (DST) in the

amount of P12,050,595.60 and Gross Receipts Tax (GRT) in the amount of P38,995,296.76 on industry
ALLIED BANKING G.R. No. 175097
CORPORATION, issue for the taxable year 2001.[6] Petitioner received the PAN on May 18, 2004 and filed a protest against it
Petitioner,
Present: on May 27, 2004.[7]

CARPIO, J., Chairperson,


- versus - BRION, On July 16, 2004, the BIR wrote a Formal Letter of Demand with Assessment Notices to
DEL CASTILLO,
ABAD, and petitioner, which partly reads as follows:[8]
PEREZ, JJ.
COMMISSIONER OF It is requested that the above deficiency tax be paid immediately upon receipt hereof,
INTERNAL REVENUE, Promulgated: inclusive of penalties incident to delinquency. This is our final decision based on
Respondent. February 5, 2010 investigation. If you disagree, you may appeal the final decision within thirty (30)
x--------------------------------------------------------x days from receipt hereof, otherwise said deficiency tax assessment shall become final,
executory and demandable.

Petitioner received the Formal Letter of Demand with Assessment Notices on August 30, 2004.[9]
DECISION

DEL CASTILLO, J.: Proceedings before the CTA First Division

The key to effective communication is clarity. On September 29, 2004, petitioner filed a Petition for Review[10] with the CTA which was raffled

to its First Division and docketed as CTA Case No. 7062.[11]

The Commissioner of Internal Revenue (CIR) as well as his duly authorized representative must

indicate clearly and unequivocally to the taxpayer whether an action constitutes a final determination on a On December 7, 2004, respondent CIR filed his Answer.[12] On July 28, 2005, he filed a Motion to

disputed assessment.[1] Words must be carefully chosen in order to avoid any confusion that could Dismiss[13] on the ground that petitioner failed to file an administrative protest on the Formal Letter of

adversely affect the rights and interest of the taxpayer. Demand with Assessment Notices. Petitioner opposed the Motion to Dismiss on August 18, 2005.[14]

Assailed in this Petition for Review on Certiorari[2] under Section 12 of Republic Act (RA) No.
9282,[3] in relation to Rule 45 of the Rules of Court, are the August 23, 2006 Decision[4] of the Court of Tax On October 12, 2005, the First Division of the CTA rendered a Resolution[15] granting

Appeals (CTA) and its October 17, 2006 Resolution[5] denying petitioners Motion for Reconsideration. respondents Motion to Dismiss.It ruled:
Clearly, it is neither the assessment nor the formal demand letter itself that
is appealable to this Court. It is the decision of the Commissioner of Internal Revenue
on the disputed assessment that can be appealed to this Court (Commissioner of Hence, the present recourse, where petitioner raises the lone issue of whether the Formal Letter
Internal Revenue vs. Villa, 22 SCRA 3). As correctly pointed out by respondent, a
disputed assessment is one wherein the taxpayer or his duly authorized of Demand dated July 16, 2004 can be construed as a final decision of the CIR appealable to the CTA under
representative filed an administrative protest against the formal letter of demand and
assessment notice within thirty (30) days from date [of] receipt thereof. In this case, RA 9282.
petitioner failed to file an administrative protest on the formal letter of demand with
the corresponding assessment notices. Hence, the assessments did not become
disputed assessments as subject to the Courts review under Republic Act No. 9282. Our Ruling
(See also Republic v. Liam Tian Teng Sons & Co., Inc., 16 SCRA 584.)

WHEREFORE, the Motion to Dismiss is GRANTED. The Petition for The petition is meritorious.
Review is hereby DISMISSED for lack of jurisdiction.

SO ORDERED.[16] Section 7 of RA 9282 expressly


provides that the CTA exercises
exclusive appellate jurisdiction to
review by appeal decisions of the
Aggrieved, petitioner moved for reconsideration but the motion was denied by the First CIR in cases involving disputed
assessments
Division in its Resolution dated February 1, 2006.[17]

Proceedings before the CTA En Banc


The CTA, being a court of special jurisdiction, can take cognizance only of

On February 22, 2006, petitioner appealed the dismissal to the CTA En Banc.[18] The case was matters that are clearly within its jurisdiction.[21] Section 7 of RA 9282 provides:

docketed as CTA EB No. 167. Sec. 7. Jurisdiction. The CTA shall exercise:

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


Finding no reversible error in the Resolutions dated October 12, 2005 and February 1, 2006 of
(1) Decisions of the Commissioner of Internal
the CTA First Division, the CTA En Banc denied the Petition for Review[19]as well as petitioners Motion for Revenue in cases involving disputed
assessments, refunds of internal revenue
Reconsideration.[20] taxes, fees or other charges, penalties in
relation thereto, or other matters arising
under the National Internal Revenue Code
The CTA En Banc declared that it is absolutely necessary for the taxpayer to file an or other laws administered by the Bureau
of Internal Revenue;
administrative protest in order for the CTA to acquire jurisdiction. It emphasized that an administrative
(2) Inaction by the Commissioner of Internal Revenue
protest is an integral part of the remedies given to a taxpayer in challenging the legality or validity of an
in cases involving disputed assessments,
assessment. According to the CTA En Banc, although there are exceptions to the doctrine of exhaustion of refunds of internal revenue taxes, fees or
other charges, penalties in relation thereto,
administrative remedies, the instant case does not fall in any of the exceptions. or other matters arising under the National
Internal Revenue Code or other laws
administered by the Bureau of Internal
Issue Revenue, where the National Internal
Revenue Code provides a specific period of
action, in which case the inaction shall be If the protest is denied in whole or in part, or is not acted upon within one
deemed a denial; (Emphasis supplied) hundred eighty (180) days from submission of documents, the taxpayer adversely
affected by the decision or inaction may appeal to the Court of Tax Appeals within
xxxx thirty (30) days from receipt of the said decision, or from the lapse of the one hundred
eighty (180)-day period; otherwise, the decision shall become final, executory and
demandable.
The word decisions in the above quoted provision of RA 9282 has been interpreted to mean the

decisions of the CIR on the protest of the taxpayer against the assessments.[22] Corollary thereto, Section In the instant case, petitioner timely filed a protest after receiving the PAN. In response thereto,
228 of the National Internal Revenue Code (NIRC) provides for the procedure for protesting an the BIR issued a Formal Letter of Demand with Assessment Notices. Pursuant to Section 228 of the NIRC,
assessment. It states: the proper recourse of petitioner was to dispute the assessments by filing an administrative protest within
SECTION 228. Protesting of Assessment. When the Commissioner or his 30 days from receipt thereof. Petitioner, however, did not protest the final assessment notices. Instead, it
duly authorized representative finds that proper taxes should be assessed, he shall
first notify the taxpayer of his findings: Provided, however, That a preassessment filed a Petition for Review with the CTA. Thus, if we strictly apply the rules, the dismissal of the Petition for
notice shall not be required in the following cases:
Review by the CTA was proper.
(a) When the finding for any deficiency tax is the result of mathematical
error in the computation of the tax as appearing on the face of the return; or The case is an exception to the
rule on exhaustion of
(b) When a discrepancy has been determined between the tax withheld administrative remedies
and the amount actually remitted by the withholding agent; or

(c) When a taxpayer who opted to claim a refund or tax credit of excess
creditable withholding tax for a taxable period was determined to have carried over However, a careful reading of the Formal Letter of Demand with Assessment Notices leads us to
and automatically applied the same amount claimed against the estimated tax
liabilities for the taxable quarter or quarters of the succeeding taxable year; or agree with petitioner that the instant case is an exception to the rule on exhaustion of administrative

remedies, i.e., estoppel on the part of the administrative agency concerned.


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

(e) When an article locally purchased or imported by an exempt person,


such as, but not limited to, vehicles, capital equipment, machineries and spare parts, In the case of Vda. De Tan v. Veterans Backpay Commission,[23] the respondent contended that
has been sold, traded or transferred to non-exempt persons.
before filing a petition with the court, petitioner should have first exhausted all administrative remedies by
The taxpayers shall be informed in writing of the law and the facts on appealing to the Office of the President.However, we ruled that respondent was estopped from invoking
which the assessment is made; otherwise, the assessment shall be void.
the rule on exhaustion of administrative remedies considering that in its Resolution, it said, The opinions
Within a period to be prescribed by implementing rules and regulations,
the taxpayer shall be required to respond to said notice. If the taxpayer fails to promulgated by the Secretary of Justice are advisory in nature, which may either be accepted or ignored
respond, the Commissioner or his duly authorized representative shall issue an
by the office seeking the opinion, and any aggrieved party has the court for recourse. The statement of the
assessment based on his findings.
respondent in said case led the petitioner to conclude that only a final judicial ruling in her favor would be
Such assessment may be protested administratively by filing a request for
reconsideration or reinvestigation within thirty (30) days from receipt of the accepted by the Commission.
assessment in such form and manner as may be prescribed by implementing rules
and regulations. Within sixty (60) days from filing of the protest, all relevant
supporting documents shall have been submitted; otherwise, the assessment shall Similarly, in this case, we find the CIR estopped from claiming that the filing of the Petition for
become final.
Review was premature because petitioner failed to exhaust all administrative remedies.
Formal Letter of Demand with Assessment Notices since the language used and the tenor of the demand

The Formal Letter of Demand with Assessment Notices reads: letter indicate that it is the final decision of the respondent on the matter. We have time and again

Based on your letter-protest dated May 26, 2004, you alleged the following: reminded the CIR to indicate, in a clear and unequivocal language, whether his action on a disputed

assessment constitutes his final determination thereon in order for the taxpayer concerned to determine
1. That the said assessment has already prescribed in accordance
with the provisions of Section 203 of the Tax Code. when his or her right to appeal to the tax court accrues.[26] Viewed in the light of the foregoing, respondent

2. That since the exemption of FCDUs from all taxes found in the Old is now estopped from claiming that he did not intend the Formal Letter of Demand with Assessment
Tax Code has been deleted, the wording of Section 28(A)(7)(b)
Notices to be a final decision.
discloses that there are no other taxes imposable upon FCDUs aside
from the 10% Final Income Tax.
Contrary to your allegation, the assessments covering GRT and DST for taxable year
2001 has not prescribed for [sic] simply because no returns were filed, thus, the three Moreover, we cannot ignore the fact that in the Formal Letter of Demand with Assessment
year prescriptive period has not lapsed.
Notices, respondent used the word appeal instead of protest, reinvestigation, or reconsideration. Although
With the implementation of the CTRP, the phrase exempt from all taxes was there was no direct reference for petitioner to bring the matter directly to the CTA, it cannot be denied that
deleted. Please refer to Section 27(D)(3) and 28(A)(7) of the new Tax
Code. Accordingly, you were assessed for deficiency gross receipts tax on onshore the word appeal under prevailing tax laws refers to the filing of a Petition for Review with the CTA. As aptly
income from foreign currency transactions in accordance with the rates provided
under Section 121 of the said Tax Code. Likewise, deficiency documentary stamp pointed out by petitioner, under Section 228 of the NIRC, the terms protest, reinvestigation and
taxes was [sic] also assessed on Loan Agreements, Bills Purchased, Certificate of
reconsideration refer to the administrative remedies a taxpayer may take before the CIR, while the term
Deposits and related transactions pursuant to Sections 180 and 181 of NIRC, as
amended. appeal refers to the remedy available to the taxpayer before the CTA. Section 9 of RA 9282, amending

The 25% surcharge and 20% interest have been imposed pursuant to the provision Section 11 of RA 1125,[27] likewise uses the term appeal when referring to the action a taxpayer must take
of Section 248(A) and 249(b), respectively, of the National Internal Revenue Code, as
amended. when adversely affected by a decision, ruling, or inaction of the CIR. As we see it then, petitioner in

appealing the Formal Letter of Demand with Assessment Notices to the CTA merely took the cue from
It is requested that the above deficiency tax be paid immediately upon receipt hereof,
inclusive of penalties incident to delinquency. This is our final decision based on respondent. Besides, any doubt in the interpretation or use of the word appeal in the Formal Letter of
investigation. If you disagree, you may appeal this final decision within thirty
(30) days from receipt hereof, otherwise said deficiency tax assessment shall Demand with Assessment Notices should be resolved in favor of petitioner, and not the respondent who
become final, executory and demandable.[24] (Emphasis supplied) caused the confusion.
It appears from the foregoing demand letter that the CIR has already made a final decision on

the matter and that the remedy of petitioner is to appeal the final decision within 30 days. To be clear, we are not disregarding the rules of procedure under Section 228 of the NIRC, as

implemented by Section 3 of BIR Revenue Regulations No. 12-99.[28] It is the Formal Letter of Demand and
In Oceanic Wireless Network, Inc. v. Commissioner of Internal Revenue,[25] we considered the Assessment Notice that must be administratively protested or disputed within 30 days, and not the
language used and the tenor of the letter sent to the taxpayer as the final decision of the CIR. PAN. Neither are we deviating from our pronouncement in St. Stephens Chinese Girls School v. Collector of

Internal Revenue,[29] that the counting of the 30 days within which to institute an appeal in the CTA
In this case, records show that petitioner disputed the PAN but not the Formal Letter of Demand commences from the date of receipt of the decision of the CIR on the disputed assessment, not from the
with Assessment Notices. Nevertheless, we cannot blame petitioner for not filing a protest against the date the assessment was issued.
What we are saying in this particular case is that, the Formal Letter of Demand with Assessment

Notices which was not administratively protested by the petitioner can be considered a final decision of

the CIR appealable to the CTA because the words used, specifically the words final decision and appeal,

taken together led petitioner to believe that the Formal Letter of Demand with Assessment Notices was in

fact the final decision of the CIR on the letter-protest it filed and that the available remedy was to appeal

the same to the CTA.

We note, however, that during the pendency of the instant case, petitioner availed of the

provisions of Revenue Regulations No. 30-2002 and its implementing Revenue Memorandum Order by

submitting an offer of compromise for the settlement of the GRT, DST and VAT for the period 1998-2003,

as evidenced by a Certificate of Availment dated November 21, 2007.[30] Accordingly, there is no reason to

reinstate the Petition for Review in CTA Case No. 7062.

WHEREFORE, the petition is hereby GRANTED. The assailed August 23, 2006 Decision and the

October 17, 2006 Resolution of the Court of Tax Appeals are REVERSED and SET ASIDE. The Petition for

Review in CTA Case No. 7062 is hereby DISMISSED based solely on the Bureau of Internal Revenues

acceptance of petitioners offer of compromise for the settlement of the gross receipts tax, documentary

stamp tax and value added tax, for the years 1998-2003.

SO ORDERED.

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