(1)Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G.R. No. 129680 September 1, 1999 CARRARA MARBLE PHILIPPINES, INC., petitioner, vs. COMMISSIONER OF CUSTOMS, respondent.

DAVIDE, JR., C.J.: In this petition for review on certiorari, petitioner urges us to set aside the decision and resolution of the Court of Appeals in CA-G.R SP No. 42976 affirming the decision of the Court of Tax Appeals (CTA). The CTA upheld the legality of the forfeiture proceedings conducted by the Collector of Customs of articles illegally withdrawn from Customs custody, and ordered their delivery to the winning bidder in the auction sale. As summarized by the Court of Appeals, the antecedents of the case are as follows: On April 10, 1987, the Collector of Customs conducted a public auction sale of various articles duly declared abandoned after appropriate proceedings. Included in the sale was Lot 15 advertised as "15 tons more or less, of marble processing machine and grinding machine, rusty and in junk condition," stored at the Mina Amapola CY-CFS, Taguig, Metro Manila, since 1979. Lot 15 was awarded to Engr. Franklin G. Policarpio as the highest bidder thereof, after payment of P61, 250.00. On April 21, 1987, after Engr. Policarpio had taken delivery of said lot, he wrote the Collector of Customs informing him that the following items supposed to be part of Lot 15 were missing: a Special Circular Saw (for vertical and horizontal cutting of strips Model Block Tailor BK-1200 with switch gear and contractor control and reinforcement main motor) and a Diamond Sawing Machine (Model TBS 500D, including switch gear cabinet with contractor for all motors). The missing machineries were later found installed in the compound of petitioner Carrara Marble Philippines, Inc., Lipa City, Batangas, true to the information furnished by Engr. Policarpio himself. Consequently, for alleged violations of Section 2536 (non-payment of duties and taxes) and Section 2530[e] (illegal removal of articles from the warehouse) of the Tariff and Customs Code (TCC), the aforesaid machineries were seized (per Warrant of Seizure and Detention dated May 29, 1991) from the compound of petitioner at Banay-banay, Lipa City. During the seizure and forfeiture proceedings, Carrara Marble Philippines, Inc., failed to present evidence of payment of duties and taxes on the subject machineries. In its defense, it claimed, that the machineries were purchased locally from a certain Jaina Perez as evidenced by two notarized deeds of absolute sale dated December 20, 1985 (for the trimming machine) and October 28, 1986 (for the high speed blocksaw). Meanwhile, Engr. Policarpio intervened in said proceedings, claiming ownership over the subject machineries as the successful bidder in the public auction sale conducted by the Bureau of Customs wherein said machineries were part of Lot 15. In a letter dated November 14, 1992, petitioner offered to settle the case in accordance with Article 2307 of the TCC. However, said offer was refused by the District Collector of Customs on the ground that said articles were already auctioned off and awarded to Engr. Policarpio.1wphi1.nt Thereafter, the Collector of Customs on June 24, 1992, declared the machineries forfeited in favor of the government. Petitioner appealed from the Collector of Customs' decision to the Commissioner of Customs who, on July 2, 1993, affirmed said decision. From said Decision of the Commissioner of Customs, appeal by way of a petition for review was further taken by herein petitioner Carrara Marble Philippines, Inc., to the Court of Tax Appeals. Engr. Franklin Policarpio, as intervenor, also
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appealed the same decision of the Commissioner of Customs to the Tax Court, which was docketed its CTA Case No. 5057, and entitled "Engineer Franklin Policarpio vs. The Honorable Commissioner of Customs and Deputy Commissioner of 3 Customs Licerio Evangelista. The CTA allowed Mary Ann Luz Puno and other individuals claiming to be minority stockholders and receivers of petitioner to intervene in the proceedings. The intervenors' prayer for possession of the machineries was granted conditioned upon the posting of a cash bond. However, they submitted the case for decision on 4 March 1996 without posting the bond. On 7 May 1996, the CTA dismissed the petition for review filed by petitioner; affirmed the authority of the Customs Commissioner to seize the machineries; and ordered the Commissioner to deliver the articles to Policarpio as the highest bidder in accordance with its decision in CTA 4 Case No. 5057. The intervenors moved for the reconsideration of the CTA's decision. On 8 October 1996, the CTA denied the motion for reconsideration. On appeal, the Court of Appeals sustained the CTA and dismissed the petition for lack of merit, capitalizing on the contract of sale between the Bureau of Customs and Policarpio, which allows a refund in case of loss or short-delivery. In case a refund is made, it is as if duties, taxes and charges on the articles remained unpaid. Consequently, importation could not be considered terminated, and the Collector of Customs was still authorized to seize the articles pursuant to Section 2530(e) of the Tariff and Customs Code (TCC). The Court of Appeals noted that petitioner's argument that with the termination of importation the Bureau of Customs lost its jurisdiction over the res was premised upon Policarpio's ownership of the property. Such premise conflicted with petitioner's pretension of being a buyer in good faith and for value, and foreclosed the possibility of a compromise. The notarized deeds of sale were merely prima facie evidence of ownership which failed to prove petitioner's claim over the property. Section 2535 of the TCC laying the burden of proof on the claimant still applied. The Court of Appeals concluded that the jurisdiction of the Collector of Customs in forfeiture proceedings extends to all questions incidental thereto including the authority to determine the true ownership of forfeited property. Petitioner then filed on 6 June 1997 a motion for reconsideration of the decision of the Court of Appeals. That motion was, however, denied for failure to state the material dates showing that it was filed on time, as required by Section 1, Rule 9, of the Revised Internal Rules of the Court of Appeals. Hence this petition. Petitioner insists that the purpose of Section 1, Rule 9 of the Revised Internal Rules of the Court of Appeals requiring motions for reconsideration to state material dates is to show that they were filed on time. It had substantially complied with that requirement because its 8 Compliance dated 28 May 1997 indicated that it received the challenged decision on 23 May 1997; thus, its filing of the motion for reconsideration was well within the reglementary period prescribed by law. Petitioner likewise contends that the Bureau of Customs had no jurisdiction over the res because importation had terminated. Forfeiture as a remedy of the government is authorized under Section 2530 of the TCC only when and while the articles are in the custody or within the jurisdiction of customs authorities or in the hands or subject to the control of the importer. When the articles were awarded to Policarpio as the winning bidder in the auction sale, taxes, duties and charges due on them were considered paid; the government was compensated, and so it no longer stood to suffer damages from the importation. Furthermore, with the legal permit for withdrawal of the articles having been granted, the government lost its lien over the property. The "possibility" of a refund in case of short delivery under the warranty in Policarpio's deed of sale only extends the definition of importation. Asserting its "prior right" over the machineries, petitioner also argues that the Bureau of Customs was without authority to seize the same. There was no probable cause that would warrant seizure and forfeiture of the subject articles. Neither was there evidence that the articles were part of Lot 15. Petitioner acquired the machineries in good faith and for value, as confirmed by two notarized deeds of sale; and it was unaware that they were imported. Hence, resort should have been through judicial process under Article 433 of the Civil Code. Besides, before forfeiture proceedings can be instituted as provided for in Section 2530 of the TCC, there must be fraud upon the government. Fraud cannot be presumed; and without evidence that petitioner acquired the machineries fraudulently, it must be presumed the owner of the articles. Moreover, petitioner maintains that no justifiable reason existed for denying its offer of a compromise in accordance with Section 2307 of the TCC. There was no fraud in the importation of the property. Neither did petitioner's offer signify that it waived previous defenses and admitted liability. Finally, petitioner reiterates that the Bureau of Customs had neither authority to seize the articles to determine their true ownership nor jurisdiction to decide questions of ownership.
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Respondent sees the matter differently. It accuses petitioner of forum-shopping and of employing delaying tactics and maneuvers which hamper the ends of justice. Respondent contends that petitioner's substantial compliance with Section 1, Rule 9 of the Revised Internal Rules of the Court of Appeals notwithstanding, the law allows dismissal of the motion for reconsideration for failure to comply with the material data rule. Respondent also insists that the Bureau of Customs had jurisdiction over the machineries. As held by the CTA and the Court of Appeals, the loss of the machineries would mean their non-delivery to Policarpio, thus creating an obligation on the part of the government to refund a proportionate amount of the purchase price paid by Policarpio. Fraudulent removal of the machineries from the warehouse under Customs supervision made Section 2530 of the TCC applicable. Respondent further points out that petitioner was unable to prove that the subject items were indeed sold to it by Jaina Perez. The latter and the notaries public who notarized the alleged deeds of sale were not presented as witnesses. Besides, said items were stolen; so the alleged seller had no right to pass on to petitioner as buyer. Likewise, petitioner's failure to present receipts validating its ownership of the property was sufficient cause for instituting seizure and forfeiture proceedings. Pursuant to Section 2535 of the TCC, the burden of proof was shifted to petitioner, who, however, failed to substantiate its good faith and lack of knowledge of the importation. Finally, respondent claims that settlement of seizure cases is not allowed under Section 2307 of the TCC where the importation is absolutely prohibited or the release of the property is contrary to law, which is what obtains in this case. Petitioner's offer of compromise puts it in estoppel and negates its argument questioning the jurisdiction of the Bureau of Customs. The questions for our resolution are the following: (1) Was the dismissal of the petition by the Court of Appeals under Section 1, Rule 9 of its Revised Internal Rules of Procedure correct? (2) Was the forfeiture of articles in the possession of a third party made after the sale at public auction proper? (3) Has the importation been terminated? (4) Who has the right to retain possession over the machineries? Petitioner cannot find fault with the denial of its motion for reconsideration. It admitted non-compliance with the requisites of Section 1, Rule 9 of the Revised Internal Rules of Procedure of the Court of Appeals, for indeed nothing in the motion indicated that it was filed on time. Its Compliance anteriorly filed did not cure the defect. It must be stressed that the rule was designed to save the Court of Appeals from reviewing the record to determine whether the motion was indeed filed on time. And now on the substantive issues. The Tariff and Customs law subjects to forfeiture any article which is removed contrary to law from any public or private warehouse under 9 10 customs supervision, or released irregularly from Customs custody. Before forfeiture proceedings are instituted the law requires the 11 presence of probable cause. Once established, the burden of proof is shifted to the claimant. Under Section 2536 of the TCC, the Commissioner of Customs, Collector of Customs or any other customs officer, with prior authorization in writing by the Commissioner, may demand evidence of payment of duties and taxes on foreign articles openly offered for sale or kept in storage, and if no such evidence can be produced, such articles may be seized and subjected to forfeiture proceedings; provided, however, that during such proceedings the person or entity from whom such articles were seized shall be given an opportunity to prove or show the source of such articles and the payment of duties and taxes thereon. The findings of fact of the CTA on this matter is informative. So it remains undisputed that after the auction sale and before delivery to Mr. Policarpio, as the winning bidder, the subject articles were carted away mysteriously from customs custody and reappeared thereafter in the premises of herein petitioner. There is no question that before delivery of these items to Mr. Franklin Policarpio, these items were under the custody of the Bureau of Customs and when they were about to be handed over to Mr. Policarpio, the latter 12 discovered the said items to be missing. It is settled that the factual findings of the CTA, as affirmed by the Court of Appeals, are entitled to the highest respect and are well-nigh 14 conclusive upon this court. Based on the findings of the CTA, the subject machineries were liable to forfeiture under customs law. Upon demand for evidence of payment of duties and taxes, petitioner failed to present receipts. What it presented were two notarized deeds of sale executed in 1985 and 1986 between petitioner as buyer and Jaina Perez as seller.
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Despite ample opportunity to discharge the burden of proof, petitioner failed to prove its claim over the machineries. Jaina Perez, the supposed seller, was subpoenaed to substantiate petitioner's claim; but she never appeared. The notaries public before whom the deed of sale were notarized were not presented either. More importantly, there was no intervening transaction between Perez and the Bureau of Customs concerning the subject machineries that would have transferred their ownership to Perez and thereafter to petitioner. That the goods were allegedly sold to petitioner in 1985 and 1986 while they were still under Customs custody and prior to the auction sale is legally untenable and unacceptable. Contrary to the CTA's rationale for sanctioning the forfeiture, importation was terminated after Policarpio signed Gate Pass No. 5136 on 10 April 1987 evidencing withdrawal of Lot No. 15 from customs custody. Importation is deemed terminated upon payment of duties, taxes and other charges due or secured to be paid upon the articles at a port of entry, and upon the grant of a legal permit for withdrawal; or in case said 15 articles are free of duties, taxes and other charges, until they have legally left the jurisdiction of the customs. The forfeiture of the subject machineries however, is not dependent on whether or not the importation was terminated; rather it is premised on the illegal withdrawal of goods from Customs custody. Thus, regardless of the termination of importation, Customs authorities may validly seize goods which, for all intents and purposes, still belong to the government. This is so because forfeiture takes effect immediately upon the commission of the offense. The forfeiture of the subject machineries, therefore, retroactect to the date they were illegally withdrawn from Customs custody. The government's right to recover the machineries proceeds from its right as lawful owner and possessor thereof upon abandonment by Filipinas Marble. Such right may be asserted 16 no matter into whose hands the property may have come, and the condemnation when obtained avoids all intermediate alienations. To sanction petitioner's possession of the property would be to close our eyes to acts of defraudation practiced upon the government. Incidentally, the forfeiture of the subject machineries rests on a different statutory basis from Policarpio's right to receive the property as winning bidder in the auction sale. The forfeiture proceedings were based upon the government's right to recover property illegally withdrawn from its custody. On the other hand, Policarpio's right stems from the government's contractual obligation to deliver the machineries to Policarpio as buyer in good faith at the public auction sale. Petitioner's contention of being a buyer in good faith and for value with a prior right over the property is likewise untenable. Petitioner allegedly derived its right over the property through the deeds of sale executed by and between it, as buyer, and a certain Jaina Perez, as seller, prior to the auction sale. The following, however, is worthy to note: [T]he subject pieces of machinery were part of lot 15 which was sold in an auction sale to satisfy the unpaid taxes, duties and other charges. Such machineries were imported but later abandoned by Filipinas Marble in favor of the government. 17 The fact that this shipment formed part of lot 15 is undisputed by both parties to this case. Before such machineries were allegedly sold to petitioner they formed part of the mass of Customs property stored inside the Mina Amapola CY-CFS in Taguig. Records of the Bureau of Customs indicated no transactions concerning the subject machineries except the abandonment by Filipinas Marble and the auction sale to Policarpio. Contrary to petitioner's contention, it is the sale of the subject machineries to petitioner by Jaina Perez, not the sale to Policarpio, that is ineffective. The government never dealt with Jaina 18 Perez; hence Perez, having no right over the property, had nothing to transfer to petitioner even if petitioner's alleged acquisition of the property was in good faith and for value. Lastly, as opined by the Collector of Customs, compromise could not be allowed anymore, since the subject machineries had already been awarded to Policarpio, being the highest bidder in the public auction sale conducted by the Bureau of Customs. WHEREFORE, the instant petition is hereby DISMISSED, for lack of merit, and the challenged decision of the Court of Appeals is AFFIRMED.1wphi1.nt SO ORDERED. Puno, Kapunan, Pardo and Ynares-Santiago, JJ., concur. Footnotes 1 Rollo, 65-75. Per Alicia Austria-Martinez, J., with Buena, A., and Callejo, Sr., R., JJ., concurring. 2 Rollo, 77. 3 Rollo, 65, 67-68.

4 Rollo, 106-119. Per Associate Judge Ramon O. De Vera, with Associate Judges Ernesto D. Acosta and Manuel K. Gruba, concurring. 5 Rollo, 208-211. 6 Id., 220. 7 Id., 230-260. 8 Rollo, 228-229. 9 Sec. 2530, par. (e), Tariff and Customs Code (TCC). 10 De Joya v. Lantin, 19 SCRA 893, 897 [1967]. 11 Sec. 2535, TCC. 12 CTA Decision; Rollo, 113. 13 Nasiad v. CTA, 61 SCRA 238, 244 [1974]; Commissioner of Internal Revenue v. Cadwallader Pacific Company, 73 SCRA 59 [1976]; Raymundo v. De Joya, 101 SCRA 495, 498 [1980]. 14 Commissioner of Internal Revenue v. PJ Kiener Co. Ltd., 65 SCRA 142, 153 [1975]. 15 Sec. 1202, TCC. 16 21 AM JUR 2d, Customs Duties and Import Regulations 125 (1965). 17 CTA Decision; Rollo 112. 18 See Article, 1459, Civil Code, which provides: "The thing must be licit and the vendor must have a right to transfer the ownership thereof at the time it is delivered."

(2)July 31, 1963 G.R. No. L-17715 JOSE AVELINO, petitioner, vs. THE COLLECTOR OF INTERNAL REVENUE, respondent. Artemio M. Lobrin and Juanito S. Mayor for petitioner. Office of the Solicitor General for respondent. Labrador, J.: This is an appeal from a decision of the Court of Tax Appeals confirming substantially the assessment of Income tax deficiencies of the petitioner Jose Avelino for the years 1946, 1947 and 1948. The assessments approved by the Court of Tax Appeals for the said years are as follows: 1946 Net taxable income in 1946P106,223.06

Tax due on P106,223.06P 29,669.22 Less tax previously assessed & paid1,472.08 Deficiency taxp 28,197.14

50% surcharge14,098.57 Total deficiency tax & surchargep 42,295.71

1947 Net taxable income in 1947P 43,504.34

Tax due on P43,504.34P 8,361.22 Less tax previously assessed & paid4,375.72. Deficiency taxp 3,985.50 50% surcharge1,992.75 Total deficiency tax & surchargep 5,978.25

1948 Net taxable income in 1948P 38,885.81

Tax due on P38,885.81P 7,090.31 Less tax previously assessed & paid747.51 Deficiency taxp 6,342.80 50% surcharge 3,171.40 Total deficiency tax & surchargep 9,514.20

SUMMARY Deficiency tax & surcharge for 1946P 42,295.71 Deficiency tax & surcharge for 19475,978.25 Deficiency tax & surcharge for 19489,414.20 GRAND TOTALP 57,788.16

In the brief of the petitioner various assignments of errors are made, each error raising specific questions of law and of fact. The errors will now be considered one by one, each independently of the others. I THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE NET WORTH METHOD USED BY RESPONDENT IN DETERMINING PETITIONER'S TAXABLE INCOME IS WITHOUT JUSTIFIABLE BASIS It is contended under this assignment of error that there is no reasonable certainty of the amount taken as an opening net worth, there being no sufficient basis for establishing such opening net worth. Included in the opening net worth as of January 1, 1946, both according to the petitioner as well as to the Commissioner of Internal Revenue, are P700.00 and P5,500.00, representing cash in bank, PNB savings account and PNB current account, respectively. But petitioner claims that the cash on hand in the opening net worth should be, on December 31, 1945 (or January 1, 1946), not P100.00 as estimated by respondent but P47,300.00, for the reason that in an income tax return submitted by the wife of the petitioner, Mrs. Enriqueta Avelino, she made it appear that the netted a profit of P55,000.00 from her business of importation of shoes,

operation of a bar, and of a restaurant, shortly after liberation. The income tax return submitted by her for the year 1946 was submitted in the year 1949 and was presented at the hearing as Exhibit "A". Petitioner asserts that his wife made a gain of P55,000.00 during the year 1946, but the supposed copy of the income tax return that she has submitted as evidence does not show how that amount had been earned. If she did actually earn that amount Exhibit "A" would have contained the details indicating the transactions in which the big sum was earned. Why none of that amount or the greater part thereof appears to have been deposited in a bank has not been explained. Apparently the court below considered the return as a self-serving statement, and We agree that on the basis of that income tax return, without any other explanation how the gains were used or invested or deposited, there is no reason to disturb the action of the court below in giving no credence to the said alleged existence of the cash net worth existing at the beginning of the year 1946. We therefore declare that the alleged error has not been committed. II THE COURT OF TAX APPEALS, IN COMPUTING THE DEFICIENCY INCOME TAX ALLEGEDLY DUE FROM THE PETITIONER, ERRED IN NOT DEDUCTING FROM THE INCREASE IN NET WORTH OF THE PETITIONER FOR THE YEAR 1948, THE SUM OF P6,508.00 REPRESENTING ONE-HALF () OF THE CAPITAL GAIN REALIZED FROM THE SALE OF TWO PARCELS OF LAND (CAPITAL ASSETS) MADE IN 1948. The respondent denies that this error have been committed. In Annex 1, the yellow working sheet prepared by Examiner Lasquety, it is shown that the sum of P6,508.00 was deducted in the year 1948 is the taxable capital gain. This deduction was sustained by the Court below. The alleged error, therefore, is disproved by Annex I. III THE COURT OF TAX APPEALS ERRED IN DISALLOWING THE AMOUNT OF P9,816.78 AS DEPRECIATION ON RENTAL PROPERTIES IN DETERMINING THE PETITIONER'S NET WORTH FOR THE YEAR 1948. This supposed error was not committed as evidenced by an examination of Annex I, which shows that P9,816.78 was allowed as deduction for 1948 under the heading "Reserve for Depreciation, Building". IV THE COURT OF TAX APPEALS ERRED IN FAILING TO REFLECT OR TAKE UP IN 1947 THE IMPROVEMENTS VALUED AT P35,000.00. ERECTED IN 1947 IN THE QUEZON CITY LOT OF PETITIONER gwyj. This error again is disproved by Annex I, the yellow working sheet prepared by Bureau of Internal Revenue Examiner Lasquety. This working sheet was adopted by the Court of Tax Appeals and it shows that P35,000.00 alleged to have been omitted was actually taken into account in the computation of the 1947 accounts of the petitioner, as improvements on four buildings. V THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONER AND HIS WIFE HAD INVESTMENT IN THE TALISAY LUMBER COMPANY IN THE SUM OF P20,000.00 WITHOUT CONSIDERING AN OFFSETTING LIABILITY IN THE SAME AMOUNT. Neither do we find any merit in this assignment of error. According to the evidence, the articles, of incorporation of the Talisay Lumber Company, which is under oath, petitioner and his wife invested the sums of P28,000.00 and P1,000.00 in the company. If these sums were not furnished by the petitioner but by the organizer of the company, still the total amount of P29,000.00 should be considered as a gift, or an income received by the petitioner and his wife from the said organizer of the Talisay Lumber Company, which income is liable to tax iehlk. VI THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONER HAD INVESTMENT IN AVELINO, BAGTAS, ALZATE AND COMPANY IN THE SUM OF P5,000.00 FOR EACH OF THE YEARS 1946 TO 1950. Under this assignment of error, petitioner argues that the appearance of the said amount as having been contributed to the partnership by petitioner is no proof that that amount was petitioner's actual investment in the company. The same reasons obtaining in the case of the investment of P29,000.00 of the spouses in the Talisay Lumber Company obtain in the case of the petitioner's investment in the partnership of Avelino, Bagtas, Alzate and Company. VII THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE LOAN OF P10,000.00 FROM ROSARIO GRAY DE HAYS AND ANOTHER LOAN OF P30,000.00 FROM ANGELA M. VDA. DE BUTTE NEVER EXISTED. In support of this assignment of error, petitioner contends that he owed the sum of P10,000.00 to Rosario Gray de Hays, which amount represents one-half of the price of P20,000.00 which was the consideration for the sale of certain property described in Exhibit "C". But the original of the document shows that the amount of the consideration was P22,000.00 and the vendor was Severina de Casal, and nothing is said in the original of the document that any part of the amount under consideration has not been paid.

It is also alleged in support of this error that the petitioner is indebted to Angela M. Vda. De Butte in 1948 in the sum of P30,000.00. Mrs. Butte testified that petitioner owed her the amount of P30,000.00; that the debt was in the form of a check and that in 1949 Mr. Avelino, the petitioner, paid P15,000.00, and that he paid the balance in 1951, no interest on the loan having been demanded and paid. Evidence of this character has, as a rule, been declared insufficient for purposes of the income tax law. (Eugenio Perez vs. Court of Tax Appeals, et al., G.R. No. L10507, May 30, 1958; Aurelio P. Reyes vs. Collector of Internal Revenue, G.R. Nos. L-11534 & L-11558, Nov. 25, 1958.) We declare that in consonance with the rule which appears to be reasonable, the alleged loan cannot be declared as, actually existing. VIII THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONER COMMITTED FRAUD IN FILING HIS INCOME TAX RETURNS FOR THE YEARS UNDER REVIEW. Under this alleged error it is contended that there was no evidence of fraud committed by the petitioner. We find that the acts of the petitioner in declaring an income of only P5,258.99 in the year 1946 when he had an actual income of P105,223.06; his act in submitting an income tax return for 1947 only for the amount of P12,219.96 when he actually had a net taxable income of P43,504.34; and lastly his act in reporting an income for the year 1948 which is only ten percent of the actual taxable income of P38,885.81 all these circumstances justify the finding of the court below that there has been fraud subject to be penalized by law. IX APPEALS ERRED IN HOLDING THE COURT OF TAX THAT THE RESPONDENT'S ASSESSMENTS HAVE NOT YET PRESCRIBED paqn9ycjy. In this assignment of error it is contended that the liability of the petitioner for income tax for the years 1946, 1947 and 1948 has already prescribed. The contention is without merit as it has been found out that the petitioner has been guilty of fraud. The period within which he may be subjected to liability in case of fraud begins from the moment the fraud is discovered and not when the income tax return was presented. (Sec. 332, Internal Revenue Law). X THE COURT OF TAX APPEALS ERRED IN HOLDING THE PETITIONER LIABLE FOR P57,788.16 AS DEFICIENCY INCOME TAX FOR THE YEARS 1946, 1947, AND 1948. This supposed error is the result of the previous errors and need not be considered. Finding no error in the conclusions of fact and of law made by the respondent court, we hereby affirm the assessments made by it as above indicated, with costs against petitioner. Bengzon, C.J., Concepcion, Reyes, J.B.L., Paredes, Regala and Makalintal, JJ., concur. Padilla, Bautista Angelo and Dizon, JJ., took no part. (3)Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-19495 November 24, 1966

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. LILIA YUSAY GONZALES and THE COURT OF TAX APPEALS, respondents. Office of the Solicitor General for the petitioner. Ramon A. Gonzales for respondent Lilia Yusay Gonzales. BENGZON, J.P., J.: Matias Yusay, a resident of Pototan, Iloilo, died intestate on May 13, 1948, leaving two heirs, namely, Jose S. Yusay, a legitimate child, and Lilia Yusay Gonzales, an acknowledged natural child. Intestate proceedings for the settlement of his estate were instituted in the Court of First Instance of Iloilo (Special Proceedings No. 459). Jose S. Yusay was therein appointed administrator.

On May 11, 1949 Jose S. Yusay filed with the Bureau of Internal Revenue an estate and inheritance tax return declaring therein the following properties:

Personal properties Palay Carabaos Real properties: Capital, 74 parcels ) Conjugal 19 parcels) Total gross estate Assessed at P179,760.00 P187,204.00 P6,444.00 1,000.00

P7,444.00

The return mentioned no heir. Upon investigation however the Bureau of Internal Revenue found the following properties:

Personal properties: Palay Carabaos Packard Automobile 2 Aparadors Real properties: Capital, 25 parcels assessed at 1/2 of Conjugal, 130 parcels assessed at Total P6,444.00 1,500.00 2,000.00 500.00

P10,444.00

P87,715.32 P121,425.00 P209,140.32 P219,584.32

The fair market value of the real properties was computed by increasing the assessed value by forty percent. Based on the above findings, the Bureau of Internal Revenue assessed on October 29, 1953 estate and inheritance taxes in the sums of P6,849.78 and P16,970.63, respectively. On January 25, 1955 the Bureau of Internal Revenue increased the assessment to P8,225.89 as estate tax and P22,117.10 as inheritance tax plus delinquency interest and demanded payment thereof on or before February 28, 1955. Meanwhile, on February 16, 1955, the Court of First Instance of Iloilo required Jose S. Yusay to show proof of payment of said estate and inheritance taxes. On March 3, 1955 Jose S. Yusay requested an extension of time within which to pay the tax. He posted a surety bond to guarantee payment of the taxes in question within one year. The Commissioner of Internal Revenue however denied the request. Then he issued a warrant of distraint and levy which he transmitted to the Municipal Treasurer of Pototan for execution. This warrant was not enforced because all the personal properties subject to distraint were located in Iloilo City. On May 20, 1955 the Provincial Treasurer of Iloilo requested the BIR Provincial Revenue Officer to furnish him copies of the assessment notices to support a motion for payment of taxes which the Provincial Fiscal would file in Special Proceedings No. 459 before the Court of First Instance of Iloilo. The papers requested were sent by the Commissioner of Internal Revenue to the Provincial Revenue Officer of Iloilo to be transmitted to the Provincial Treasurer. The records do not however show whether the Provincial Fiscal filed a claim with the Court of First Instance for the taxes due. On May 30, 1956 the commissioner appointed by the Court of First Instance for the purpose, submitted a reamended project of partition which listed the following properties:

Personal properties:

Buick Sedan Packard car Aparadors Cash in Bank (PNB) Palay Carabaos Real properties: Land, 174 parcels assessed at Buildings Total

P8,100.00 2,000.00 500.00 8,858.46 6,444.00 1,500.00

P27,402.46

P324,797.21 4,500.00

P329,297.21 P356,699.67

More than a year later, particularly on July 12, 1957, an agent of the Bureau of Internal Revenue apprised the Commissioner of Internal Revenue of the existence of said reamended project of partition. Whereupon, the Internal Revenue Commissioner caused the estate of Matias Yusay to be reinvestigated for estate and inheritance tax liability. Accordingly, on February 13, 1958 he issued the following assessment:

Estate tax 5% surcharge Delinquency interest Compromise No notice of death Late payment Total Inheritance Tax 5% surcharge Delinquency interest Compromise for late payment Total Total estate and inheritance taxes

P16,246.04 411.29 11,868.90

P15.00 40.00

55.00 P28,581.23 P38,178.12 1,105.86 28,808.75 50.00 P69,142.73 P97,723.96

Like in previous assessments, the fair market value of the real properties was arrived at by adding 40% to the assessed value. In view of the demise of Jose S. Yusay, said assessment was sent to his widow, Mrs. Florencia Piccio Vda. De Yusay, who succeeded him in the administration of the estate of Matias Yusay. No payment having been made despite repeated demands, the Commissioner of Internal Revenue filed a proof of claim for the estate and inheritance taxes due and a motion for its allowance with the settlement court in voting priority of lien pursuant to Section 315 of the Tax Code. On June 1, 1959, Lilia Yusay, through her counsel, Ramon Gonzales, filed an answer to the proof of claim alleging non-receipt of the assessment of February 13, 1958, the existence of two administrators, namely Florencia Piccio Vda. De Yusay who administered two-thirds of the estate, and Lilia Yusay, who administered the remaining one-third, and her willingness to pay the taxes corresponding to her share, and praying for deferment of the resolution on the motion for the payment of taxes until after a new assessment corresponding to her share was issued. On November 17, 1959 Lilia Yusay disputed the legality of the assessment dated February 13, 1958. She claimed that the right to make the same had prescribed inasmuch as more than five years had elapsed since the filing of the estate and inheritance tax return on May 11, 1949. She therefore requested that the assessment be declared invalid and without force and effect. This request was rejected by the Commissioner in his letter dates January 20, 1960, received by Lilia Yusay on March 14, 1960, for the reasons, namely, (1) that the right to assess the taxes in question has not been lost by prescription since the return which did not name the heirs cannot be considered a true and complete return

sufficient to start the running of the period of limitations of five years under Section 331 of the Tax Code and pursuant to Section 332 of the same Code he has ten years within which to make the assessment counted from the discovery on September 24, 1953 of the identity of the heirs; and (2) that the estate's administrator waived the defense of prescription when he filed a surety bond on March 3, 1955 to guarantee payment of the taxes in question and when he requested postponement of the payment of the taxes pending determination of who the heirs are by the settlement court. On April 13, 1960 Lilia Yusay filed a petition for review in the Court of Tax Appeals assailing the legality of the assessment dated February 13, 1958. After hearing the parties, said Court declared the right of the Commissioner of Internal Revenue to assess the estate and inheritance taxes in question to have prescribed and rendered the following judgment: WHEREFORE, the decision of respondent assessing against the estate of the late Matias Yusay estate and inheritance taxes is hereby reversed. No costs. The Commissioner of Internal Revenue appealed to this Court and raises the following issues: 1. Was the petition for review in the Court of Tax Appeals within the 30-day period provided for in Section 11 of Republic Act 1125? 2. Could the Court of Tax Appeals take cognizance of Lilia Yusay's appeal despite the pendency of the "Proof of Claim" and "Motion for Allowance of Claim and for an Order of Payment of Taxes" filed by the Commissioner of Internal Revenue in Special Proceedings No. 459 before the Court of First Instance of Iloilo? 3. Has the right of the Commissioner of Internal Revenue to assess the estate and inheritance taxes in question prescribed? On November 17, 1959 Lilia Yusay disputed the legality of the assessment of February 13, 1958. On March 14, 1960 she received the decision of the Commissioner of Internal Revenue on the disputed assessment. On April 13, 1960 she filed her petition for review in the Court of Tax Appeals. Said Court correctly held that the appeal was seasonably interposed pursuant to Section 11 of Republic Act 1125. We already ruled 1 in St. Stephen's Association v. Collector of Internal Revenue, that the counting of the thirty days within which to institute an appeal in the Court of Tax Appeals should commence from the date of receipt of the decision of the Commissioner on the disputed assessment, not from the date the assessment was issued. Accordingly, the thirty-day period should begin running from March 14, 1960, the date Lilia Yusay received the appealable decision. From said date to April 13, 1960, when she filed her appeal in the Court of Tax Appeals, is exactly thirty days. Hence, the appeal was timely. Next, the Commissioner attacks the jurisdiction of the Court of Tax Appeals to take cognizance of Lilia Yusay's appeal on the ground of lis pendens. He maintains that the pendency of his motion for allowance of claim and for order of payment of taxes in the Court of First Instance of Iloilo would preclude the Court of Tax Appeals from acquiring jurisdiction over Lilia Yusay's appeal. This contention lacks merit. Lilia Yusay's cause seeks to resist the legality of the assessment in question. Should she maintain it in the settlement court or should she elevate her cause to the Court of Tax Appeals? We say, she acted correctly by appealing to the latter court. An action involving a disputed assessment 2 for internal revenue taxes falls within the exclusive jurisdiction of the Court of Tax Appeals. It is in that forum, to the exclusion of the Court of 3 First Instance, where she could ventilate her defenses against the assessment. Moreover, the settlement court, where the Commissioner would wish Lilia Yusay to contest the assessment, is of limited jurisdiction. And under 4 5 the Rules, its authority relates only to matters having to do with the settlement of estates and probate of wills of deceased persons. Said court has no jurisdiction to adjudicate the contentions in question, which assuming they do not come exclusively under the Tax Court's cognizance 6 must be submitted to the Court of First Instance in the exercise of its general jurisdiction. We now come to the issue of prescription. Lilia Yusay claims that since the latest assessment was issued only on February 13, 1958 or eight years, nine months and two days from the filing of the estate and inheritance tax return, the Commissioner's right to make it has expired. She would rest her stand on Section 331 of the Tax Code which limits the right of the Commissioner to assess the tax within five years from the filing of the return. The Commissioner claims that fraud attended the filing of the return; that this being so, Section 332(a) of the Tax Code would apply. It may be well to note that the assessment letter itself (Exhibit 22) did not impute fraud in the return with intent to evade payment of tax. Precisely, no surcharge for fraud was imposed. In his answer to the petition for review filed by Lilia Yusay in the Court of Tax Appeals, the Commissioner alleged no fraud. Instead, he broached the insufficiency of the return as barring the commencement of the running of the statute of limitations. He raised the point of fraud for the first time in the proceedings, only in his memorandum filed with the Tax Court subsequent to resting his case. Said Court rejected the plea of fraud for lack of allegation and proof, and ruled that the return, although not accurate, was sufficient to start the period of prescription.
7

Fraud is a question of fact. The circumstances constituting it must be alleged and proved in the court below. And the finding of said court as to 10 its existence and non-existence is final unless clearly shown to be erroneous. As the court a quo found that no fraud was alleged and proved therein, We see no reason to entertain the Commissioner's assertion that the return was fraudulent. The conclusion, however, that the return filed by Jose S. Yusay was sufficient to commence the running of the prescriptive period under Section 331 of the Tax Code rests on no solid ground. Paragraph (a) of Section 93 of the Tax Code lists the requirements of a valid return. It states: (a) Requirements. In all cases of inheritance or transfers subject to either the estate tax or the inheritance tax, or both, or where, though exempt from both taxes, the gross value of the estate exceeds three thousand pesos, the executor, administrator, or anyone of the heirs, as the case may be, shall file a return under oath in duplicate, setting forth (1) the value of the gross estate of the decedent at the time of his death, or, in case of a nonresident not a citizen of the Philippines ; (2) the deductions allowed from gross estate in determining net estate as defined in section eighty-nine; (3) such part of such information as may at the time be ascertainable and such supplemental data as may be necessary to establish the correct taxes. A return need not be complete in all particulars. It is sufficient if it complies substantially with the law. There is substantial compliance (1) when the return is made in good faith and is not false or fraudulent; (2) when it covers the entire period involved; and (3) when it contains information as to the various items of income, deduction and credit with such definiteness as to permit the computation and assessment of the 11 tax. There is no question that the state and inheritance tax return filed by Jose S. Yusay was substantially defective. First, it was incomplete. It declared only ninety-three parcels of land representing about 400 hectares and left out ninety-two parcels covering 503 hectares. Said huge under declaration could not have been the result of an over-sight or mistake. As found in L-11378, supra note 7, Jose S. Yusay very well knew of the existence of the ommited properties. Perhaps his motive in under declaring the inventory of properties attached to the return was to deprive Lilia Yusay from inheriting her legal share in the hereditary estate, but certainly not because he honestly believed that they did not form part of the gross estate. Second, the return mentioned no heir. Thus, no inheritance tax could be assessed. As a matter of law, on the basis of the return, there would be no occasion for the imposition of estate and inheritance taxes. When there is no heir - the return showed none - the intestate estate is 12 escheated to the State. The State taxes not itself. In a case where the return was made on the wrong form, the Supreme Court of the United States held that the filing thereof did not start the 13 running of the period of limitations. The reason is that the return submitted did not contain the necessary information required in the correct form. In this jurisdiction, however, the Supreme Court refrained from applying the said ruling of the United States Supreme Court in Collector of Internal Revenue v. Central Azucarera de Tarlac, L-11760-61, July 31, 1958, on the ground that the return was complete in itself although inaccurate. To our mind, it would not make much difference where a return is made on the correct form prescribed by the Bureau of Internal Revenue if the data therein required are not supplied by the taxpayer. Just the same, the necessary information for the assessment of the tax would be missing. The return filed in this case was so deficient that it prevented the Commissioner from computing the taxes due on the estate. It was as though no return was made. The Commissioner had to determine and assess the taxes on data obtained, not from the return, but from other sources. We therefore hold the view that the return in question was no return at all as required in Section 93 of the Tax Code. The law imposes upon the taxpayer the burden of supplying by the return the information upon which an assessment would be based. His duty complied with, the taxpayer is not bound to do anything more than to wait for the Commissioner to assess the tax. However, he is not 15 required to wait forever. Section 331 of the Tax Code gives the Commissioner five years within which to make his assessment. Except, of course, if the taxpayer failed to observe the law, in which case Section 332 of the same Code grants the Commissioner a longer period. Nonobservance consists in filing a false or fraudulent return with intent to evade the tax or in filing no return at all. Accordingly, for purposes of determining whether or not the Commissioner's assessment of February 13, 1958 is barred by prescription, Section 16 332(a) which is an exception to Section 331 of the Tax Code finds application. We quote Section 332(a): SEC. 332. Exceptions as to period of limitation of assessment and collection of taxes. (a) In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the falsity, fraud or omission. As stated, the Commissioner came to know of the identity of the heirs on September 24, 1953 and the huge underdeclaration in the gross estate on July 12, 1957. From the latter date, Section 94 of the Tax Code obligated him to make a return or amend one already filed based on
14

his own knowledge and information obtained through testimony or otherwise, and subsequently to assess thereon the taxes due. The running of the period of limitations under Section 332(a) of the Tax Code should therefore be reckoned from said date for, as aforesaid, it is from that time that the Commissioner was expected by law to make his return and assess the tax due thereon. From July 12, 1957 to February 13, 1958, the date of the assessment now in dispute, less than ten years have elapsed. Hence, prescription did not abate the Commissioner's right to issue said assessment. Anent the Commissioner's contention that Lilia Yusay is estopped from raising the defense of prescription because she failed to raise the same in her answer to the motion for allowance of claim and for the payment of taxes filed in the settlement court (Court of First Instance of Iloilo), suffice it to state that it would be unjust to the taxpayer if We were to sustain such a view. The Court of First Instance acting as a settlement court is not the proper tribunal to pass upon such defense, therefore it would be but futile to raise it therein. Moreover, the Tax Code does not bar the right to contest the legality of the tax after a taxpayer pays it. Under Section 306 thereof, he can pay the tax and claim a refund therefor. A fortiori his willingness to pay the tax is no waiver to raise defenses against the tax's legality. WHEREFORE, the judgment appealed from is set aside and another entered affirming the assessment of the Commissioner of Internal Revenue dated February 13, 1958. Lilia Yusay Gonzales, as administratrix of the intestate estate of Matias Yusay, is hereby ordered to pay the sums of P16,246.04 and P39,178.12 as estate and inheritance taxes, respectively, plus interest and surcharge for delinquency in accordance with Section 101 of the National Internal Revenue Code, without prejudice to reimbursement from her co-administratrix, Florencia Piccio Vda. De Yusay for the latter's corresponding tax liability. No costs. So ordered. Concepcion, C.J., Reyes, J.B.L., Barrera, Dizon, Regala, Makalintal, Sanchez and Castro, JJ., concur. Zaldivar, J., took no part.

RESOLUTION April 24, 1967 BENGZON, J.P., J.: Respondent Lilia Yusay Gonzales seeks reconsideration of our decision holding her liable for the payment of P97,723.96 as estate and inheritance taxes plus delinquency penalties as administratrix of the intestate estate of Matias Yusay. The grounds raised by her deserve this extended resolution. Firstly, movant maintains that the issue of whether or not the estate and inheritance tax return filed by Jose Yusay on May 13, 1949 was sufficient to start the running of the statute of limitations on assessment, was neither raised in the Court of Tax Appeals nor assigned as error before this Court. The records in the Court of Tax Appeals however show the contrary. Paragraph 2 of the answer filed by the Commissioner of Internal Revenue states: 2. That he likewise admits, as alleged in paragraph 1 thereof having received the letter of the petitioner dated November 27, 1959 (Annex "A" of the Petition for Review), contesting the assessment of estate and inheritance taxes levied against the Intestate Estate of the late Matias Yusay, Special Proceedings No. 459, Court of First Instance of Iloilo, on the ground that the said assessment has already prescribed, but specifically denies the allegation that the assessment have already prescribed, the truth of the matter being that the returns filed on May 11, 1949 cannot be considered as a true, and complete return sufficient to start the running of the period of five (5) years prescribed in Sec. 331 of the Tax Code; This point was discussed in the memorandum of the Commissioner of Internal Revenue, thus: In the estate and inheritance tax return filed by Jose S. Yusay (Exhibits B & 1, pp. 14-20, B.I.R. records) the net value of the estate of the deceased was claimed to be P203,354.00 and no inheritance tax was shown as the heirs were not indicated. In the final computation of the estate by an examiner of the respondent, the net estate was found to be worth P410,518.38 (p. 105, B.I.R. records) or about more than twice the original amount declared in the return. In the subsequent investigation of this case, it was also determined that the heirs of the deceased were Jose S. Yusay, a legitimate son, and Lilia Yusay, an acknowledged natural child, (petitioner herein). Under the circumstances, we believe the return filed on May 11, 1949 was false or fraudulent in the sense that the value of the properties were underdeclared and that the said return was also incomplete as the heirs to the estate were not specified. Inasmuch as the respondent was not furnished adequate data upon which to base an assessment, the said return cannot be considered a true

and complete return sufficient to start the running of the period of limitations of five (5) years prescribed in Section 331 of the Tax Code. In the lower court the defense of the Commissioner of Internal Revenue against Lilia Yusay Gonzales' plea of prescription, centered on the insufficiency and fraudulence or falsity of the return filed by Jose Yusay. The Court of Tax Appeals overruled the Commissioner of Internal Revenue. Said the Tax Code: The provision of Section 332(a) of the Tax Code cannot be invoked in this case as it was neither alleged in respondent's answer, nor proved during the hearing that the return was false or fraudulent with intent to evade the payment of tax. Moreover, the failure of respondent to charge fraud and impose the penalty thereof in the assessments made in 1953, 1955 and 1956 is an eloquent demonstration that the filing of petitioner's transfer tax return was not attended by falsity or fraud with intent to evade tax. Xxx xxx xxx

But respondent urges upon us that the filing of the return did not start the running of the five (5) year period for the reason that the return did not disclose the heirs of the deceased Matias Yusay, and contained inadequate data regarding the value of the estate. We believe that these mere omissions do not require additional returns for the same. Altho incomplete for being deficient on these matters, the return cannot be regarded as a case of failure to file a return where want of good faith and intent to evade the tax on the part of petitioner are not charged. It served as a sufficient notice to the Commissioner of Internal Revenue to make his assessment and start the running, of the period of limitation. In this connection, it must be borne in mind that the Commissioner is not confined to the taxpayer's return in making assessment of the tax, and for this purpose he may secure additional information from other sources. As was done in the case at bar, he sends investigators to examine the taxpayer's records and other pertinent data. His assessment is based upon the facts uncovered by the investigation (Collector vs. Central Azucarera de Tarlac, G.R. Nos. L11760 and L-11761, July 31, 1958). Furthermore, the failure to state the heirs in the return can be attributed to the then unsettled conflict raging before the probate court as to who are the heirs of the estate. Such failure could not have been a deliberate attempt to mislead the government in the assessment of the correct taxes. In his appeal, the Commissioner of Internal Revenue assigned as third error of the Court of Tax Appeals the finding that the assessment in question was "made beyond the five-year statutory period provided in Section 332 (a) of the Tax Code," and that the right of the Commissioner of Internal Revenue to assess the estate and inheritance taxes has already prescribed. To sustain his side, the Commissioner ventilated in his brief, fraud in the filing of the return, absence of certain data from the return which prevented him from assessing thereon the tax due and the pendency in this Court of L-11374 entitled "Intestate Estate of the late Matias Yusay, Jose C. Yusay, Administrator vs. Lilia Yusay Gonzales" which allegedly had the effect of suspending the running of the period of limitations on assessment. Clearly, therefore, it would be incorrect to say that the question of whether or not the return filed by Jose Yusay was sufficient to start the running of the statute of limitations to assess the corresponding tax, was not raised by the Commissioner in the Court of Tax Appeals and in this Court. Second. Movant contend that contrary to Our ruling, the return filed by Jose Yusay was sufficient to start the statute of limitations on assessment. Inasmuch as this question was amply discussed in Our decision sought to be reconsidered, and no new argument was advanced, We deem it unnecessary to pass upon the same. There is no reason for any change on Our stand on this point. Third. Movant insists that since she administers only one-third of the estate of Matias Yusay, she should not be liable for the whole tax. And she suggests that We hold the intestate estate of Matias Yusay liable for said taxes, one-third to be paid by Lilia Yusay Gonzales and two-thirds to be paid by Florencia P. Vda. De Yusay. The foregoing suggestion to require payment of two-thirds of the total taxes by Florencia P. Vda. De Yusay is not acceptable, for she (Florencia P. Vda. De Yusay) is not a party in this case. It should be pointed out that Lilia Yusay Gonzales appealed the whole assessment to the Court of Tax Appeals. Thereupon, the Commissioner of Internal Revenue questioned her legal capacity to institute the appeal on the ground that she administered only one-third of the estate of Matias Yusay. In opposition, she espoused the view, which was sustained by the Tax Court, that in co-administration, the administratrices are regarded as one person and the acts of one of them in relation to the regular administration of the estate are deemed to be the acts of all; hence, each administratrix can represent the whole estate. In advancing such proposition, Lilia Yusay Gonzales represented the whole estate and hoped to benefit from the favorable outcome of the case. For the same reason that she represented her co-administratrix and the whole estate of Matias Yusay, she risked being ordered to pay the whole assessment, should the assessment be sustained. Her change of stand adopted in the motion for reconsideration to the effect that she should be made liable for only one-third of the total tax, would negate her aforesaid proposition before the Court of Tax Appeals. She is now estopped from denying liability for the whole tax.

At any rate, estate and inheritance taxes are satisfied from the estate and are to be paid by the executor or administrator. Where there are 2 two or more executors, all of them are severally liable for the payment of the estate tax. The inheritance tax, although charged against the 3 account of each beneficiary, should be paid by the executor or administrator. Failure to pay the estate and inheritance taxes before distribution of the estate would subject the executor or administrator to criminal liability under Section 107(c) of the Tax Code. It is immaterial therefore that Lilia Yusay Gonzales administers only one-third of the estate and will receive as her share only said portion, for 4 her right to the estate comes after taxes. As an administratrix, she is liable for the entire estate tax. As an heir, she is liable for the entire 5 inheritance tax although her liability would not exceed the amount of her share in the estate. The entire inheritance tax which amounts to P39,178.12 excluding penalties is obviously much less than her distributive share. Motion for reconsideration denied. Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Sanchez and Castro, JJ., concur. Zaldivar, J., took no part.

Footnotes
1

L-11238, August 21, 1958. See also Baguio Country Club Corporation v. Collector of Internal Revenue, et al., L-11419, April 22, 1959. Sec. 7(1), Rep. Act 1125; Blaquera v. Rodriguez, L-11295, March 29,1958. Castro v. Blaquera, L-8429, February 28, 1957, 53 O.G. 2135; Ledesma v. Court of Tax Appeals, 102 Phil. 931. Rules 74-92, now Rules 73-91, Rules of Court. Adapon v. Maralit, 69 Phil. 383, 387. Guzman v. Anog and Anog, 37 Phil. 62. Brief for Petitioner, p. 26. Collector of Internal Revenue v. Bautista, L-12250 and L-12259, May 27, 1959. Gutierrez v. Court of Tax Appeals, L-9738 and L-9771, May 31, 1957. Perez v. Court of Tax Appeals, L-9738, May 31, 1957. Jacob Mertens, Jr., The Law of Federal Income Taxation, 1958 ed., Vol. 10, Section 57.13. Articles 1011-1014, Civil Code. Rule 91, Rules of Court.

10

11

12

13

Florsheim Brothers Dry-Goods Company, Ltd. V. United States, 280 US 453, 74 L. Ed. 542. See also Commissioner v. Lane-Wells Co., 321 US 219, 88 L. Ed. 684; Rockland & Rockport Lime Corporation v. Ham, 38 F 2d 239 (D.C.S.D. Main, 1930); Dubuque Packing Co. V. US, 126 F. Supp. 796 (D.C.N.D. Iowa, 1954).
14

Florsheim Brothers Dry-Goods Company, Ltd. V. United States, 280 U.S. 453, 74 L. Ed. 542, 547. Republic of the Philippines v. Lim De Yu, L-17438, April 30, 1964.

15

16

Taligaman Lumber Co. V. Collector of Internal Revenue, L-15717, March 31, 1962; Tan Tiong Bio, et al. V. Commissioner of Internal Revenue, L-15778, April 23, 1962. BENGZON, J.P., J.: RESOLUTION

Section 95(a) (1), Tax Code. Baldwin v. Commissioner of Internal Revenue, 94 F. 2d 355, 20 AFTR 940.

Jose Araas, Annotations and Jurisprudence on the National Internal Revenue Code, As Amended, Second Edition, 1963, Vol. I, p. 630.
4

Section 105, Tax Code. Section 95(c), Tax Code.

. (4)September 29, 1966 G.R. No. L-21609 REPUBLIC OF THE PHILIPPINES, plaintiff-appellant, vs. KER & COMPANY, LTD., defendant-appellant. Office of the Solicitor General for plaintiff-appellant. Leido, Andrada, Perez and Associates for defendant-appellant. , J.: Ker & Co., Ltd., a domestic corporation, filed its income tax returns for the years 1947, 1948, 1949 and 1950 on the following dates: yeardate Filed 1947April 12, 1948 1948April 30, 1949 1949May 15, 1950 1950May 9, 1951 It amended its income tax returns for 1948 and 1949 on May 11, 1949 and June 30, 1950, respectively. In 1953 the Bureau of Internal Revenue examined and audited Ker & Co., Ltd.'s returns and books of accounts and subsequently issued the following assessments for deficiency income tax: yearamountdate Assessed 1947P42,342.30July 25, 1953 194818,651.87Feb. 16, 1953 1949139.67Feb. 16, 1953 195012,813.00Feb. 16, 1953 due and payable on dates indicated in the accompanying notices of assessment. The assessments for 1948 and 1950 carried the surcharge of 50% authorized under Section 72 of the Tax Code for the filing of fraudulent returns. Upon request of Ker & Co., Ltd., through Atty. Jose Leido, its counsel, the Bureau of Internal Revenue reduced the assessments for the year 1947 from P42,342.30 to P27,026.28 and for the year 1950 from P12,813.00 to P8,542.00, imposed the 50% surcharge for the year 1947 and eliminated the same surcharge from the assessment for the year 1950. The assessments for years 1948 and 1949 remained the same. On March 1, 1956 Ker & Co., Ltd. Filed with the Court of Tax Appeals a petition for review with preliminary injunction. No preliminary injunction was issued, for said court dismissed the appeal for having been instituted beyond the 30-day period provided for in Section 11 of Republic Act 1125. We affirmed the order of dismissal of L-12396. 1

On March 15, 1962, the Bureau of Internal Revenue demanded payment of the aforesaid assessments together with a surcharge of 5% for late payment and interest at the rate of 1% monthly. Ker & Co., Ltd. Refused to pay, instead in its letters dated March 28, 1962 and April 10, 1962 it set up the defense of prescription of the Commissioner's right to collect the tax. Subsequently, the Republic of the Philippines filed on March 27, 1962 a complaint with the Court of First Instance of Manila seeking collection of the aforesaid deficiency income tax for the years 1947, 1948, 1949 and 1950. The complaint did not allege fraud in the filing of any of the income tax returns for the years involved, nor did it pray for the payment of the corresponding 50% surcharge, but it prayed for the payment of 5% surcharge for late payment and interest of 1% per month without however specifying from what date interest started to accrue. Summons was served not on the defendant taxpayer but upon Messrs. Leido and Associates, its counsel in the proceedings before the Bureau of Internal Revenue and the Court of Tax Appeals. On April 14, 1962 Ker & Co., Ltd. Through its counsel, Leido, Andrada, Perez & Associates, moved for the dismissal of the complaint on the ground that the court did not acquire jurisdiction over the person of the defendant and that plaintiff's cause of action has prescribed. This motion was denied and defendant filed a motion for reconsideration. Resolution on said motion, however, was deferred until trial of the case on the merits yfj9q. On May 18, 1962, Ker & Co., Ltd. Filed its answer to the complaint interposing therein the defense set up in its motion to dismiss of April 14, 1962. On September 18, 1962 the Republic of the Philippines amended its complaint, in answer to which Ker & Co., Ltd. Adopted the same answer which it had filed on May 18, 1962. On January 30, 1963 the Court of First Instance rendered judgment, the dispositive portion of which states: WHEREFORE, this Court dismisses the claim for the collection of deficiency income taxes for 1947, but orders defendant taxpayer to pay the deficiency income taxes for 1948, 1949 and 1950, in the amounts of P18,651.87, P139.67 and P8,542.00, respectively, plus 5% surcharge thereon on each amount and interest of 1% a month computed from March 27, 1962 and until full payment thereof is made, plus the costs of suit. On February 20, 1963 the Republic of the Philippines filed a motion for reconsideration contending that the right of the Commissioner of Internal Revenue to collect the deficiency assessment for 1947 has not prescribed by a lapse of merely five years and three months, because the taxpayer's income tax return was fraudulent in which case prescription sets in ten years from October 31, 1951, the date of discovery of the fraud, pursuant to Section 332 (a) of the Tax Codes and that the payment of delinquency interest of 1% per month should commence from the date it fell due as indicated in the assessment notices instead of on the date the complaint was filed. On March 6, 1963 Ker & Co., Ltd. Also filed a motion for reconsideration reiterating its assertion that the Court of First Instance did not acquire jurisdiction over its person, and maintaining that since the complaint was filed nine years, one month and eleven days after the deficiency assessments for 1948, 1949 and 1950 were made and since the filing of its petition for review in the Court of Tax Appeals did not stop the running of the period of limitations, the right of the Commissioner of Internal Revenue to collect the tax in question has prescribed. The two motions for reconsideration having been denied, both parties appealed directly to this Court. The issues in this case are: 1. Did the Court of First Instance acquire jurisdiction over the person of defendant Ker & Co., Ltd.? . 2. Did the right of the Commissioner of Internal Revenue to assess deficiency income tax for the year 1947 prescribe? . 3. Did the filing of a petition for review by the taxpayer in the Court of Tax Appeals suspend the running of the statute of limitations to collect the deficiency income for the years 1948, 1949 and 1950? 4. When did the delinquency interest on the deficiency income tax for the years 1948, 1949 and 1950 accrue? First Issue Ker & Co., Ltd. Maintains that the court a quo did not acquire jurisdiction over its person inasmuch as summons was not served upon it but upon Messrs. Leido and Associates who do not come under any of the class of persons upon whom summons should be served as enumerated in Section 13, Rule 7 of the Rules of Court, 2 which reads: SEC. 13. Service upon private domestic corporation or partnership. If the defendant is a corporation formed under the laws of the Philippines or a partnership duly registered, service may be made on the president, manager, secretary, cashier, agent, or any of its directors. Messrs. Leido and Associates acted as counsel for Ker Co., Ltd. When this tax case was in its administrative stage. The same counsel represented Ker & Co., Ltd., when it appealed said case to the Court of Tax Appeals and later to this Court. Subsequently, when the Deputy Commissioner of Internal Revenue, by letter dated March 15, 1962, demanded the payment of the deficiency income tax in question, it was

Messrs. Leido, Andrada, Perez & Associates who replied in behalf of Ker & Co., Ltd. In two letters, dated March 28, 1962 and April 10, 1962, both after the complaint in this case was filed. At least therefore on April 2, 1962 when Messrs. Leido and Associates received the summons, they were still acting for and in behalf of Ker & Co., Ltd. In connection with its tax liability involved in this case. Perforce, they were the taxpayer's agent when summons was served. Under Section 13 of Rule 7, aforequoted, service upon the agent of a corporation is sufficient. We observe that the motion to dismiss filed on April 14, 1962, aside from disputing the lower court's jurisdiction over defendant's person, prayed for dismissal of the complaint on the ground that plaintiff's cause of action has prescribed. By interposing such second ground in its motion to dismiss, Ker & Co., Ltd. Availed of an affirmative defense on the basis of which it prayed the court to resolve controversy in its favor. For the court to validly decide the said plea of defendant Ker & Co., Ltd., it necessarily had to acquire jurisdiction upon the latter's person, who, being the proponent of the affirmative defense, should be deemed to have abandoned its special appearance and voluntarily submitted itself to the jurisdiction of the court.3 Voluntary appearance cures defects of summons, if any.4 Such defect, if any, was further cured when defendant filed its answer to the complaint.5 A defendant can not be permitted to speculate upon the judgment of the court by objecting to the court's jurisdiction over its person if the judgment is adverse to it, and acceding to jurisdiction over its person if and when the judgment sustains its defenses ujj0hvf. Second Issue Ker & Co., Ltd. Contends that under Section 331 of the Tax Code the right of the Commissioner of Internal Revenue to assess against it a deficiency income tax for the year 1947 has prescribed because the assessment was issued on July 25, 1953 after a lapse of five years, three months and thirteen days from the date (April 12, 1948) it filed its income tax return. On the other hand, the Republic of the Philippines insists that the taxpayer's income tax return was fraudulent, therefore the Commissioner of Internal Revenue may assess the tax within ten years from discovery of the fraud on October 31, 1951 pursuant to Section 322(a) of the Tax Code. The stand of the Republic of the Philippines hinges on whether or not taxpayer's income tax return for 1947 was fraudulent Wr84ZdkMAA. The court a quo, confining itself to determining whether or not the assessment of the tax for 1947 was issued within the five-year period provided for in Section 331 of the Tax Code, ruled that the right of the Commissioner of Internal Revenue to assess the tax has prescribed. Said the lower court: The Court resolves the second issue in the negative, because Section 331 of the Revenue Code explicitly provides, in mandatory terms, that "Internal Revenue taxes shall be assessed within 5 years after the return was filed, and no proceedings in court without assessment, for the collection of such taxes, shall be begun after expiration of such period. The attempt by the Commissioner of Internal Revenue to make an assessment on July 25, 1953, on the basis of a return filed on April 12, 1948, is an exercise of authority against the aforequoted explicit and mandatory limitations of statutory law. Settled in our system is the rule that acts committed against the provisions of mandatory or prohibitory laws shall be void (Art. 5, New Civil Code). . . . Said court resolved the issue without touching upon fraudulence of the return. The reason is that the complaint alleged no fraud, nor did the plaintiff present evidence to prove fraud. In reply to the lower court's conclusion, the Republic of the Philippines maintains in its brief that Ker & Co., Ltd. Filed a false return and since the fraud penalty of 50% surcharge was imposed in the deficiency income tax assessment, which has become final and executory, the finding of the Commissioner of Internal Revenue as to the existence of the fraud has also become final and need not be proved. This contention suffers from a flaw in that it fails to consider the well-settled principle that fraud is a question of fact6 which must be alleged and proved.7 Fraud is a serious charge and, to be sustained, it must be supported by clear and convincing proof.8 Accordingly, fraud should have been alleged and proved in the lower court. On these premises We therefore sustain the ruling of the lower court upon the point of prescription. It would be worth mentioning that since the assessment for deficiency income tax for 1947 has become final and executory, Ker & Co., Ltd. May not anymore raise defenses which go into the merits of the assessment, i.e., prescription of the Commissioner's right to assess the tax. Such was our ruling in previous cases.9 In this case however, Ker & Co., Ltd. Raised the defense of prescription in the proceedings below and the Republic of the Philippines, instead of questioning the right of the defendant to raise such defense, litigated on it and submitted the issue for resolution of the court. By its actuation, the Republic of the Philippines should be considered to have waived its right to object to the setting up of such defense. Third Issue Ker & Co., Ltd. Impresses upon Us that since the Republic of the Philippines filed the complaint for the collection of the deficiency income tax for the years 1948, 1949 and 1950 only on March 27, 1962, or nine years, one month and eleven days from February 16, 1953, the date the tax was assessed, the right to collect the same has prescribed pursuant to Section 332 (c) of the Tax Code. The Republic of the Philippines however contends that the running of the prescriptive period was interrupted by the filing of the taxpayer's petition for review in the Court of Tax Appeals on March 1, 1956. If the period during which the case was pending in the Court of Tax Appeals and in the Supreme Court were not counted in reckoning the prescriptive period, less than five years would have elapsed, hence, the right to collect the tax has not prescribed nbbd. The taxpayer counters that the filing of the petition for review in the Court of Tax Appeals could not have stopped the running of the

prescriptive period to collect because said court did not have jurisdiction over the case, the appeal having been interposed beyond the 30-day period set forth in Section 11 of Republic Act 1125. Precisely, it adds, the Tax Court dismissed the appeal for lack of jurisdiction and said dismissal was affirmed by the Supreme Court in L-12396 aforementioned. Under Section 333 of the Tax Code, quoted hereunder: SEC. 333. Suspension of running of statute. The running of the statute of limitations provided in Section 331 or three hundred thirty-two on the making of assessments and the beginning, of distraint or levy or a proceeding in court for collection, in respect of any deficiency, shall be suspended for the period during which the Collector of Internal Revenue is prohibited from making the assessment or beginning distraint or levy or a proceeding in court, and for sixty days thereafter. The running of the prescriptive period to collect the tax shall be suspended for the period during which the Commissioner of Internal Revenue is prohibited from beginning a distraint and levy or instituting a proceeding in court, and for sixty days thereafter 74oqdpww. Did the pendency of the taxpayer's appeal in the Court of Tax Appeals and in the Supreme Court have the effect of legally preventing the Commissioner of Internal Revenue from instituting an action in the Court of First Instance for the collection of the tax? Our view is that it did. From March 1, 1956 when Ker & Co., Ltd. Filed a petition for review in the Court of Tax Appeals contesting the legality of the assessments in question, until the termination of its appeal in the Supreme Court, the Commissioner of Internal Revenue was prevented, as recognized in this Court's ruling in Ledesma, et al. V. Court of Tax Appeals, 10 from filing an ordinary action in the Court of First Instance to collect the tax. Besides, to do so would be to violate the judicial policy of avoiding multiplicity of suits and the rule on lis pendens. 11 It would be interesting to note that when the Commissioner of Internal Revenue issued the final deficiency assessments on January 5, 1954, he had already lost, by prescription, the right to collect the tax (except that for 1950) by the summary method of warrant of distraint and levy. Ker & Co., Ltd. Immediately thereafter requested suspension of the collection of the tax without penalty incident to late payment pending the filing of a memorandum in support of its views. As requested, no tax was collected. On May 22, 1954 the projected memorandum was filed, but as of that date the Commissioner's right to collect by warrant of distraint and levy the deficiency tax for 1950 had already prescribed. So much so, that on March 1, 1956 when Ker & Co., Ltd. Filed a petition for review in the Court of Tax Appeals, the Commissioner of Internal Revenue had but one remedy left to collect the tax, that is, by judicial action. 12 However, as stated, an independent ordinary action in the Court of First Instance was not available to the Commissioner pursuant to Our ruling in Ledesma, et al. V. Court of Tax Appeals, supra, in view of the pendency of the taxpayer's petition for review in the Court of Tax Appeals. Precisely he urgently filed a motion to dismiss the taxpayer's petition for review with a view to terminating therein the proceedings in the shortest possible time in order that he could file a collection case in the Court of First Instance before his right to do so is cut off by the passage of time. As moved, the Tax Court dismissed the case and Ker & Co., Ltd. Appealed to the Supreme Court. By the time the Supreme Court affirmed the order of dismissal of the Court of Tax Appeals in L-12396 on January 31, 1962 more than five years had elapsed since the final assessments were made on January 5, 1954. Thereafter, the Commissioner of Internal Revenue demanded extra-judicially the payment of the deficiency tax in question and in reply the taxpayer, by its letter dated March 28, 1962, advised the Commissioner of Internal Revenue that the right to collect the tax has prescribed pursuant to Section 332 (c) of the Tax Code. Thus, did the taxpayer produce the effect of temporarily staying the hands of the Commissioner of Internal Revenue simply through a choice of remedy. And, if We were to sustain the taxpayer's stand, We would be encouraging taxpayers to delay the payment of taxes in the hope of ultimately avoiding the same. Under the circumstances, the Commissioner of Internal Revenue was in effect prohibited from collecting the tax in question. This being so, the provisions of Section 333 of the Tax Code will apply. Fourth Issue The Republic of the Philippines maintains that the delinquency interest on the deficiency income tax for 1948, 1949 and 1950 accrued and should commence from the date of the assessments as shown in the assessment notices, pursuant to Section 51(e) of the Tax Code, instead of from the date the complaint was filed as determined in the decision appealed from. Section 51 (e) of the Tax Code states: SEC. 51(e). Surcharge and interest in case of delinquency. To any sum or sums due and unpaid after the dates prescribed in subsections (b), (c) and (d) for the payment of the same, there shall be added the sum of five per centum on the amount of tax unpaid and interest at the rate of one per centum a month upon said tax from the time the same became due, except from the estates of insane, deceased, or insolvent persons. (emphasis supplied) Exhibit "F" the letter of assessment shows that the deficiency income tax for 1948 and 1949 became due on March 15, 1953 and that for 1950 accrued on February 15, 1954 in accordance with Section 51(d) of the Tax Code. Since the tax in question remained unpaid, delinquency interest accrued and became due starting from said due dates. The decision appealed from should therefore be modified accordingly. WHEREFORE, the decision appealed from is affirmed with the modification that the delinquency interest at the rate of 1% per month shall be computed from March 15, 1953 for the deficiency income tax for 1948 and 1949 and from February 15, 1954 for the deficiency income tax for 1950. With costs against Ker & Co., Ltd. So ordered.

Concepcion, C.J., Reyes, J.B.L., Barrera, Dizon, Regala, Makalintal, Zaldivar, Sanchez and Castro, JJ., concur. Footnotes 1Ker & Company, Ltd. V. The Court of Tax Appeals and The Collector of Internal Revenue, promulgated on January 31, 1962. 2Now Section 13, Rule 14 3hzs. 3Flores v. Zurbito, 37 Phil. 746; Menghra vs. Tarachand and Rewachand, 67 Phil. 286. 4Infante v. Toledo and Santiong, 44 Phil. 834, 840. 5Ramos v. Maalac, et al., 89 Phil. 270. 6Gutierrez v. Court of Tax Appeals, L-9738, L-9771, May 31, 1957. 7Section 12, Rule 15 (now Section 5, Rule 8), Rules of Court. 8Collector of Internal Revenue v. Benipayo, L-13656, January 31, 1962. 9Republic of the Philippines v. Albert, L-12996, December 28, 1961, Republic of the Philippines v. Lim Tian Teng Sons & Co., Inc., L-21731, March 31, 1966 0jbwlstg. 10L-11343, January 29, 1958. 11Par. (d), Section 1, Rule 8, now Par. (g), Section 1, Rule 16, Rules of Court. 12See Sec. 316, Tax Code. . (5)Republic of the Philippines SUPREME COURT Manila EN BANC G.R. Nos. L-13099 and L-13462 April 29, 1960

COLLECTOR OF INTERNAL REVENUE, petitioner, vs. BOHOL LAND TRANSPORTATION CO., respondent. BOHOL LAND TRANSPORTATION CO., petitioner, vs. COLLECTOR OF INTERNAL REVENUE, respondent. Solicitor General Edilberto Barot, Solicitor Felicisimo R. Rosete and Special Attorney Librada del Rosario-Natividad for the Collector of Internal Revenue. Isabelo V. Binamira and Filemon B. Barria for the Bohol Land Transportation Co. BAUTISTA ANGELO, J.: This in an appeal from a decision of the Court of Tax Appeals dated September 25, 1957 ordering the Bohol Land Transportation Co., hereinafter referred to as company, to pay the amounts of P20,711.99, P18,728.21 and P30,155.09 as deficiency income taxes for the years 1948, 1949 and 1950. The Bohol Land Transportation Co. Is a domestic corporation engaged in the land transportation business with main office at Tagbilaran, Bohol. From 1945 to 1951 had consistently filed its income tax returns and paid the corresponding income taxes due thereon as per said returns. Subsequently, a verification of its income returns was conducted by an examiner of the Bureau Internal Revenue and as a result the following deficiency assessments were issued against, it on August 4 and 5 1953: for 1945 the deficiency income tax assess P15,275.31; for 1946, P15,768.20; for 1947, P11,732.90; for 1948, P20,711.09; for 1949, 18,728.21; for 1950, P30,155.09, and for 1951, P30,189.00.

Due to the company's failure to settle said deficiency income taxes, the Collector of Internal Revenue issued warrant of distraint and levy on the property of the company on December 23, 1954. On March 8, 1956, the Collector garnished the sum of P53,910.13 deposited by the company with the Philippine National Bank, Manila Branch, and the current accounts and bank deposits it had with the Chartered Bank of India, Australia, and China, Cebu City, in the amount of P200,000.00. On April 7, 1956, the company filed in the Court of Tax Appeals an appeal contesting the validity of the deficiency assessments made by the Collector as well as of the warrant of distraint and levy issued by him. On May 7, 1956, the Collector filed his answer praying that the company be ordered to pay the deficiency income taxes for the years 1945 to 1951, plus the delinquent penalties that have accrued thereon, in accordance with the assessments made by him. On January 10, 1957, the company filed with the Court of Tax Appeals an urgent motion for mandatory injunction praying that the Collector be required (1) to revoke the warrant of distraint and levy and/or garnishment issued against its properties consisting of 79 motor buses, lands, buildings and office and shop equipment, and against its deposits in the Philippine National Bank, Manila, and the Chartered Bank of India, Australia, and China Cebu City; and (2) to enjoin him from collecting by summary methods the aforesaid deficiency income taxes for the years 1945 to 1951, inclusive. At the hearing on the injunction, the Collector admitted that pursuant to several decisions of the Supreme Court he has no authority to collect by summary methods the income taxes assessed against the company for the years 1945 to 1950, inclusive, it appearing that the warrant of distraint and levy and the warrant of garnishment were issued beyond the period of three years from the time the income tax returns were filed. Consequently, the parties entered into an agreement dated February 23, 1957 whereby the Collector agreed to withdraw the warrant of distraint and levy against the properties of the company as well as the warrant of garnishment issued against its deposit with the Chartered Bank of India, Austria, and China, Cebu City in the amount of P200,000.00, but "leaving the cash deposit with the Philippine National Bank in Manila, in the amount of P53,910.13, subject to said garnishment to guarantee the interest of the Government with respect to the collection of the tax assessment for the year 1951." At the hearing of the case on the merits, the company in spite of the suggestion of the court did not present any evidence to show the incorrectness of the deficiency income tax assessments with respect to the years 1945 to 1950, inclusive, and so the court considered such failure fatal in view of the theory that the assessment made by the Collector is presumed to be prima facie correct unless controverted. Hence, the Court of Tax Appeals held the petitioner liable for deficiency income taxes for the years 1948, 1949 and 1950. However, the court found and held that the collection of deficiency taxes from 1945 to 1947 has already prescribed for the reason that the assessments corresponding to said years had been made beyond the 5-year period counted from the time the returns for said years were filed. From this decision, both parties have appealed. The Collector of Internal Revenue is appealing from that portion of the decision which holds that the right of the Government to assess and collect by judicial action the income taxes for the years 1945 to 1947, inclusive, has already prescribed, invoking our ruling in the case of Collector of Internal Revenue vs. Jose Avelino, et al., 100 Phil., 327; 54 Off. Gaz. [31 645, November 10, 1956, the pertinent portion of which reads: It is true that under section 331 and 332 of the National Internal Revenue Code the Collector of Internal Revenue may assess an internal revenue tax within five years after the return was filed, and in case of a false or fraudulent return he may also assess such tax as may be found to be due at any time within ten years after the discovery of the falsity, fraud or omission, and their collection may be enforced either by distraint or levy or by a proceeding in court; but said sections merely apply to internal revenue taxes in general and not to income taxes the collection of which is specifically provided for under a different title of the same law. Thus, when the National Internal Revenue Code was codified and enacted in 1939, the whole Act No. 2833, commonly known as the Income Tax Law, was incorporated therein and became Title II thereof, which is exclusively devoted to income tax, section 51 (d) of said Code, which refers to the assessment and payment of income tax, being merely a reproduction of section 9(a) of the former Income Tax Law, but there is nothing provided in the new Code from which it may be inferred that the provisions of said section 51(d) were deemed repealed or modified by the provisions of sections 331 and 332 thereof. Since repeals by implication are not favored, unless the contrary clearly appears, and it is a well known rule that conflicting provisions should be harmonize and reconcile so that both may be given force and validity, it is our duty to harmonize and reconcile them if only to give effect to the clear intent of our legislative body. A cursory reading of the provisions of our National Internal Revenue Code regarding the collection of income tax as distinguished from internal revenue taxes in general clearly reveals the intention of our legislative body to preserve in toto the procedure and method of collection originally adopted with regard to the former considering its nature and peculiarities in spite of the adoption of a similar method of collection with some variation with regard to the latter. And because of this manifest intent of Congress, we have no other course of action than to hold that the two provisions are valid and binding, one being special, particularly applicable to income tax, and the other general, applicable to other kinds of internal revenue taxes. To hold otherwise would be to render nugatory and meaningless section 51(d) of our National Internal Revenue Code, a conclusion not warranted by the circumstances, since it cannot be presumed that Congress has adopted it merely through an oversight. We find no sufficient justification for such conclusion. In other words, because in the aforesaid case we said that Sections 331 and 332 of the National Internal Revenue Code apply to internal revenue taxes in general and not to income taxes the collection of which is specifically provided for under a different title of the same Code, particularly Title II which refers exclusively to income tax, the Collector concludes that the right of the Government to assess and collect income

taxes by judicial action has no definite period of limitation and so the deficiency income taxes for 1945, 1946 and 1947 which the Government is seeking to collect has not as yet prescribed. But it should be noted that in expressing the opinion that the right to collect by summary methods can only be exercised within the period of the year from the time the return is filed, otherwise the right can only be enforced by judicial action, this Court did not say that the right to collect by judicial action is unlimited or imprescriptible. The only question on which we have been called upon to determine is whether Section 51 (d) of the National Internal Revenue Code, which refers to the collection of income taxes, shall be deemed to have been repealed by implication by Sections 331 and 332 of the same Code, which refers to internal revenue taxes in general, in view of their apparent conflicting provisions. We held then that said Section 51 cannot be deemed to have been repealed because it refers exclusively to income tax which is covered by a separate title of the Code and which Congress has intended to preserve in toto by incorporating it therein This view is reflected in the following portion of our decision: . . . A cursory reading of the provisions of our National Internal Revenue Code regarding the collection of income tax as distinguished from internal revenue taxes in general clearly reveals the intention of our legislative body to preserve in toto the procedure and method of collection originally adopted with regard to the former considering its nature and peculiarities in spite of the adoption of a similar method of collection with some variation with regard to the latter. And because of this manifest intent of Congress, we have no other course of action than to hold that the two provisions are valid and binding, one being special, particularly applicable to income tax, and the other general, applicable to other kinds of internal revenue taxes. To hold otherwise would be to render nugatory and meaningless section 51(d) of our National Internal Revenue Code, a conclusion not warranted by the circumstances, since it cannot be presumed that Congress has adopted it merely through an oversight. We find no sufficient justification for such conclusion. (The Collector of internal Revenue v. Avelino, supra) We notice, however, that Section 51 (d) of the National Internal Revenue Code, which refers to the collection of income tax, by judicial action is concerned the prescriptive period therein mentioned being merely applicable to collection by summary methods, as interpreted by this Court. Considering this void in the law applicable to income tax, and bearing in mind that, Section 331 of the Code which provides for the limitation upon assessment and collection by judicial action comes under Title IX, Chapter II, which refers to "CIVIL", REMEDIES FOR COLLECTION OF TAXES", we may conclude that the provisions of said Section 331 are general in character which may be considered suppletory with regard to matter not covered by the title covering income tax. In other words, Title 11 of the Code is a special provision which governs exclusively all matters pertaining to income tax, whereas Title IX, Chapter II, is a general provision which governs all internal revenue taxes in general, which cannot apply insofar as it may conflict with the provisions of Title II as to which the latter shall prevail, but that in the absence of any provision in said Title, III relative to the period and method of collection of the tax, the provisions of Title 1X, Chapter II, may be deemed to be suppletory in, character. Hence, in our opinion, the Court of Tax Appeals did not err in holding that the right of the Government to collect the deficiency income taxes for the years 1945, 1946 and 1947 has already prescribed under Section 331 of the National Internal Revenue Code. Coming now to the appeal of the company, the following are the errors ascribed to the trial court: (1) in holding that the proceeding for review instituted by the company is equivalent to a judicial action within the purview of Section 332 (c) of the Tax Code; (2) in holding that under the facts and circumstances of this case, the tax assessments for the years 1948, 1949 and 1950 are presumptively correct; (3) in holding the company liable for the payment of the 1948, 1949 and 1950 tax assessments; and (4) in denying its motion for reconsideration reopening to enable it in the interest of justice to introduce further evidence to prove the errors committed in the assessment for 1948, 1949 and 1950. In holding that the appeal interposed by the company with the Court of Tax Appeals is equivalent to a judicial action within the purview of Section 332 (c) of. The Tax Code, the Court of Tax Appeals made the following comment: We find his theory not well taken. The judicial action contemplated may refer not only to the civil case instituted by the government to collect the tax but also to, a case where the taxpayer takes the initiative to contest the validity of the assessment or collection of taxes by the Collector of Internal Revenue. The objective in both cases is the same the validity and correctness of the determination and collection of the tax. Thus, a single claim filed by the Collector of Internal Revenue against the estate of a deceased in a probate case has been recognized as tantamount to the judicial collection of taxes. (Collector vs. Annie Laurie Haygood, 65 Phil., 520). On the other hand, in a claim for refund instituted against the Collector of Internal Revenue, the Supreme Court considered the taxpayer's suit for refund as sufficient judicial action for the collection of taxes on the part of the former (see Phil. Sugar Estate Development Co., Inc. Vs.Posadas, 65 Phil., 216). We agree with the foregoing view. Indeed, had the company not taken the matter to the Court of Tax Appeals, the Collector would have reasonably taken a similar action for, as it should be noted, he has already taken the preliminary step, which is the collection by distraint and levy, to insure the effective collection of the tax assessed against the company. And when the company appealed the Collector's decision, the Collector was placed in the alternative of sustaining his decision, which is tantamount to a judicial action. As the Court of Tax Appeals well observed, "The objective in both cases is the same the validity and correctness of the determination and collection of the tax." Indeed, the action of the Collector cannot be taken in any other light. It is a judicial action pure and simple. The company argues that its failure to substantiate its defense insofar as the years 1945 to 1950 are concerned should not be held against it for there is no validity to the prima facie correctness of the Collector's findings since the assessments are signed not by the Collector, nor by the chief of income tax division, but by one Casto Ayeras, who did not even reveal his position, nor state if he had any authority to sign for his chief.

This contention is untenable, for a cursory examination of the assessment notices will show that they were duly signed by Ayeras in behalf of his chief, the Collector. Under the set-up of the Bureau of Internal Revenue, the chief of the income tax division as regards tax assessments is possessed of delegated powers to issue assessment notices in behalf of the Collector of Internal Revenue. And in such a case we may not infer that the decision is not the decision of the Collector himself. Nor is the fact that the tax assessments were not duly sworn to of any consequence, because tax assessments are not required by law to be under oath. With regard to the second issue raised, what transpired during the trial is as follows: When the turn of the company to present its evidence with regard to the alleged errors committed in the assessment of the deficiency income taxes for the years 1948, 1949 and 1950 came, its counsel informed the court that he was abstaining from presenting any evidence in view of the theory he entertained that the interposition of the present appeal is not equivalent to a judicial action within the purview of the law, and he adopted this attitude in order that he may not be taken as having waived his right to press that legal question. But counsel for the company took the action we have related above in spite of the suggestion of the court that he present his evidence without prejudice to having that legal question determined when the case is decided. On the merits, but he remained adamant and desisted from presenting his evidence. And when the decision came contrary to his theory it was only then that he filed a motion for reopening in order that he may be given his chance to present evidence invoking the interest of justice. We agree with the Solicitor General that such honest mistake on the part of counsel cannot be considered a ground for reopening the case for he has taken such action at his own risk. This is especially so when the court has already suggested that he present his evidence without prejudice of pressing the issue later and he disregarded the suggestion. Since no evidence was presented to substantiate the errors that are claimed to have been committed by the Collector in making the assessments for the years 1948, 1949 and 1950, the trial court had no other alternative than to resort to the legal truism that "all presumptions are in favor of the correctness of tax assessments". The burden of proof is on the taxpayer to show the contrary. This the company failed to do. This action find support in the following authorities: All presumptions are in favor of the correctness of tax assessments. The good faith of tax assessors and the validity of their actions are presumed. They will be presumed to have taken into consideration all the facts to which their attention was called. No presumption can be indulged that all of the public officials of the state in the various counties who have to do with the assessment of property for taxation will knowingly violate the duties imposed upon them by law. As a logical outgrowth of the presumption in favor of the validity of assessments, when such assessments are assailed, the burden of proof is upon the complaining party. It is incumbent upon the property owner clearly to show that the assessment was erroneous, in order to relieve himself from it.' (51 Am. Jur. Pages 620-621). (Interprovincial Autobus Co., Inc. Vs. Collector of Internal Revenue, 98 Phil., 290; 52 Off. Gaz., [2] 791.) When an importer challenges by legal steps the correctness the assessment of a duty by the Collector of Customs, the question to be decided is not whether the Collector was wrong but whether the importer was right, the burden being on the latter to establish the correctness of his own contention. (Behn, Meyer & Co.vs. Collector of Customs, 26 Phil., 647) That the determination of the tax deficiency by the Government has prima facie validity and the burden rests upon the taxpayer to overcome this presumption and to show to the satisfaction of the Tax Court that the determination was not correct. (Perez vs. Court of Tax Appeals, et al., G.R. No. L-10507, May 30, 1958) Wherefore, the decision appealed from is affirmed, without pronouncement as to costs. Paras, C.J., Bengzon, Montemayor, Labrador, Concepcion, Endencia, Barrera and Gutierrez David, JJ., concur.

(6)Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-9687 June 30, 1961

LIDDELL & CO., INC., petitioner-appellant, vs. THE COLLECTOR OF INTERNAL REVENUE, respondent-appellee.

Ozaeta, Lichauco and Picazo for petitioner-appellant. Office of the Solicitor General for respondent-appellee. BENGZON, C.J.: Statement. This is an appeal from the decision of the Court of Tax Appeals imposing a tax deficiency liability of P1,317,629.61 on Liddell & Co., Inc. Said Company lists down several issues which may be boiled to the following: (a) Whether or not Judge Umali of the Tax Court below could validly participate in the making of the decision; (b) Whether or not Liddell & Co. Inc., and the Liddell Motors, Inc. Are (practically) identical corporations, the latter being merely .the alter ego of the former; (c) Whether or not, granting the identical nature of the corporations, the assessment of tax liability, including the surcharge thereon by the Court of Tax Appeals, is correct. Undisputed Facts. The parties submitted a partial stipulation of facts, each reserving the right to present additional evidence. Said undisputed facts are substantially as follows: The petitioner, Liddell & Co. Inc., (Liddell & Co. For short) is a domestic corporation establish in the Philippines on February 1, 1946, with an authorized capital of P100,000 divided into 1000 share at P100 each. Of this authorized capital, 196 shares valued at P19,600 were subscribed and paid by Frank Liddell while the other four shares were in the name of Charles Kurz, E.J. Darras, Angel Manzano and Julian Serrano at one shares each. Its purpose was to engage in the business of importing and retailing Oldsmobile and Chevrolet passenger cars and GMC and Chevrolet trucks.. On January 31, 1947, with the limited paid-in capital of P20,000, Liddell & Co. Was able to declare a 90% stock dividend after which declaration on, Frank Liddells holding in the Company increased to 1,960 shares and the employees, Charles Kurz E.J. Darras, Angel Manzano and Julian Serrano at 10 share each. The declaration of stock dividend was followed by a resolution increasing the authorized capital of the company to P1,000.000 which the Securities & Exchange Commission approved on March 3, 1947. Upon such approval, Frank Liddell subscribed to 3,000 additional shares, for which he paid into the corporation P300,000 so that he had in his own name 4,960 shares. On May 24, 1957, Frank Liddell, on one hand and Messrs. Kurz, Darras, Manzano and Serrano on the other, executed an agreement (Exhibit A) which was further supplemented by two other agreements (Exhibits B and C) dated May 24, 1947 and June 3, 1948, wherein Frank Liddell transferred (On June 7, 1948) to various employees of Liddell & Co. Shares of stock. At the annual meeting of stockholders of Liddell & Co. Held on March 9, 1948, a 100% stock dividend was declared, thereby increasing the issued capital stock of aid corporation from P1,000.000 to P 3,000,000 which increase was duly approved by the Securities and Exchange Commission on June 7, 1948. Frank Liddell subscribed to and paid 20% of the increase of P400,000. He paid 25% thereof in the amount of P100,000 and the balance of P3,000,000 was merely debited to Frank Liddell-Drawing Account and credited to Subscribed Capital Stock on December 11, 1948. On March 8, 1949, stock dividends were again issued by Liddell & Co. And in accordance with the agreements, Exhibits A, B, and C, the stocks of said company stood as follows: Name Frank Liddell Irene Liddell Mercedes Vecin Charles Kurz E.J. Darras Angel Manzano Julian Serrano No. Of Shares 13,688 1 1 1,225 1,225 1,150 710 Amount P1,368,800 100 100 122,500 122,500 115,000 71,000 Per Cent 72.00% .01% .01% 6.45% 6.45% 6.06% 3.74%

E. Hasim G. W. Kernot

500 500 19,000

50,000 50,000 P1,900,000

2.64% 2.64% 100.00%

On November 15, 1948, in accordance with a resolution of a special meeting of the Board of Directors of Liddell & Co., stock dividends were again declared. As a result of said declaration and in accordance with the agreements, Exhibits, A, B, and C, the stockholdings in the company appeared to be: Name Frank Liddell Irene Liddell Mercedes Vecin Charles Kurz E.J. Darras Angel Manzano Julian Serrano E. Hasim G. W. Kernot No. Of Shares 19,738 1 1 2,215 2,215 1,810 1,700 830 1,490 30,000 Amount P1,973,800 100 100 221,500 221,500 181,000 170,000 83,000 149,000 P3,000,000 Per Cent 65.791% .003% .003% 7.381% 7.381% 6.031% 5.670% 2.770% 4.970% 100.000%

On the basis of the agreement Exhibit A, (May, 1947) "40%" of the earnings available for dividends accrued to Frank Liddell although at the time of the execution of aid instrument, Frank Liddell owned all of the shares in said corporation. 45% accrued to the employees, parties thereto; Kurz 12-1/2%; Darras 12-1/2%; A. Manzano 12-1/2% and Julian Serrano 7-1/2%. The agreement Exhibit A was also made retroactive to 1946. Frank Liddell reserved the right to reapportion the 45% dividends pertaining to the employees in the future for the purpose of including such other faithful and efficient employees as he may subsequently designate. (As a matter of fact, Frank Liddell did so designate two additional employees namely: E. Hasim and G. W. Kernot). It was for such inclusion of future faithful employees that Exhibits B-1 and C were executed. As per Exhibit C, dated May 13, 1948, the 45% given by Frank Liddell to his employees was reapportioned as follows: C. Kurz 12,%; E. J. Darras 12%; A. Manzano l2%; J. Serrano 3-1/2%; G. W. Kernot 2%. Exhibit B contains the employees' definition in detail of the manner by which they sought to prevent their share-holdings from being transferred to others who may be complete strangers to the business on Liddell & Co. From 1946 until November 22, 1948 when the purpose clause of the Articles of Incorporation of Liddell & Co. Inc., was amended so as to limit its business activities to importations of automobiles and trucks, Liddell & Co. Was engaged in business as an importer and at the same time retailer of Oldsmobile and Chevrolet passenger cars and GMC and Chevrolet trucks. On December 20, 1948, the Liddell Motors, Inc. Was organized and registered with the Securities and Exchange Commission with an authorized capital stock of P100,000 of which P20,000 was subscribed and paid for as follows: Irene Liddell wife of Frank Liddell 19,996 shares and Messrs. Marcial P. Lichauco, E. K. Bromwell, V. E. Del Rosario and Esmenia Silva, 1 share each. At about the end of the year 1948, Messrs. Manzano, Kurz and Kernot resigned from their respective positions in the Retail Dept. Of Liddell & Co. And they were taken in and employed by Liddell Motors, Inc.: Kurz as Manager-Treasurer, Manzano as General Sales Manager for cars and Kernot as General Sales Manager for trucks. Beginning January, 1949, Liddell & Co. Stopped retailing cars and trucks; it conveyed them instead to Liddell Motors, Inc. Which in turn sold the vehicles to the public with a steep mark-up. Since then, Liddell & Co. Paid sales taxes on the basis of its sales to Liddell Motors Inc. Considering said sales as its original sales. Upon review of the transactions between Liddell & Co. And Liddell Motors, Inc. The Collector of Internal Revenue determined that the latter was but an alter ego of Liddell & Co. Wherefore, he concluded, that for sales tax purposes, those sales made by Liddell Motors, Inc. To the public were considered as the original sales of Liddell & Co. Accordingly, the Collector of Internal Revenue assessed against Liddell & Co. A sales tax deficiency, including surcharges, in the amount of P1,317,629.61. In the computation, the gross selling price of Liddell Motors, Inc. To the general public from January 1, 1949 to September 15, 1950, was made the basis without deducting from the selling price, the taxes already paid by Liddell & Co. In its sales to the Liddell Motors Inc.

The Court of Tax Appeals upheld the position taken by the Collector of Internal Revenue. A. Judge Umali: Appellant urges the disqualification on of Judge Roman M. Umali to participate in the decision of the instant case because he was Chief of the Law Division, then Acting Deputy Collector and later Chief Counsel of the Bureau of Internal Revenue during the time when the 1 assessment in question was made. In refusing to disqualify himself despite admission that had held the aforementioned offices, Judge Umali stated that he had not in any way participated, nor expressed any definite opinion, on any question raised by the parties when this case was presented for resolution before the said bureau. Furthermore, after careful inspection of the records of the Bureau, he (Judge Umali as well as the other members of the court below), had not found any indication that he had expressed any opinion or made any decision that would tend to disqualify him from participating in the consideration of the case in the Tax Court. At this juncture, it is well to consider that petitioner did not question the truth of Judge Umali's statements. In view thereof, this Tribunal is not inclined to disqualify said judge. Moreover, in furtherance of the presumption of the judge's moral sense of responsibility this Court has adopted, and now here repeats, the ruling that the mere participation of a judge in prior proceedings relating to the subject in the capacity of 2 an administrative official does not necessarily disqualify him from acting as judge. Appellant also contends that Judge Umali signed the said decision contrary to the provision of Section 13, Republic Act No. 1125; that whereas the case was submitted for decision of the Court of Tax Appeals on July 12, 1955, and the decision of Associate Judge Luciano and Judge Nable were both signed on August 11, 1955 (that is, on the last day of the 30-day period provided for in Section 13, Republic Act No. 1125), Judge Umali signed the decision August 31, 1955 or 20 days after the lapse of the 30-day period allotted by law. By analogy it may be said that inasmuch as in Republic Act No. 1125 (law creating the Court of Tax Appeals) like the law governing the procedure in the court of Industrial Relations, there is no provision invalidating decisions rendered after the lapse of 30 days, the requirement 4 of Section 13, Republic Act No. 1125 should be construed as directory. Besides as pointed out by appellee, the third paragraph of Section 13 of Republic Act No. 1125 (quoted in the margin) confirms this view; because in providing for two thirty-day periods, the law means that decision may still be rendered within the second period of thirty days (Judge Umali signed his decision within that period). B. Identity of the two corporations: On the question whether or not Liddell Motors, Inc. Is the alter ego of Liddell & Co. Inc., we are fully convinced that Liddell & Co. Is wholly owned by Frank Liddell. As of the time of its organization, 98% of the capital stock belonged to Frank Liddell. The 20% paid-up subscription with which the company began its business was paid by him. The subsequent subscriptions to the capital stock were made by him and paid with his own money. These stipulations and conditions appear in Exhibit A: (1) that Frank Liddell had the authority to designate in the future the employee who could receive earnings of the corporation; to apportion among the stock holders the share in the profits; (2) that all certificates of stock in the names of the employees should be deposited with Frank Liddell duly indorsed in blank by the employees concerned; (3) that each employee was required to sign an agreement with the corporation to the effect that, upon his death or upon his retirement or separation for any cause whatsoever from the corporation, the said corporation should, within a period of sixty days therefor, have the absolute and exclusive option to purchase and acquire the whole of the stock interest of the employees so dying, resigning, retiring or separating. These stipulations in our opinion attest to the fact that Frank Liddell also owned it. He supplied the original his complete control over the corporation. As to Liddell Motors, Inc. We are fully persuaded that Frank Liddell also owned it. He supplied the original capital funds. It is not proven that his 7 wife Irene, ostensibly the sole incorporator of Liddell Motors, Inc. Had money of her own to pay for her P20,000 initial subscription. Her income in the United States in the years 1943 and 1944 and the savings therefrom could not be enough to cover the amount of subscription, much less to operate an expensive trade like the retail of motor vehicles. The alleged sale of her property in Oregon might have been true, but the money received therefrom was never shown to have been saved or deposited so as to be still available at the time of the organization of the Liddell Motors, Inc. The evidence at hand also shows that Irene Liddell had scant participation in the affairs of Liddell Motors, Inc. She could hardly be said to possess business experience. The income tax forms record no independent income of her own. As a matter of fact, the checks that represented her salary and bonus from Liddell Motors, Inc. Found their way into the personal account of Frank Liddell. Her frequent absences from the country negate any active participation in the affairs of the Motors company. There are quite a series of conspicuous circumstances that militate against the separate and distinct personality of Liddell Motors, Inc. From 8 Liddell & Co. We notice that the bulk of the business of Liddell & Co. Was channeled through Liddell Motors, Inc. On the other hand, Liddell Motors, Inc. Pursued no activities except to secure cars, trucks, and spare parts from Liddell & Co. Inc. And then sell them to the general public. These sales of vehicles by Liddell & Co. To Liddell Motors, Inc. For the most part were shown to have taken place on the same day that Liddell Motors, Inc. Sold such vehicles to the public. We may even say that the cars and trucks merely touched the hands of Liddell Motors, Inc. As a matter of formality.
6 5 3

During the first six months of 1949, Liddell & Co. Issued ten (10) checks payable to Frank Liddell which were deposited by Frank Liddell in his personal account with the Philippine National Bank. During this time also, he issued in favor of Liddell Motors, Inc. Six (6) checks drawn against his personal account with the same bank. The checks issued by Frank Liddell to the Liddell Motors, Inc. Were significantly for the most part 9 issued on the same day when Liddell & Co. Inc. Issued the checks for Frank Liddell and for the same amounts. It is of course accepted that the mere fact that one or more corporations are owned and controlled by a single stockholder is not of itself 10 sufficient ground for disregarding separate corporate entities. Authorities support the rule that it is lawful to obtain a corporation charter, even with a single substantial stockholder, to engage in a specific activity, and such activity may co-exist with other private activities of the stockholder. If the corporation is a substantial one, conducted lawfully and without fraud on another, its separate identity is to be respected. Accordingly, the mere fact that Liddell & Co. And Liddell Motors, Inc. Are corporations owned and controlled by Frank Liddell directly or indirectly is not by itself sufficient to justify the disregard of the separate corporate identity of one from the other. There is, however, in this instant case, a peculiar consequence of the organization and activities of Liddell Motors, Inc. Under the law in force at the time of its incorporation the sales tax on original sales of cars (sections 184, 185 and 186 of the National Internal Revenue Code), was progressive, i.e. 10% of the selling price of the car if it did not exceed P5000, and 15% of the price if more than P5000 but not more than P7000, etc. This progressive rate of the sales tax naturally would tempt the taxpayer to employ a way of reducing the price of the first sale. And Liddell Motors, Inc. Was the medium created by Liddell & Co. To reduce the price and the tax liability. Let us illustrate: a car with engine motor No. 212381 was sold by Liddell & Co. Inc. To Liddell Motors, Inc. On January 17, 1948 for P4,546,000.00 including tax; the price of the car was P4,133,000.23, the tax paid being P413.22, at 10%. And when this car was later sold (on 11 the same day) by Liddell Motors, Inc. To P.V. Luistro for P5500, no more sales tax was paid. In this price of P5500 was included the P413.32 representing taxes paid by Liddell & Co. Inc. In the sale to Liddell Motors, Inc. Deducting P413.32 representing taxes paid by Liddell & Co., Inc. The price of P5500, the balance of P5,087.68 would have been the net selling price of Liddell & Co., Inc. To the general public (had Liddell Motors, Inc. Not participated and intervened in the sale), and 15% sales tax would have been due. In this transaction, P349.68 in the form of taxes was evaded. All the other transactions (numerous) examined in this light will inevitably reveal that the Government coffers had been deprived of a sizeable amount of taxes. As opined in the case of Gregory v. Helvering, "the legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or 13 altogether avoid them by means which the law permits, cannot be doubted." But, as held in another case, "where a corporation is a dummy, is unreal or a sham and serves no business purpose and is intended only as a blind, the corporate form may be ignored for the law cannot countenance a form that is bald and a mischievous fiction." Consistently with this view, the United States Supreme Court held that "a taxpayer may gain advantage of doing business thru a corporation if he pleases, but the revenue officers in proper cases, may disregard the separate corporate entity where it serves but as a shield for tax evasion and treat the person who actually may take the benefits of the transactions as the person accordingly taxable." Thus, we repeat: to allow a taxpayer to deny tax liability on the ground that the sales were made through an other and distinct corporation when it is proved that the latter is virtually owned by the former or that they are practically one and the same is to sanction a circumvention of 15 our tax laws. C. Tax liability computation: In the Yutivo case the same question involving the computation of the alleged deficiency sales tax has been raised. In accordance with our ruling in said case we hold as correctly stated by Judge Nable in his concurring and dissenting opinion on this case, that the deficiency sales tax should be based on the selling price obtained by Liddell Motors, Inc. To the public AFTER DEDUCTING THE TAX ALREADY PAID BY LIDDELL & CO., INC. In its sales to Liddell Motors, Inc. On the imposition of the 50% surcharge by reason of fraud, we see that the transactions between Liddell Motors Inc. And Liddell & Co., Inc. Have always been embodied in proper documents, constantly subject to inspection by the tax authorities. Liddell & Co., Inc. Have always made a full report of its income and receipts in its income tax returns. Paraphrasing our decision in the Yutivo case, we may now say, in filing its return on the basis of its sales to Liddell Motors, Inc. And not on those by the latter to the public, it cannot be held that the Liddell & Co., Inc. Deliberately made a false return for the purpose of defrauding the government of its revenue, and should suffer a 50% surcharge. But penalty for late payment (25%) should be imposed. In view of the foregoing, the decision appealed from is hereby modified: Liddell & Co., Inc. Is declared liable only for the amount of P426,811.67 with 25% surcharge for late payment and 6% interest thereon from the time the judgment becomes final. As it appears that, during the pendency of this litigation appellant paid under protest to the Government the total amount assessed by the Collector, the latter is hereby required to return the excess to the petitioner. No costs.
16 14 12

Padilla, Labrador, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, De Leon and Natividad, JJ., concur.

Footnotes
1

Section 5, Rep. Act No. 1125: "Judges of the said Court shall be disqualified from sitting in any case on the same grounds provided under Rule One Hundred Twenty-six of the Rules of Court for the disqualification of judicial offices."
2

Gov't of the Phil. V. Heirs of Abella, 49 Phil. 374.

See. 13, Republic Act No. 1125. Decision. Cases brought before the Court shall be decided within thirty days after the submission thereof for decision.
4

See case of Permanent Concrete Products, Inc., and Santiago v. Juan Frivalden, L-14179, September 10, 1960.

"If no decision is rendered by the Court within thirty days from the date a case is submitted for decision, the party adversely affected by said ruling, order or decision, may file with said Court a notice of intention to appeal, and if, within thirty days from the filing of said notice, no decision has as yet been rendered by the Court, the aggrieved party may file directly with the Supreme Court an appeal from said decision, ruling or order, notwithstanding the foregoing provisions of this section." (Emphasis ours).
6

In fact it was paid by her husband's personal check. The other four owned only one share each. Appellee's brief describes several. We mention only a few. See Exhibits 2 to 17.

10

Burnet, Commissioner v. Clarke, 287 U.S. 410, 53 S. Ct. 207, 77 L. Ed. 397; Burnet, Commissioner v. Commonwealth Improvement Co., 287 U.S. 415, 53 S. Ct. 198, 77 L. Ed.
11

At this price sales tax of 15% would have represented P825.00. 293 U.S. 465, 7 L. Ed. 596, 599, 55 S. Ct. Higgins v. Smith, 1940, 308 U.S. 406, 84 L. Ed. Higgins v. Smith (supra). Cf. Koppel v. Yatco, 77 Phil. 496.16 Yutivo Sons Hardware Co. V. The Collector of Internal Revenue, L-13203, January 28, 1961. Yutivo & Son Hardware Co. Vs. The Collector of Internal Revenue, 110 Phil., 750.

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13

14

15

16

(7)Republic of the Philippines SUPREME COURT Manila

EN BANC

DECISION

July 30, 1970 G.R. No. L-26806 , vs. ROYAL INTEROCEAN LINES and THE COURT OF TAX APPEALS, respondents. Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosette and Special-Attorneys Cesar L. Kierulf Epifanio G. Gonzales and Sonia S. Soriano for petitioner. Ross, Salcedo, Del Rosario, Bito & Misa for respondent Royal Interocean Lines. . , J.: Appeal by the Commissioner of Internal Revenue from a decision of the Court of Tax Appeals reversing that of said official, in connection with the liability of the Royal Interocean Lines, Inc., for deficiency carrier's percentage tax, plus surcharge. Said Royal Interocean Liner, Inc. hereinafter referred to as the taxpayer is a foreign corporation duly licensed to do business in the Philippines, with head office in Amsterdam, Holland. The taxpayer is engaged in the operation of ocean-going vessels, plying between the Philippines and other countries, transporting passengers and cargo. It is, likewise, an agent and representative of the Holland East Asia Lines, a Dutch shipping company, from which the taxpayer receive compensation in the form of commissions for services rendered. It is not disputed that from February to May, 1962, inclusive, vessels of the taxpayer and/or the Holland East Asia Lines called at Philippine ports to load cargo, with freight, payable at destination, valued at US $37,501.50. This sum had been collected by and paid to the taxpayer's head office in Holland, and was not actually turned over or forwarded, as such freight fees, to the taxpayer in the Philippines. The only remittances received by the latter from its aforementioned head office were those made, through its agent bank, for the operational expenses of the branch office in the Philippines. Prior to January, 1962, its dollar earnings derived from freight revenues were converted into the Philippine peso equivalent thereof, under the prevailing free market rate, for purposes of the common carrier's tax prescribed in Section 192 of the National Internal Revenue Code. Thereafter, the taxpayer discontinued this practice and, since February, 1962, it reported said revenues, in its monthly returns for carrier's tax, based on the parity rate of P2 to $1, and paid P1,500.00 as such carrier's tax. Upon examination of the records of the taxpayer, the Commissioner of Internal Revenue, hereinafter referred to as the petitioner, held that, applying the free market converse on rate, the taxpayer's gross receipts from February to May, 1962, aggregated P163,776.38, and, based thereon demanded payment of P2,219,35 as deficiency common carrier's tax, plus surcharge and penalty. Having found, soon later, that the sum of P29,920.50 had twice been included in the computation of said receipts, petitioner subsequently agreed with the taxpayer that its gross receipts for the period in question, reckoned on the free market conversion rate, amounted to P133,855.88, based on which petitioner demanded, in a letter received by the taxpayer on January 18, 1963, payment of the total sum of P1,471.39, consisting of P1,177.12, as deficiency carrier's tax, plus a 25% surcharge, computed as follows: Total gross receipts ($37,501.50. U.S. currency) converted to Philippine currency at market rate ................ P133,855.88 Percentage tax (2% of P133,855.88) .............................. P 2,677.12 Less: Amount paid (based on P2.00 to $1.00, parity rate) ........ 1,500.00 Deficiency tax ................................................................. 1,177.12 25% surcharge ............................................................... 294.27 Total amount assessed .................................................... P 1,471.39 Petitioner, likewise, demanded payment of P200.00 as compromise penalty. The taxpayer protested against this deficiency assessment, upon the ground that the conversion rate should be the parity rate of P2 to a US dollar, not the current market rate, it being conceded that the freight fees in question had not been physically remitted, as such, to the taxpayer in the Philippines, but were actually collected by its head office abroad, which had remitted no funds to the former, except those needed for its operating expenses. The last remittance therefor amounted to $20,000. Petitioner having overruled the protest, the taxpayer

appealed to the Court of Tax Appeals, which, relying mainly upon Commissioner of Internal Revenue v. United States Lines, 1 reversed petitioner's decision, without costs. Hence this appeal by the petitioner, which we find to be well taken. Indeed, "due to the pressure on the international reserve of the country and the threat to economic stability," as well as "the state of exchange crisis the Monetary Board availed of the emergency power granted by Section 74 of Republic Act No. 265, otherwise known as the Central Bank Act, and issued, on December 9, 1949, Circular No. 20 restricting "sales of exchange by the Central Bank," subjecting "all transactions in gold and foreign exchange to licensing" by the same, and requiring the surrender thereto of 100% of all foreign exchange receipts at the official parity rate of P2 to a US dollar. Section 2 of Circular No. 42 of the Central Bank, dated May 21, 1953, provided, inter alia: The following are foreign exchange transactions and as required by Central Bank Circular No. 20 are subject to prior licensing by or on behalf of the Central Bank: xxx xxx xxx (d) Any act by which a resident debits or credits the account of a non-resident in any currency or the account of a resident in foreign currency; xxx xxx xxx (f) Any transaction by which a resident performs any service for a non-resident other than tourists or temporary visitors. If the proper license is obtained, the former shall demand and obtain payment for such service within ninety days in U.S. dollars or in any other foreign currency acceptable to the Central Bank; xxx xxx xxx (h) All collections of residents made abroad through their overseas branch offices, agents or representatives. Such collections shall be brought or ordered to be brought by such residents into the Philippines in U.S. currency or in any other currency acceptable to the Central Bank after deducting normal business expenses incurred by such overseas branch offices, agents or representatives; xxx xxx xxx (m) Any other transactions involving international financial implications. 2

Subdivision (h) of said section 2 of Circular No. 42 was amended on May 27, 1957, to read as follows: (h) All collections of residents made abroad thru their overseas branch office, agents or representatives. Such collections shall be brought or ordered to be brought by such residents into the Philippines in U.S. currency or in any other currency acceptable to the Central Bank. 3

Pursuant to this provision, the aforementioned freight fees earned by the taxpayer are the product of "foreign exchange" transactions, within the purview of Central Bank Circular No. 20, because, having been collected by the taxpayer's main office in Amsterdam, said fees are deemed to have been paid to the taxpayer in the Philippines, on behalf of which the former had acted; because they were due for services rendered in the Philippines, without which said main office would have had no right to collect or receive said fees; because the same represented the compensation for services performed by a resident of the Philippines the taxpayer's branch office therein; because they represented "collections of residents made abroad," to which subdivision (h) of said section 2 refers; and because they fall under the category of "(a)ny other transactions involving international financial implications," covered by subdivision (m) of the same section. It should be noted that on July 16, 1959, the policy incorporated in Circular No. 20 and implemented in subsequent circulars, was relaxed with the enactment of Republic Act No. 2609, which directed the monetary authorities to take steps for the adoption of a four-year program of gradual decontrol, during which the Monetary Board, with the approval of the President, could and did fix the conversion rate of the Philippine peso to the US dollar at a ratio other than that prescribed in Section 48 of Republic Act 265. During the period involved in the case at bar, the free market conversion rate ranged from P3.47 to P3.65 to a US dollar, at which rates the freight fees in question were computed in the contested assessment. Inasmuch as said fees were revenues derived from "foreign exchange" transactions, it follows necessarily that the petitioner was fully justified in computing the taxpayer's receipts at said free market rates 2hlm. The theory of the taxpayer to the effect that, not having been physically remitted to the Philippines, the fees in question do not partake of the nature of revenues derived from foreign exchange transactions, is manifestly devoid of merit. The transactions from which said revenues were derived involved the loading of cargo in the Philippines, the transportation of said cargo to its ports of destination, the delivery of the cargo to the respective consignees, and the payment of the corresponding fees to the taxpayer's head office at Amsterdam. As regards the taxpayer, the transactions were consummated upon delivery of the cargo to the consignee. Upon the other hand, the obligations of the latter or the shipper were discharged upon payment of the freight. Insofar as the parties to said transaction were concerned, the same were fully completed upon payment of the fees at Amsterdam. The question whether or not such fees were to be remitted by the taxpayer's head office in that City to its branch office in the Philippines, which had earned it, was one that concerned exclusively the former and the latter, it being independent of the rights and obligations of the parties to the aforementioned transactions, which were extinguished upon delivery of the cargo at destination and

payment of the freight to said maid office of the taxpayer. In short, the remittance or non-remittance of said fees could not affect the nature of said transactions, as involving foreign exchange, not being a part thereof in any manner whatsoever. Then again, we take it that in line with the ordinary course of business, adherence to which is presumed, in the absence of proof to the contrary upon receipt of said freight, the same must have been credited in the records of the taxpayer's main office in Amsterdam in favor of its branch office in the Philippines, and that, upon notice of such payment to the head office in Amsterdam, the branch office in the Philippines must have, in turn, debited said fees against its main office. Such processes of bookkeeping and accounting are, for legal purposes, tantamount to delivery, receipt, or remittance. In fact, by so crediting said fees, the taxpayer's main office in Amsterdam in effect acknowledged being, in a way, indebted to its Philippine branch, as debited in the latter's records, in much the same way as the former would have been had it received the fees directly from the latter. Incidentally, this is in accord with established practice especially among merchants the world over, who seldom bring or send money physically from one country to another, but, generally resort to bills, notes or other conventional forms of transacting business in the manner they may deem most practical and suitable to their respective interests. Needless to say, the remittances made by the taxpayer's head office to its Philippine branch, for the operational expenses thereof or for any other purposes must have been credited in the books of account of the latter in favor of the former in the records of which they must have been debited said branch, and, hence, deducted from its assets in Amsterdam, including the freight revenues involved herein. The infirmity of the taxpayer's theory becomes readily apparent when We consider that, if upheld, its effect would be to subject to the carrier's tax at the free market rate all business enterprises that bring their dollar earnings into the Philippines, and to exempt from such tax or apply the parity rate to those who do not bring in their dollars or other foreign exchange, thereby discriminating against those who help maintain or increase our international reserve and in favor of these who do not only fail to do so, but jeopardize the condition of such reserved, by keeping abroad their dollar and other earnings and, worse still, by inducing other merchants in the Philippines, engaged in foreign trade, to adopt the same practice, in order to avoid, evade or cut down the payment of said tax. This result could not surely have been intended or countenanced by the framers of our tax laws, much less by those responsible for our policy of control and, later, of gradual decontrol, considering their grave concern for our international reserve and stability of the Philippine currency vhxybg. The case of the United States Lines, on which the appealed decision of the Court of Tax Appeals is anchored, refers to transactions that took place before the approval of Republic Act 2609, on July 16, 1959, when the only legal rate of exchange obtaining in the Philippines was P2 to $1, and all foreign exchange had to be surrendered to the Central Bank, subject to its disposition pursuant to its own rules and regulations. Upon the other hand, the present case refers to transactions that took place during the effectivity of Republic Act 2609, when there was, apart from the parity rate, a legal free market conversion rate for foreign exchange transactions, which rate had been fixed in open trading, such as those involved in the case at bar. Although the decision in the case cited contains a phrase suggesting that there can be no foreign exchange operation when the amount involved therein is not remitted to the Philippines, this implied pronouncement was a mere obiter, inasmuch as the result would have been the same had there been a remittance of said amount, there being, at that time, no other legal rate of exchange of US dollars than the parity rate. It is, thus, our considered view that the freight revenues accruing to the taxpayer in the present case, even though collected abroad and, not remitted to its branch office in the Philippines, are part of its foreign exchange operations and subject to the common carrier's tax, computed at the free market rate then prevailing. It is next urged that the 25% surcharge sought to be collected by the petitioner should not be imposed upon the taxpayer, it having acted in good faith in doing what it did, for it merely followed the advice of counsel. The aforementioned surcharge was imposed by petitioner herein in accordance with Section 183 of the National Internal Revenue Code, 4 subdivision (a) of which reads: SEC. 183. Payment of Percentage taxes (a) In general. It shall be the duty of every person conducting a business on which a percentage tax is imposed under this Title, to make a true and complete return of the amount of his, her or its gross monthly sales, receipts or earnings, or gross value of output actually removed from the factory or mill warehouse and within twenty days after the end of each month, pay the tax due thereon: Provided, That any person retiring from a business subject to the percentage tax shall notify the nearest internal revenue officer thereof, file his return or declaration, and pay the tax due thereon within twenty days after closing his business. If the percentage tax on any business is not paid within the time specified above, the amount of the tax shall be increased by twenty-five per centum, the increment to be a part of the tax. In case of willful neglect to file the return within the period prescribed herein, or in case a false or fraudulent return is wilfully made, there shall be added to the tax or to the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud, a surcharge of fifty per centum of its amount. The amount so added to any tax shall be collected at the same time and in the same manner and as part of the tax unless the tax has been paid before the discovery of the falsity or fraud, in which case the amount so added shall be collected in the same manner as the tax. 5

Pursuant to this provision, if the tax in question is not paid "within twenty days after the end of each month, ... The amount of the tax shall be increased by twenty five per centum the increment to be a part of the tax." As early as February 11, 1925, We held in Lim Co Chui v. Posadas 6 construing a similar provision, that the same is "mandatory," and, accordingly, sanctioned the imposition of the 25% surcharge on the sales tax involved therein, which had been paid one day late, or October 21, 1924, because of a riot against the Chinese in Manila on October 18, 19 and 20, 1924. This view was reiterated in Koppel (Phil.) Inc. V. Collector of Internal Revenue 7 referring to a similar tax payable not later than

January 20, 1942, but not paid then, owing to the outbreak of war in the Pacific and the military occupation of the Philippines by Japanese forces. To the same effect are Insular Lumber Co. V. Collector of Internal Revenue, 8 Republic of the Philippines v. Luzon Industrial Corp., 9 in which a check, issued on time and brought by a passenger to the office of the City Treasurer on April 20, 1948, could not be delivered to him on that date, on account of the numerous taxpayers then lined up in his office, and was not actually received by said official until April 22, 1948 Pirovano v. Commissioner of Internal Revenue 1 0 and the Republic of the Philippines v. Lim Tian Teng Sons & Co., Inc. 1 1 Connel Bros. Co. V. Collector of Internal Revenue 1 2 and Imus Electric Co. V. Court of Tax Appeals, 1 3 upon which the taxpayer relies, are not in point. In the first case, the issue was whether the sales tax of 5% of the "gross selling price" of certain articles shall be imposed upon the price set forth in the corresponding invoices, notwithstanding the fact that the phrase "5% sales tax included" appeared thereon. The question was resolved in the affirmative, upon the ground that a circular of the Bureau of Internal Revenue, implementing the law imposing said tax, provided: ... Unless billed to the purchaser as separate items in the invoice, the amounts intended to cover the sales tax shall be considered as part of the gross selling price of the articles sold, and deductions thereof will not be allowed. And that the taxpayer had not complied with it since January 18, 1948, although it had adhered thereto up to then, by issuing invoices containing an itemization of the actual selling price and of the 5% sales tax thereon which was added to the selling price and shifted to the customer, who paid the total amount. It should be noted, however, that unlike the taxpayer in the case at bar, which declared its revenues from February to May 1962 as P75,003.00, when, in fact, the revenues aggregated P133,855.88 Connel Bros Co. Had set forth in its invoices the true amounts collected from its customers and the issue hinged merely on the application of the law thereto, namely, whether the sales tax shall be based upon said amounts, or should be computed after deducting therefrom the sum corresponding to the tax. Moreover, although disagreeing with the position taken by the Bureau of Internal Revenue, Connel Bros. Had forthwith deposited the amount assessed by the same, and the deposit was later converted into payment, followed by a formal request for refund and then, upon denial thereof, by the corresponding petition for review in the Court of Tax Appeals. Thus, upon demand, the amount representing the taxes sought to be collected by the Government was placed at the latters disposed, subject only to the taxpayer's claim that it was not legally due. Hence, the reason for the imposition of a surcharge which is non-payment within the period prescribed by law did not, in effect, exist in Connel Bros' case. The second case initially referred to a similar claim for refund of payments made of the corporate franchise tax provided in section 259 of the Tax Code, as amended by Rep. Act No. 39, effective in 1946 of 5% of the gross earnings or receipts of a corporation that had, since 1930, a municipal franchise imposing a tax of 1% the earnings for the first 20 years and 2% for the next 15 years. The taxpayer maintained that the application of the Tax Code impaired its vested rights under said municipal franchise. The claim for refund had an exchange of views, between the Bureau of Internal Revenue and the taxpayer, that dragged for a number of years, culminating, in September 1961, in an assessment for deficiency franchise tax, for the period from January 1956 to September 1960, plus 25% surcharge Although the claim of impairment of contractual obligation was overruled, for the reason that the municipal franchise contained an express reservation that it was subject to amendment or repeal, We exempted the taxpayer from the payment of the surcharge upon the authority of the Connel Bros.' case. Regardless of our present opinion on the applicability to the Imus case of the view taken in the Connel Bros.' case concerning the payment of surcharges, the fact is that, in such case, there had been no failure to pay the tax assessed therein, so that there really was no legal justification for the imposition of surcharges. The circumstance that Imus Electric Co. Had begun by demanding a refund of the payments it had made, for the period from 1948 to 1951, pursuant to the Tax Code, to which it later claimed, it could not be made subject without violating rights vested under its municipal franchise, may, perhaps, account for the reliance upon the Connel Bros.' case, although the issue between the electric company and the Government, eventually, became one for collection of the deficiency franchise tax from 1956 to 1960. At any rate, neither case nor both suffice to outweigh the above-mentioned six cases declaring that the provision imposing surcharges is mandatory. The alleged good faith of the taxpayer herein is apart from being insufficient to justify a departure from the rule laid down and repeatedly applied in said cases merely based upon the advice said to have been given by its counsel. Considering, moreover, that, up to December 1961, the taxpayer had reported its earnings at the free market conversion rate thereby indicating that such was, in its belief, the rate at which its foreign exchange transactions should be computed its change of policy in 1962, allegedly following said advice of counsel, implied no more than the taking of a calculated risk. WHEREFORE, the appealed decision of the Court Of Tax Appeals is reversed, and judgment shall be entered affirming that of the Commissioner of Internal Revenue, except as to the compromise penalty of P200.00, which is hereby eliminated, and sentencing respondent corporation, Royal Interocean Lines, Inc., to pay to petitioner here the sum of P1,471.39. With interest thereon at the legal rate from January 18, 1963, when it received the letter of demand of said petitioner, until full payment, 1 4 With costs against said respondent. It is so ordered. Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo and Villamor, JJ., concur KY05XYES.

# Footnotes 1 G.R. No. L-16850, May 30, 1962.

2 Emphasis supplied. 3 Emphasis supplied. 4 Commonwealth Act No. 466, as amended by Rep. Act No. 2025, approved on June 22, 1957. 5 Emphasis supplied. 6 47 Phil. 460, 462. 7 87 Phil. 348, 350-351. 8 98 Phil. 1012-1013. 9 102 Phil. 189, 193 e9buh. 10 L-19865, July 31, 1965 Xd3j. 11 L-21731, March 31, 1966. 12 L-15470, Dec. 26, 1963. 13 L-22421, March 18, 1967. 14 Art. 2209, Civil Code of the Philippines; Commissioner of Internal Revenue v. Abad, L-19627, June 27, 1968. .

(8)Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-9692 January 6, 1958

COLLECTOR OF INTERNAL REVENUE, petitioner, vs. BATANGAS TRANSPORTATION COMPANY and LAGUNA-TAYABAS BUS COMPANY, respondents. Office of the Solicitor General Ambrosio Padilla, Solicitor Conrado T. Limcaoco and Zoilo R. Zandoval for petitioner. Ozaeta, Lichauco and Picazo for respondents. MONTEMAYOR, J.: This is an appeal from the decision of the Court of Tax Appeals (C.T.A.), which reversed the assessment and decision of petitioner Collector of Internal Revenue, later referred to as Collector, assessing and demanding from the respondents Batangas Transportation Company, later referred to as Batangas Transportation, and Laguna-Tayabas Bus Company, later referred to as Laguna Bus, the amount of P54,143.54, supposed to represent the deficiency income tax and compromise for the years 1946 to 1949, inclusive, which amount, pending appeal in the C.T.A., but before the Collector filed his answer in said court, was increased to P148,890.14. The following facts are undisputed: Respondent companies are two distinct and separate corporations engaged in the business of land transportation by means of motor buses, and operating distinct and separate lines. Batangas Transportation was organized in 1918, while Laguna Bus was organized in 1928. Each company now has a fully paid up capital of Pl,000,000. Before the last war, each company maintained separate head offices, that of Batangas Transportation in Batangas, Batangas, while the Laguna Bus had its head office in San Pablo Laguna. Each company also kept and maintained separate books, fleets of buses, management, personnel, maintenance and repair shops, and other facilities. Joseph Benedict managed the Batangas Transportation, while Martin Olson was the manager of the Laguna Bus. To show the connection and close relation between the two companies, it should be stated that Max Blouse was the President of both corporations and owned about 30 per cent of the stock in each company. During the war, the American officials of these two corporations were interned in Santo Tomas, and said companies ceased operations. They also lost their respective properties and equipment. After Liberation, sometime in April, 1945, the two companies were able to acquire 56 auto buses from the United States Army, and the two companies diveded said equipment equally between themselves,registering the same separately in their respective names. In March, 1947, after the resignation of Martin Olson as

Manager of the Laguna Bus, Joseph Benedict, who was then managing the Batangas Transportation, was appointed Manager of both companies by their respective Board of Directors. The head office of the Laguna Bus in San Pablo City was made the main office of both corporations. The placing of the two companies under one sole mangement was made by Max Blouse, President of both companies, by virtue of the authority granted him by resolution of the Board of Directors of the Laguna Bus on August 10, 1945, and ratified by the Boards of the two companies in their respective resolutions of October 27, 1947. According to the testimony of joint Manager Joseph Benedict, the purpose of the joint management, which was called, "Joint Emergency Operation", was to economize in overhead expenses; that by means of said joint operation, both companies had been able to save the salaries of one manager, one assistant manager, fifteen inspectors, special agents, and one set of office of clerical force, the savings in one year amounting to about P200,000 or about P100,000 for each company. At the end of each calendar year, all gross receipts and expenses of both companies were determined and the net profits were divided fifty-fifty, and transferred to the book of accounts of each company, and each company "then prepared its own income tax return from this fifty per centum of the gross receipts and expenditures, assets and liabilities thus transferred to it from the `Joint Emergency Operation' and paid the corresponding income taxes thereon separately". Under the theory that the two companies had pooled their resources in the establishment of the Joint Emergency Operation, thereby forming a joint venture, the Collector wrote the bus companies that there was due from them the amount of P422,210.89 as deficiency income tax and compromise for the years 1946 to 1949, inclusive. Since the Collector caused to be restrained, seized, and advertized for sale all the rolling stock of the two corporations, respondent companies had to file a surety bond in the same amount of P422,210.89 to guarantee the payment of the income tax assessed by him. After some exchange of communications between the parties, the Collector, on January 8, 1955, informed the respondents "that after crediting the overpayment made by them of their alleged income tax liabilities for the aforesaid years, pursuant to the doctrine of equitable recoupment, the income tax due from the `Joint Emergency Operation' for the years 1946 to 1949, inclusive, is in the total amount of P54,143.54." The respondent companies appealed from said assessment of P54,143.54 to the Court of Tax Appeals, but before filing his answer, the Collector set aside his original assessment of P54,143.54 and reassessed the alleged income tax liability of respondents of P148,890.14, claiming that he had later discovered that said companies had been "erroneously credited in the last assessment with 100 per cent of their income taxes paid when they should in fact have been credited with only 75 per cent thereof, since under Section 24 of the Tax Code dividends received by them from the Joint Operation as a domestic corporation are returnable to the extent of 25 per cent". That corrected and increased reassessment was embodied in the answer filed by the Collector with the Court of Tax Appeals. The theory of the Collector is the Joint Emergency Operation was a corporation distinct from the two respondent companies, as defined in section 84 (b), and so liable to income tax under section 24, both of the National Internal Revenue Code. After hearing, the C.T.A. found and held, citing authorities, that the Joint Emergency Operation or joint management of the two companies "is not a corporation within the contemplation of section 84 (b) of the National Internal Revenue Code much less a partnership, association or insurance company", and therefore was not subject to the income tax under the provisions of section 24 of the same Code, separately and independently of respondent companies; so, it reversed the decision of the Collector assessing and demanding from the two companies the payment of the amount of P54,143.54 and/or the amount of P148,890.14. The Tax Court did not pass upon the question of whether or not in the appeal taken to it by respondent companies, the Collector could change his original assessment by increasing the same from P54,143.14 to P148,890.14, to correct an error committed by him in having credited the Joint Emergency Operation, totally or 100 per cent of the income taxes paid by the respondent companies for the years 1946 to 1949, inclusive, by reason of the principle of equitable recoupment, instead of only 75 per cent. The two main and most important questions involved in the present appeal are: (1) whether the two transportation companies herein involved are liable to the payment of income tax as a corporation on the theory that the Joint Emergency Operation organized and operated by them is a corporation within the meaning of Section 84 of the Revised Internal Revenue Code, and (2) whether the Collector of Internal Revenue, after the appeal from his decision has been perfected, and after the Court of Tax Appeals has acquired jurisdiction over the same, but before said Collector has filed his answer with that court, may still modify his assessment subject of the appeal by increasing the same, on the ground that he had committed error in good faith in making said appealed assessment. The first question has already been passed upon and determined by this Tribunal in the case of Eufemia Evangelista et al., vs. Collector of ,* Internal Revenue et al. G.R. No. L-9996, promulgated on October 15, 1957. Considering the views and rulings embodied in our decision in that case penned by Mr. Justice Roberto Concepcion, we deem it unnecessary to extensively discuss the point. Briefly, the facts in that case are as follows: The three Evangelista sisters borrowed from their father about P59,000 and adding thereto their own personal funds, bought real properties, such as a lot with improvements for the sum of P100,000 in 1943, parcels of land with a total area of almost P4,000 square meters with improvements thereon for P18,000 in 1944, another lot for P108,000 in the same year, and still another lot for P237,000 in the same year. The relatively large amounts invested may be explained by the fact that purchases were made during the Japanese occupation, apparently in Japanese military notes. In 1945, the sisters appointed their brother to manage their properties, with full power to lease, to collect and receive rents, on default of such payment, to bring suits against the defaulting tenants, to sign all letters and contracts, etc. The properties therein involved were rented to various tenants, and the sisters, through their brother as manager, realized a net rental income of P5,948 in 1945, P7,498 in 1946, and P12,615 in 1948. In 1954, the Collector of Internal Revenue demanded of them among other things, payment of income tax on corporations from the year 1945 to 1949, in the total amount of P6,157, including surcharge and compromise. Dissatisfied with the said assessment, the three sisters appealed to the Court of Tax Appeals, which court decided in favor of the Collector of Internal Revenue. On appeal to us, we affirmed the decision of the

Tax Court. We found and held that considering all the facts and circumstances sorrounding the case, the three sisters had the purpose to engage in real estate transactions for monetary gain and then divide the same among themselves; that they contributed to a common fund which they invested in a series of transactions; that the properties bought with this common fund had been under the management of one person with full power to lease, to collect rents, issue receipts, bring suits, sign letters and contracts, etc., in such a manner that the affairs relative to said properties have been handled as if the same belonged to a corporation or business enterprise operated for profit; and that the said sisters had the intention to constitute a partnership within the meaning of the tax law. Said sisters in their appeal insisted that they were mere co-owners, not co-partners, for the reason that their acts did not create a personality independent of them, and that some of the characteristics of partnerships were absent, but we held that when the Tax Code includes "partnerships" among the entities subject to the tax on corporations, it must refer to organizations which are not necessarily partnerships in the technical sense of the term, and that furthermore, said law defined the term "corporation" as including partnerships no matter how created or organized, thereby indicating that "a joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporations"; that besides, said section 84 (b) provides that the term "corporation" includes "joint accounts" (cuentas en participacion) and "associations", none of which has a legal personality independent of that of its members. The decision cites 7A Merten's Law of Federal Income Taxation. In the present case, the two companies contributed money to a common fund to pay the sole general manager, the accounts and office personnel attached to the office of said manager, as well as for the maintenance and operation of a common maintenance and repair shop. Said common fund was also used to buy spare parts, and equipment for both companies, including tires. Said common fund was also used to pay all the salaries of the personnel of both companies, such as drivers, conductors, helpers and mechanics, and at the end of each year, the gross income or receipts of both companies were merged, and after deducting therefrom the gross expenses of the two companies, also merged, the net income was determined and divided equally between them, wholly and utterly disregarding the expenses incurred in the maintenance and operation of each company and of the individual income of said companies. From the standpoint of the income tax law, this procedure and practice of determining the net income of each company was arbitrary and unwarranted, disregarding as it did the real facts in the case. There can be no question that the receipts and gross expenses of two, distinct and separate companies operating different lines and in some cases, different territories, and different equipment and personnel at least in value and in the amount of salaries, can at the end of each year be equal or even approach equality. Those familiar with the operation of the business of land transportation can readily see that there are many factors that enter into said operation. Much depends upon the number of lines operated and the length of each line, including the number of trips made each day. Some lines are profitable, others break above even, while still others are operated at a loss, at least for a time, depending, of course, upon the volume of traffic, both passenger and freight. In some lines, the operator may enjoy a more or less exclusive exclusive operation, while in others, the competition is intense, sometimes even what they call "cutthroat competition". Sometimes, the operator is involved in litigation, not only as the result of money claims based on physical injuries ar deaths occassioned by accidents or collisions, but litigations before the Public Service Commission, initiated by the operator itself to acquire new lines or additional service and equipment on the lines already existing, or litigations forced upon said operator by its competitors. Said litigation causes expense to the operator. At other times, operator is denounced by competitors before the Public Service Commission for violation of its franchise or franchises, for making unauthorized trips, for temporary abandonement of said lines or of scheduled trips, etc. In view of this, and considering that the Batangas Transportation and the Laguna Bus operated different lines, sometimes in different provinces or territories, under different franchises, with different equipment and personnel, it cannot possibly be true and correct to say that the end of each year, the gross receipts and income in the gross expenses of two companies are exactly the same for purposes of the payment of income tax. What was actually done in this case was that, although no legal personality may have been created by the Joint Emergency Operation, nevertheless, said Joint Emergency Operation joint venture, or joint management operated the business affairs of the two companies as though they constituted a single entity, company or partnership, thereby obtaining substantial economy and profits in the operation. For the foregoing reasons, and in the light of our ruling in the Evangelista vs. Collector of Internal Revenue case,supra, we believe and hold that the Joint Emergency Operation or sole management or joint venture in this case falls under the provisions of section 84 (b) of the Internal Revenue Code, and consequently, it is liable to income tax provided for in section 24 of the same code. The second important question to determine is whether or not the Collector of Internal Revenue, after appeal from his decision to the Court of Tax Appeals has been perfected, and after the Tax Court Appeals has acquired jurisdiction over the appeal, but before the Collector has filed his answer with the court, may still modify his assessment, subject of the appeal, by increasing the same. This legal point, interesting and vital to the interests of both the Government and the taxpayer, provoked considerable discussion among the members of this Tribunal, a minority of which the writer of this opinion forms part, maintaining that for the information and guidance of the taxpayer, there should be a definite and final assessment on which he can base his decision whether or not to appeal; that when the assessment is appealed by the taxpayer to the Court of Tax Appeals, the collector loses control and jurisdiction over the same, the jurisdiction being transferred automatically to the Tax Court, which has exclusive appellate jurisdiction over the same; that the jurisdiction of the Tax Court is not revisory but only appellate, and therefore, it can act only upon the amount of assessment subject of the appeal to determine whether it is valid and correct from the standpoint of the taxpayer-appellant; that the Tax Court may only correct errors committed by the Collector against the taxpayer, but not those committed in his favor, unless the Government itself is also an appellant; and that unless this be the rule, the Collector of Internal Revenue and his agents may not exercise due care, prudence and pay too much attention in making tax assessments, knowing that they can at any time correct any error committed by them even when due to negligence, carelessness or gross mistake in the interpretation or application of the tax law, by increasing the assessment, naturally to the prejudice of the taxpayer who would not know when his tax liability has been completely and definitely met and complied with, this knowledge being necessary for the wise and proper conduct and operation of his business; and that lastly, while in the United States of America, on appeal from the decision of the Commissioner of Internal Revenue to the Board or Court of Tax

Appeals, the Commissioner may still amend or modify his assessment, even increasing the same the law in that jurisdiction expressly authorizes the Board or Court of Tax Appeals to redetermine and revisethe assessment appealed to it. The majority, however, holds, not without valid arguments and reasons, that the Government is not bound by the errors committed by its agents and tax collectors in making tax assessments, specially when due to a misinterpretation or application of the tax laws, more so when done in good faith; that the tax laws provide for a prescriptive period within which the tax collectors may make assessments and reassessments in order to collect all the taxes due to the Government, and that if the Collector of Internal Revenue is not allowed to amend his assessment before the Court of Tax Appeals, and since he may make a subsequent reassessment to collect additional sums within the same subject of his original assessment, provided it is done within the prescriptive period, that would lead to multiplicity of suits which the law does not encourage; that since the Collector of Internal Revenue, in modifying his assessment, may not only increase the same, but may also reduce it, if he finds that he has committed an error against the taxpayer, and may even make refunds of amounts erroneously and illegally collected, the taxpayer is not prejudiced; that the hearing before the Court of Tax Appeals partakes of a trial de novo and the Tax Court is authorized to receive evidence, summon witnesses, and give both parties, the Government and the taxpayer, opportunity to present and argue their sides, so that the true and correct amount of the tax to be collected, may be determined and decided, whether resulting in the increase or reduction of the assessment appealed to it. The result is that the ruling and doctrine now being laid by this Court is, that pending appeal before the Court of Tax Appeals, the Collector of Internal Revenue may still amend his appealed assessment, as he has done in the present case. There is a third question raised in the appeal before the Tax Court and before this Tribunal, namely, the liability of the two respondent transportation companies for 25 per cent surcharge due to their failure to file an income tax return for the Joint Emergency Operation, which we hold to be a corporation within the meaning of the Tax Code. We understand that said 25 per cent surcharge is included in the assessment of P148,890.14. The surcharge is being imposed by the Collector under the provisions of Section 72 of the Tax Code, which read as follows: The Collector of Internal Revenue shall assess all income taxes. In case of willful neglect to file the return or list within the time prescribed by law, or in case a false or fraudulent return or list is willfully made the collector of internal revenue shall add to the tax or to the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud, a surcharge of fifty per centum of the amount of such tax or deficiency tax. In case of any failure to make and file a return list within the time prescribed by law or by the Collector or other internal revenue officer, not due to willful neglect, the Collector, shall add to the tax twenty-five per centum of its amount, except that, when the return is voluntarily and without notice from the Collector or other officer filed after such time, it is shown that the failure was due to a reasonable cause, no such addition shall be made to the tax. The amount so added to any tax shall be collected at the same time in the same manner and as part of the tax unless the tax has been paid before the discovery of the neglect, falsity, or fraud, in which case the amount so added shall be collected in the same manner as the tax. We are satisfied that the failure to file an income tax return for the Joint Emergency Operation was due to a reasonable cause, the honest belief of respondent companies that there was no such corporation within the meaning of the Tax Code, and that their separate income tax return was sufficient compliance with the law. That this belief was not entirely without foundation and that it was entertained in good faith, is shown by the fact that the Court of Tax Appeals itself subscribed to the idea that the Joint Emergency Operation was not a corporation, and so sustained the contention of respondents. Furthermore, there are authorities to the effect that belief in good faith, on advice of reputable tax accountants and attorneys, that a corporation was not a personal holding company taxable as such constitutes "reasonable cause" for failure to file holding company surtax returns, and that in such a case, the imposition of penalties for failure to file holding company surtax returns, and 1 that in such a case, the imposition of penalties for failure to file return is not warranted In view of the foregoing, and with the reversal of the appealed decision of the Court of Tax Appeals, judgment is hereby rendered, holding that the Joint Emergency Operation involved in the present is a corporation within the meaning of section 84 (b) of the Internal Revenue Code, and so is liable to incom tax under section 24 of the code; that pending appeal in the Court of Tax Appeals of an assessment made by the Collector of Internal Revenue, the Collector, pending hearing before said court, may amend his appealed assessment and include the amendment in his answer before the court, and the latter may on the basis of the evidence presented before it, redetermine the assessment; that where the failure to file an income tax return for and in behalf of an entity which is later found to be a corporation within the meaning of section 84 (b) of the Tax Code was due to a reasonable cause, such as an honest belief based on the advice of its attorneys and accountants, a penalty in the form of a surcharge should not be imposed and collected. The respondents are therefore ordered to pay the amount of the reassessment made by the Collector of Internal Revenue before the Tax Court, minus the amount of 25 per cent surcharge. No costs. Bengzon, Paras, C.J., Padilla, Labrador, Concepcion, Reyes, J.B.L., Endencia, and Felix, JJ., concur. Reyes, A. J., concurs in the result.

Footnotes
1

Walnut St. Co. Vs. Glenn, D.C. Ky. 148, 83 F. Supp. 945; Safety Tube Corp. Vs. Commissioner of Internal Revenue, 1947 8 T.C. 757 affirmed 168 F. 2d 787; Elm Beach Trust Co. Vs. Commissioner of Internal Revenue, 174 F. 2d 527.

(9)Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-30364 July 28, 1969

ANGEL C. BAKING and SIMEON G. RODRIGUEZ, petitioners, vs. THE DIRECTOR OF PRISONS, respondent. ----------------------------G.R. No. L-30603 July 28, 1969

IN THE MATTER OF THE APPLICATION FOR A WRIT OF HABEAS CORPUS, JOSE LAVA, RAMON ESPIRITU, FEDERICO R. MACLANG, FEDERICO BAUTISTA, ONOFRE MANGILA and CESARIO TORRES, petitioners. Jovito R. Salonga and Martiniano P. Vivo for petitioners Angel C. Baking and Simeon G. Rodriguez. Juan T. David for petitioners Jose Lava, et al. Office of the Solicitor General Felix V. Makasiar, Solicitors Eduardo C. Abaya and Vicente A. Torres for respondent. SANCHEZ, J.: Before us for resolution are two identical petitions for habeas corpus filed by petitioners: (1) Angel C. Baking and Simeon G. Rodriguez in L-30364; and (2) Jose Lava, Ramon Espiritu, Federico R. Maclang, Federico Bautista, Onofre Mangila, and Cesario Torres in L-30603. Petitioners concededly had been under detention for more than eighteen (18) years under the charge of respondent Director of Prisons when, on May 16, 1969, this Court in its decision in People vs. Lava, et al., G.R. Nos. L-4974-5-6-7-8, convicted petitioners for the crime of rebellion and sentenced each of them to ten (10) years' imprisonment. This decision has since become final. Previously, on March 31, 1969, petitioners Angel C. Baking and Simeon G. Rodriguez registered their petition for habeas corpus in G.R. No. L-30364, one of the cases at bar. They claimed that they had been denied the right to a speedy trial. On May 24, 1969, after this Court rendered its decision convicting petitioners of the crime of rebellion, Angel C. Baking and Simeon G. Rodriguez filed a motion for early decision of their petition for habeas corpus and for their immediate release, based primarily upon an averment similar to the other petition for habeas corpus before us in L-30603, filed on June 17, 1969. The present thrust of the two petitions is that petitioners should now be released because they have already served the ten (10) year sentences meted out to them. They give as reasons: First. Petitioners have been detained in prison pending the decision of their cases for more than eighteen (18) years and seven (7) months. 1 By Article 29 of the Revised Penal Code, one-half of their preventive imprisonment is to be deducted from their sentence. In other words, they are already credited with more than nine (9) years and three (3) months, representing one-half of eighteen (18) years and seven (7) months. 2 This is not disputed. Second. Petitioners would go farther and claim for themselves benefits accorded by Article 97 of the Revised Penal Code granting time allowance for good conduct. Petitioners would apply said Article 97 through all the time of their detention period of over eighteen years. We directed respondent Director of Prisons to produce before us the bodies of the petitioners. He did. In his return, thru the Solicitor General, he balks vehemently at the application of Article 97 to petitioners' case. After hearing and submission of memoranda, the present cases are now up for decision. 1. The key problem that now confronts us in the two petitions at bar is whether or not Article 97 of the Revised Penal Code is applicable to detention prisoners. Said provision of law in its English version reads:

ART. 97. Allowance for good conduct. The good conduct of any prisoner in any penal institution shall entitle him to the following deductions from the period of his sentence: 1. During the first two years of his imprisonment, he shall be allowed a deduction of five days for each month of good behavior; . 2. During the third to the fifth year, inclusive, of his imprisonment, he shall be allowed a deduction of eight days for each month of good behavior; . 3. During the following years until the tenth year, inclusive, of his imprisonment, he shall be allowed a deduction of ten days for each month of good behavior; and 4. During the eleventh and successive years of his imprisonment, he shall be allowed a deduction of fifteen days for each month of good behavior. Petitioners who have been detention prisoners prior to the finality of this Court's judgment of May 16, 1969, lay heavy stress on the phrase "any prisoner" in the English text of Article 97. In asking that the provision be made to apply to them when they were still detention prisoners, they say that the law does not distinguish between a prisoner who is serving sentence and decision prisoner. The Spanish text of Article 97 of the Revised Penal Code reads: 1wph1.t ART. 97. Abono de tiempo por buena conducto. La buena conducta, observada por el penado en cualquier establiciemento penal le hara acreedor a las siguientes reducciones del tiempo de su condena. 1.a Cinco dias cada mes de buena conducta durante los dos primeros aos de privacion de libertad; 2.a Ocho dias por mes durante los aos tercero al quinto inclusive; 3.a Diez dias por mes, durante los demas aos hasta el decimo inclusive; y 4.a Quince dias por mes desde el undecimo en adelante. It must be stated that inasmuch as the Revised Penal Code was originally approved and enacted in Spanish, the Spanish text governs. The term "any prisoner" in the Spanish text is "el penado." Who is a convict or a person already sentenced by final judgment. For, "el penado" 4 means a "delincuente condenado a una pea." There is thus no doubt that Article 97 does not embrace detention prisoners within its reach. Because it speaks of the buena conducta observada por el penado not one under "prision preventiva." The allowance for good conduct "for each month of good behavior" then unquestionably refers to good behavior of a prisoner while he is serving his term as a convict and not otherwise. Indeed, under Article 24 (1), Revised Penal Code, the arrest and temporary detention of accused persons are not considered as penalties. 5 By necessary implication from the statutory scheme of the Revised Penal Code, especially Article 28 thereof, the service of a sentence of one in prison begins only on the day the judgment of conviction becomes final. More to this. While Article 97 talks of "any prisoner" in the English text, it speaks, however, of that prisoner as being entitled to deductions for good conduct allowances "from the period of his sentence" ("del tiempo de su condena"). An accurate reading, therefore, of the provision yields the plain implication that the prisoner concerned is one who already has a sentence clamped upon him, i.e., a definite sentence by final judgment. The term "any prisoner" should thus be limited to those convicted by final judgment. This is the import of the law as written. 2. And then, there is the familiar precept that a codal provision is not to be interpreted in isolation. It is axiomatic in legal hermeneutics that a code, such as the Revised Penal Code, should be construed as a whole. Courts are duty-bound to harmonize the various provisions thereof. The rule we should go by is that "a code enacted as a single comprehensive statute, is to be considered as such, and not as a series of 6 disconnnected articles or statutes." The reason why we now take stock of the foregoing rule is that we find in the same Revised Penal Code, Article 94, which provides as follows: ART. 94. Partial extinction of criminal liability. Criminal liability is extinguished partially:
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1wph1.t 1. By conditional pardon; 2. By commutation of the sentence; and 3. For good conduct allowances which the culprit may earn while he is serving his sentence. As originally written in Spanish, this article reads: ART. 94. Como se extingue parcialmente la responsabilidad penal. 1.o Por indulto condicional; 2.o Por conmutacion de la sentencia; y 3.o Por abonos de buena conducta que obtenga el reo mientras este extinguiendo sentencia. By the above provision, good conduct allowances are given only to the culprit who earns the same "while he is serving his sentence" ("el 8 reo mientras este extinguiendo sentencia"). What is crystal clear in Article 94 then is that good conduct allowances are awarded only to those who are serving their sentences. Petitioners, as detention prisoners, cannot by any stretch of the imagination, be said to be serving sentence during the period of their preventive imprisonment. And this, even in the face of Article 29 of the Revised Penal Code which reduces petitioners' respective sentences by one-half of their preventive imprisonment. As correctly argued by the Solicitor General, Article 29 merely credits said time [of one-half of the preventive imprisonment] to convicts by final judgment. Said article does not in any way imply that detention prisoners, thereafter convicted by final judgment, have been serving sentence during their detention period. So it is, that Article 97 is to be read in conjunction with Article 94 which, under the circumstances, should likewise be deemed to give meaning to the term "any prisoner" in Article 97. Article 94 above-quoted, we must say, is embraced in the same chapter of the Revised Penal Code as Article 97 relied upon by petitioners. Both of them are in Book One, Title Four, Chapter Two, entitled "PARTIAL EXTINCTION OF CRIMINAL LIABILITY", the very same heading of Article 94. And Article 94 appears to be the lead article of Chapter Two, because it talks in general terms of everything contained in said Chapter Two. To elaborate, Article 95 speaks of conditional pardon, provided in Article 94(1); Article 96 deals with commutation of sentence, mentioned in Article 94(2); and Articles 97, 98 and 99 (the rest of the Chapter) refer to good conduct allowances treated by Article 94(3). Obvious from all these is that it is from Article 94(3) that Articles 97 (the provision under interpretation), 98 and 99 should take their bearings. And it says we repeat that: "La responsabilidad penal se extinguira parcialmente: ... 3.o Por abonos de buena conducta que obtenga el reo mientras este extinguiendo sentencia. Our view on the meaning of Article 97 gets a tremendous lift from Article 98 of the Revised Penal Code, viz.: ART. 98. Special time allowance for loyalty. A deduction of one-fifth of the period of his sentence shall be granted to any prisoner who, having evaded the service of his sentence under the circumstances mentioned in Article 158 of this Code, gives himself up to the authorities within 48 hours following the issuance of a proclamation announcing the passing away of the calamity or 9 catastrophe referred to in said article. While Article 98 also contains the phrase "any prisoner" (translated from the Spanish text which uses the words "los penados"), it is clear that this phrase is confined to convicts who have "evaded the service of [their] sentence" ("que quebrantaren su sentencia"). The position we here take is not without jurisprudential support. In People vs. Martin, 68 Phil. 122, the accused was convicted of abduction and sentenced to 14 years, 8 months and 1 day of reclusion temporal. After having served 8 years, 1 month and 17 days, he was pardoned "on condition that he should not again be found guilty of any crime." He left unserved 6 years, 6 months and 14 days. Subsequently, he was prosecuted, tried, found guilty of another crime attempted robbery in band with physical injuries and sentenced by final judgment to pay a fine of 330 pesetas, with the corresponding subsidiary imprisonment. He was thereafter charged with a violation of the condition of his pardon. After trial, he was adjudged guilty and sentenced "to suffer the penalty which was remitted in the pardon namely, six years, six months and fourteen days." In upholding that judgment of conviction on appeal, this Court, amongst others, said: "The appellant's contention that there should be deducted from this remitted penalty the allowance of time provided in article 97 of the Revised Penal Code, is unsound. This allowance is given in consideration of the good conduct of the prisoner while serving his sentence. Not having served this remitted penalty, 10 there is no reason for the allowance, namely, the good conduct of the appellant while serving his sentence." We accordingly hold that, by a consideration of the terms of Article 97 alone, and also in conjunction with other parts of the Revised Penal Code, the phrase "any prisoner" in Article 97 thereof is to be regarded as referring only to a prisoner serving sentence. La responsabilidad penal se extinguira parcialmente: .
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3. A formidable argument against the tenability of petitioners' plea is Section 5 of Act 1533 of the Philippine Commission (enacted on August 30, 1906), the old law "providing for the diminution of sentences ... in consideration of good conduct and diligence." Section 5 of said Act 1533 reads: SEC. 5. Detention prisoners who voluntarily offer in writing to perform such labor as may be assigned to them shall be entitled to a credit in accordance with the provisions of this Act, which shall be deducted from such sentence as may be imposed upon them 11 in the event of their conviction. This provision of law, it must be said, still subsists. The repealing clause of the Revised Penal Code, Article 367 thereof, expressly abrogated Sections 1, 2 and 6 only of Act 1533. Section 5 thereof must therefore be deemed to form part of the present law on good conduct allowances. By Section 5 just transcribed, detention prisoners are entitled to good conduct allowances it they "voluntarily offer in writing to perform such labor as may be assigned to them." In which case, the credit they receive "shall be deducted from such sentence as may be imposed upon them in the event of their conviction." This is the soleexception to the rule that only those serving sentence shall be entitled to good conduct allowances. If detention prisoners do not follow the condition imposed by Section 5, Act 1533, they cannot earn credit for good conduct. In the cases before us, there is not as much as an intimation that petitioners have voluntarily offered in writing to perform such labor as may be assigned to them. Petitioners have not even told us that they worked during the period of their preventive imprisonment. The burden to show that the condition imposed by Section 5, Act 1533 has been met, is certainly upon petitioners. They have not discharged this burden. It is thus our firm conclusion that they cannot avail of the benefits granted to detention prisoners under Section 5 of Act 1533. Upon the law we read it, petitioners' remedy is not with this Court. The law is the law. We cannot change the law under the guise of interpretation. Under our system of government, we may not tread on forbidden grounds; we cannot rewrite the law. This is the function of 12 Congress. For the reasons given, the petitions herein to set petitioners at liberty are hereby denied. No costs allowed. So ordered. Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar and Teehankee, JJ., concur. Castro, Barredo and Capistrano, JJ., took no part.

Separate Opinions

FERNANDO, J., dissenting: With regret and with due recognition of the merit inherent in Justice Sanchez' ably written opinion viewed from the approach pursued, I find myself unable to concur. Hence these few words of dissent. My starting point is the fundamental postulate under our system of government that the Constitution as the supreme law cannot be 1 ignored or disregarded but instead imperatively calls for application to the facts as ascertained in every appropriate case or proceeding. It is on such an overriding principle, as a matter of fact, that the power of judicial review rests, enabling the courts to pass upon and, if necessary, 2 annul legislative or executive acts. The decisive question for me then is whether on the admitted facts the Constitution requires that these two petitions for habeas corpus prosper? I would answer in the affirmative. According to the opinion of Justice Sanchez: "Petitioners concededly had been under detention for more than eighteen (18) years under the charge of respondent Director of Prisons when, on May 16, 1969, this Court in its decision in People vs. Lava, et al., G.R. L-4974-5-6-7-8, convicted petitioners for the crime of rebellion and sentenced each of them to ten (10) years' imprisonment. This decision has since become final." As a result petitioners, still under confinement, sought the remedy of habeas corpus. It may be well to recall the broad, well-nigh illimitable reach of this great writ of liberty. So it was affirmed in one of the truly outstanding 3 opinions of Justice Malcolm, Villavicencio v. Lukban. As was there stated: "The writ of habeas corpus was devised and exists as a speedy and 4 effectual remedy to relieve persons from unlawful restraint, and as the best and only sufficient defense of personal freedom." Textwriters are 5 similarly agreed on its importance and significance. Cooley spoke of it as "one of the principal safeguards to personal liberty." Willoughby, not

to be outdone, referred to it as "the greatest of the safeguards erected by the civil law against arbitrary and illegal imprisonment by 6 7 whomsoever detention may be exercised or ordered." Burdick considered it as "one of the most important bulwarks of liberty." Fraenkel in 8 stressing its importance, said "that without it, much else would be of no avail." To give the writ of habeas corpus then its full, all-encompassing scope, I would not limit our inquiry to the particular ground or grounds invoked by petitioners. If our function were thus limited, there is much to be said as earlier intended for the conclusion reached by the Court. The statutory reliance appears to be inadequate. I would not think, however, that in discharge of this function, perhaps second to none in the catalogue of judicial responsibility, we should thus be circumscribed. If it were so, the effect might very well be to dilute this great writ of much of its significance. Instead, the decisive question for me is whether the admitted fact of continued detention for more than eighteen years, after the penalty had been reduced to ten years imprisonment, constitutes a denial of liberty without due process. That the Constitution prohibits. The historic role of due process as a safeguard of freedom cannot be sufficiently stressed. It bears repeating that freedom is the rule and restraint the 9 exception. The eloquent language of the Chief Justice Concepcion in People v. Hernandez comes to mind: "Furthermore, individual freedom is too basic, too transcendental and vital in a republican state, like ours, to be denied upon mere general principles and abstract consideration of public safety. Indeed, the preservation of liberty is such a major preoccupation of our political system that, not satisfied with guaranteeing its enjoyment in the very first paragraph of section (1) of the Bill of Rights, the framers of our Constitution devoted paragraphs (3), (4), (5), (6), (7), (8), (11), (12), (13), (14), (15), (16), (17), (18), and (21) of said section (1) to the protection of several aspects of freedom." Considering that one stark fact emerges in all its significance, the continued imprisonment of petitioners after eighteen years, notwithstanding a reduction in their penalty to ten years, I view the matter as a grave infraction of the due process clause. This is not to lose sight of the distinction between their preventive detention and their imprisonment after final judgment. Realistically viewed, however, they have been denied and continue to be denied their liberty for more than eighteen years. The loss of freedom is no less real, the affliction no less severe by whatever name such incarceration is called. I find it difficult to believe that the Constitution affords no protection just because previous to the finality of our decision, the confinement may be characterized as other than serving the penalty imposed. To the person undergoing such a deprivation, the characterization as to the nature of the detention is without significance. To go back then to what for me is the decisive question, is there a violation of the due process guaranty? I am inclined to think so. As far 10 back as 1924, we made clear that due process is a safeguard against the arbitrary exercise of power. That is a concept that has an ancient 11 lineage traceable as it is to an 1819 United States Supreme Court decision. We have time and time again identified due process with responsiveness to the supremacy of reason, obedience to the dictates of justice. That is to rule out oppressiveness and avoid unfairness. If an 12 official action were marred by the absence of fair play, then no fealty is shown this cardinal precept. I cannot help but entertain the conviction that to continue the incarceration of these petitioners who all this while for a period longer than the penalties imposed on them have been deprived of their freedom is to commit an affront against the rudimentary requirement of fairness and of justice, which the due process clause is intended to secure. Hence, my inability to concur in the decision reached by the Court. There is this additional matter to consider. According to the opinion of Justice Sanchez: "Upon the law as we read it, petitioners' remedy is not with this Court. The law is the law. We cannot change the law under the guise of interpretation. Under our system of government, we may not tread on forbidden grounds: we cannot rewrite the law. This is the function of Congress." As a statement of a general proposition, the above excerpt can be admitted unqualifiedly. It is to its applicability to the situation before us that I beg to differ. What is involved is liberty, and on that issue it is the theory of our constitutional regime, confirmed by constant and uninterrupted practice that the role thrust upon the judiciary is far from modest. As a matter of fact, the courts are called upon to assure that in each and every appropriate legal proceeding, and habeas corpus is the remedy most suitable for the purpose, the claims of freedom must be given the utmost sympathy and accorded priority. Otherwise, the judiciary runs the risk of failing to live up to the exacting responsibility that is peculiarly its own. It could be argued to the contrary that the force of what I just affirmed is blunted by a specific provision of the Revised Penal Code. It reads: "Offenders who have undergone preventive imprisonment shall be credited in the services of their sentences consisting of deprivation of liberty, with one-half of the time during which they have undergone preventive imprisonment, ..." On its face, it does appear to stand in the way of yielding full assent to the view that petitioners' plea for liberty is solidly buttressed by the imperative requirement of the due process guaranty. I am not convinced that it poses such an insurmountable obstacle. It is to be remembered that the reduction of the penalty to ten years from the much more severe life sentence imposed by the lower court resulted from our finding that there was a grossly mistaken assumption on the part of the prosecution as to the existence of such a complex offense of rebellion with other crimes. Certainly, it does appear arbitrary for the petitioners to be made to suffer further for the error thus incurred. Also, the final disposition of the cases against them did consume a protracted period of time. It could very well be that they were in part to blame for such delay, not to mention other fortuitous causes. At any rate, it is undeniable that another arbitrary aspect would be imparted to the proceeding against petitioners, if after all this while it is held that they had not as yet fully served a ten-year sentence after the lapse of eighteen years. The due process mandate, it would seem to me, would be ignored if on the above considerations it is not given controlling force entitling petitioners to the remedy now sought.
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I would add the further observation that the constitutional infirmity of the above Revised Penal Code provision is rather apparent manifesting as it does so little regard for the equal protection clause in general and repugnant as it is to the due process safeguard in the matter under consideration. Not that there is any need as I see it for such a declaration of nullity. It suffices, as we had occasion to do in other litigations, to declare it inapplicable considering that the constitutional safeguard of due process is undoubtedly the higher law and takes precedence. The undeniable facts of record leave such conclusion inescapable. If necessary, however, from and after November 15, 1935, the effectivity of our Constitution, I would consider such Revised Penal Code provision, dating back to January 1, 1932, inoperative, as we did in at 14 least two cases, in view of its contrariety and repugnance to the regime of liberty and equal protection enshrined in the fundamental law. The foregoing consideration appear to me decisive and compel me to reach a result at variance with that reached by the Court.

Footnotes
1

ART. 29. One-half of the period of the preventive imprisonment deducted from term of imprisonment. Offenders who have undergone preventive imprisonment shall be credited in the service of their sentences consisting of deprivation of liberty, with onehalf of the time during which they have undergone preventive imprisonment, except in the following cases: 1. When they are recidivists, or have been convicted previously twice or more times of any crime; 2. When upon being summoned for the execution of their sentence they have failed to surrender voluntarily; 3. When they have been convicted of robbery, theft, estafa malversation of public funds, falsification, vagrancy, or prostitution.
2

Petitioners claimed in a previous petition for habeas corpus (G.R. No. L-28151) that Article 29 of the Revised Penal Code is unconstitutional. Petitioners moved to withdraw that petition on the ground that the petition had become moot and academic, which motion was granted by this Court on June 19, 1969.
3

People vs. Abilong, 82 Phil. 172, 174, citing People vs. Manaba, 58 Phil. 665, 668.

Diccionario de la Lengua Espaola, Decimoctava ed. (1956), pag. 1002. See also: Spanish-English Dictionary by Velasquez (1942), pag. 489.
5

The first paragraph of Article 28, in its English and Spanish versions, reads:

ART 28. Computation of penalties. If the offender shall be in prison the term of the duration of the temporary penalties shall be computed from the day on which the judgment of conviction shall have become final. xxx xxx xxx

ART. 28. Modo de computer las peas. Cuando el culpable estuviese preso, la duracion de las peas temporales empezara a contarse desde el dia en que la sentencia condenatoria hubiere quedado firme. xxx
6

xxx

xxx

Crawford, Statutory Construction, 1940 ed., p. 669, citing cases. Emphasis supplied.

"Reo" in Spanish may mean: "Criminoso, culpado or "Persona que por haber cometido una culpa merece castigo." Diccionario de la Lengua Espaola, Decimoctava ed. (1956), pag. 1130.
9

Emphasis supplied. The Spanish text reads:

ART. 98. Abono especial de tiempo por lealtad. A los penados que quebrantaren su sentencia en las circumstancias previstas en el articulo 158 de este Codigo, y se entregaren a la autoridad dentro de las 48 horas siguientes a la proclama del cese de la calamidad a que se refiere dicho articulo, se les condera un abono de una quintaparte de su condena.
10

At p. 125; emphasis supplied. See also. People vs. Tapel, 64 Phil. 112, 114; Alvarado vs. Director of Prisons, 87 Phil. 157, 158 (1959). Emphasis supplied. The "credit" mentioned in Sec. 5, Act 1533, appears in Section 1 thereof, which reads:

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SECTION 1. Each convict who is sentenced for a definite term of more than thirty days and less than life shall be entitled to diminish the period of his sentence under the following rules and regulations: (a) For each full month, commencing with the first day of his arrival at a provincial or Insular jail or prison, during which he has not been guilty of a violation of discipline or any of the rules of the prison, and has labored with diligence and fidelity upon all such tasks as have been assigned to him, he shall be allowed a deduction of five days from the period of his sentence. (b) After he has served two full years of a sentence, the deduction shall be eight days for each month thereafter. (c) After he has served five full years of a sentence, the deduction shall be ten days for each month thereafter. (d) After he has served ten full years of his sentence, the deduction from his term shall be fifteen days for each month thereafter. This was supplanted by Article 97 of the Revised Penal Code.
12

The present Article 33 of the Penal Code of Spain reads:

ART 33. El tiempo de prision preventiva sufrida por el delincuente durante la tramitacion de la causa, se abonara en su totalidad para el cumplimiento de la condena, cualquiera que sea la clase de la pea impuesta. (Redaccion de 1944: (Ripolles, Codigo Penal, Tomo 1, pag. 338). FERNANDO, J.: dissenting:
1

Cf. Haines, The Role of the Supreme Court in American Government and Politics, pp. 10-16 (1960). Angara v. Electoral Commission, 63 Phil. 139 (1936); Marbury v. Madison, 1 Cranch 137 (1803). 39 Phil. 778 (1919). Ibid., p. 788. 2 Cooley, Constitutional Limitations 709 (1927). 3 Willoughby, on the Constitution 1612 (1929). Burdick, The Law of the American Constitution 27 (1922). Fraenkel, Our Civil Liberties 6 (1944). 99 Phil. 515, 551-552 (1956). Lopez v. Director of Lands, 47 Phil. 23 (1924).

10

11

Bank of Columbia v. Okely, 4 Wheat 235, 244. Cf. "As to the words from Magna Charta, incorporated into the constitution of Maryland, after volumes spoken and written with a view to their exposition, the good sense of mankind has at length settled down

to this: that they were intended to secure the individual from the arbitrary exercise of the powers of government, unrestrained by the established principles of private rights and distributive justice."
12

Cf. Victorias Milling Co. v. Workmen's Compensation Commission, L-25665, May 22, 1969. Article 29. People v. Lisangan, 62 Phil. 646 (1935); De los Santos v. Mallare, 87 Phil. 289 (1950).

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(10)Republic of the Philippines SUPREME COURT Manila EN BANC

G.R. No. 115942 May 31, 1995 RUBLE RUBENECIA, petitioner, vs. CIVIL SERVICE COMMISSION, respondent.

FELICIANO, J.: Petitioner Ruble Rubenecia assails Civil Service Commission ("CSC" or "Commission") Resolution No. 94-0533, dated 25 January 1994, aquitting him of a charge of insubordination but finding him guilty of several other administrative charges and imposing upon him the penalty of dismissal from the service. He also questions the validity of CSC Resolution No. 93-2387 dated 29 June 1993, which allegedly abolished the Merit System Protection Board ("MSPB") and authorized the elevation of cases pending before that body to the Commission. Teachers of Catarman National High School in Catarman, Northern Samar, filed before the MSPB an administrative complaint against petitioner Rubenecia, the School Principal, for dishonesty, nepotism, oppression and violation of Civil Service Rules. After a preliminary inquiry, the MSPB on 15 January 1992 formally charged Rubenecia and required him to file an answer with the CSC Regional Office in Tacloban City. On 24 February 1992, petitioner Rubenecia, instead of filing an answer, requested that he be furnished with copies of the documents submitted by 1 complainants in support of the charges against him. On 15 May 1992, the CSC Regional Director assigned to investigate the case invited Rubenecia to the Regional Office and there identify and pick up the documents he desired. The Regional Office had then just received the records of the case transmitted by the MSPB. In response, Rubenecia requested that his visit to the CSC Regional Office be deferred because of alleged problems in his school relating to the enrollment period. The CSC reiterated on 10 June 1992 its order to Rubenecia to file his answer. In turn, petitioner through counsel in a letter dated 9 July 1992, reiterated his request that the CSC Regional Office furnish him copies of the documents submitted in connection with the charges against him. Although petitioner did not file his answer, the Regional Director set the case for hearing on 20 August 1992. This hearing, however, did not take place as the complainants did not there show up. Petitioner Rubenecia appeared at that hearing, but filed no answer. In an order issued on the same day, i.e., 20 August 1992, the Regional Office declared that the case was deemed submitted for resolution on the basis of the documents theretofore filed. On 25 August 1992, Rubenecia wrote to the Chairman of the Civil Service Commission, praying that the case against him be dismissed and attaching to that letter many documents in support of his claim of innocence.

On 28 September 1992, the Regional Director submitted an investigation report to the Chairman, MSPB. Before the MSPB could render a decision, the Commission issued on 29 June 1993 Resolution No. 93-2387 which provided, among other things, that cases then pending before the MSPB were to be elevated to the Commission for decision. The Commission, accordingly, took over the case against petitioner and on 25 January 1994, rendered its Resolution No. 94-0533 finding petitioner guilty and ordering his dismissal from the service. Petitioner moved for reconsideration, asserting lack of jurisdiction on the part of the Commission and attaching most if not all of the same documents he had annexed to his letter-answer to support his assertion of innocence. The motion for reconsideration was denied in a resolution of the Commission on 31 May 1994. Two (2) principal issues are raised in this Petition for Certiorari: (1) Whether or not the CSC had authority to issue its Resolution No. 93-2387 and assume jurisdiction over the administrative case against petitioner; and (2) Whether or not petitioner had been accorded due process in connection with rendition of CSC Resolution No. 94-0533 finding him guilty and ordering his dismissal from the service. I In respect of the first issue, petitioner Rubenecia contends that the Commission had no jurisdiction to take over the administrative case against him from the MSPB for the reason that CSC Resolution No. 93-2387 was invalid. The argument of the petitioner is that since the MSPB was a creation of law, it could be abolished only by law, and that Resolution No. 93-2387 was accordingly an ultra vires act on the part of the Commission. Resolution No. 93-2387 reads in full: WHEREAS, the Civil Service Commission recognizes the government-wide call and the need for streamlining of operations which requires implification of systems, cutting of red tape and elimination of unnecessary bureaucratic layer; WHEREAS, one of the powers and functions of the Commission provided for in Section 12 (11) of Book V of the Administrative Code of 1987 is to hear and decide administrative cases instituted by or brought before it directly or on appeal, including contested appointments and review decisions and actions of its offices and of the agencies attach to it; WHEREAS, Section 47 (1) of Book V of the Administrative Code of 1987 specifically provides that theCommission shall decide upon appeal all administrative disciplinary cases involving the imposition of penalty of suspension for more that thirty days, or fine in an amount exceeding thirty days salary, demotion in rank or salary or transfer removal or dismissal from office; WHEREAS, under Section 16 (2) of Book V of the Code, the Merit System Protection Board (MSPB),an office of the Commission, has the function to hear and decide administrative cases involving officials and employees of the civil service concurrently with the Commission; WHEREAS, most decisions on administrative cases rendered by the MSPB are later appealed to the Commission for review and final resolution; WHEREAS, the existing procedure wherein most administrative cases are first reviewed by the MSPB before they are elevated to the Commission makes it difficult for these cases to be finally resolved within a short period of time; WHEREAS, the present situation requires immediate streamlining of the operation of the Civil Service Commission to achieve as speedier delivery of administrative justice and economical operation without impairing due process and the substantive rights of the parties in administrative cases; NOW, THEREFORE, pursuant to the provisions of Section 17 of Book V of the Administrative Code of 1987 which authorizes the Commission, as an independent constitutional body, to effect changes in its organization as the need arises, the Commission Resolves as it is hereby Resolved to effect the following changes; 1. Decisions in administrative cases involving officials and employees of the civil serviceappealable to the Commission pursuant to Section 47 of Book V of the Code including personnel actions such

as contested appointments shall now be appealed directly to the Commission and not to the MSPB; and 2. Decisions and administrative cases involving the officials and employees of the Civil Service including contested appointments which have already been appealed to the MSPB and other pending administrative cases brought directly before the MSPB, shall now be elevated to the Commission for final resolution. Parties in administrative cases pending before the MSPB shall be notified in writing that their respective cases have already been elevated to the Commission for final resolution. They shall have 15 days from receipt of notice to submit their comments on or objections to the new procedures. This Resolution shall take effect on 1 July 1993 and the new procedure shall remain effective until rescinded by the Commission in another resolution. Adopted this 29th day of June 1993. Patricia A. Sto. Tomas Chairman Ramon P. Ereneta, Jr. Thelma P. Gaminde Commissioner Commissioner Juanito Demetrio Board Secretary VI (Emphasis supplied) The Merit System Protection Board was originally created by P.D. No. 1409, dated 8 June 1978, Section 1 of which said: "There is hereby created in the Civil Service Commission a Merit Systems Board." The Board was composed of "a commissioner and two (2) associate 2 commissioners" appointed by the CSC. The powers and functions of this Board were set out in Section 5 of P.D. No. 1409 in the following terms: Sec. 5. Powers and Functions of the Board. The Board shall have the following powers and functions, among others:

(1) Hear and decide administrative cases involving officers and employees of the civil service. (2) Hear and decide cases brought before it by officers and employees who feel aggrieved by the determination of appointing authorities involving appointment promotion, transfer, detail, reassignment and other personnel actions, as well as complaints against any officers in the government arising from abuses arising from personnel actions of these officers or from violation of the merit system. (3) Hear and decide complaints of civil service employees regarding malpractices of other officials and employees. (4) Promulgate, subject to the approval of the Civil Service Commission, rules and regulations to carry out the functions of the Board. (5) Administer oaths, issue subpoena and subpoena duces tecum, and take testimony in any investigation or inquiry. The Board shall have the power to punish for contempt in accordance with the rules of court under the same procedure with the same penalties provided therein. (6) Perform such other functions as may be assigned by the Civil Service Commission. xxx xxx xxx Decisions of the Board involving removal of officers and employees from the service were "subject to automatic review by the Commission;" all 3 other decisions of the Board were also subject to appeal to the Commission.

As noted, P.D. No. 1409 had "created in the Civil Service Commission [the] Merit Systems Board." Section 16 of the present Civil Service Law found in the 1987 Administrative Code followed the same line and re-created the Merit Systems Board as an office of the Commission and gave it a new name: "Merit System Protection Board." Section 16 of the present Civil Service Law reads as follows, in pertinent part: Sec. 16. Offices in the Commission. The Commission shall have the following offices: (1) The Office of the Executive Director . . . (2) The Merit System Protection Board composed of a Chairman and two (2) members which have the following functions: (a) Hear and decide on appeal administrative cases involving officials and employees of the Civil Service. Its decision shall be final except those involving dismissal or separation from the service which may be appealed to the Commission; (b) Hear and decide cases brought before it on appeal by officials and employees who feel aggrieved by the determination of appointing authorities involving personnel actions and violations of the merit system. The decision of the Board shall be final except those involving division chiefs or officials of higher ranks which may be appealed to the Commission; (c) Directly take cognizance of complaints affecting functions of the Commission, those which are unacted upon by the agencies, and such other complains which required direct action of the Board in the interest of justice; (d) Administer oaths, issue subpoena and subpoena duces tecum, take testimony in any investigation or inquiry, punish for contempt in accordance with the same procedures and penalties prescribed in the Rules of Court; and (e) Promulgate rules and regulations to carry out the functions of the Board subject to the approval of the Commission. (3) The Office of Legal Affairs . . . . . xxx xxx xxx The 1987 Administrative Code thus made clear that the MSPB was intended to be an office of the Commission like any of the other thirteen (13) offices in the Commission: e.g., the Office of Legal Affairs; the Office of Planning and Management; the Central Administrative Office, and so forth. The MSPB was, in other words, a part of the internal structure and organization of the Commission and thus a proper subject of organizational change which the Commission is authorized to undertake under Section 17 of the present Civil Service Law: Sec. 17. Organizational Structure. Each office of the Commission shall be headed by a Director with at least one (1) Assistant Director, and may have such divisions as are necessary to carry out their respective functions. As an independent constitutional body, the Commission may effect changes in the organization as the need arises. (Emphasis supplied). Since it was part and parcel of the internal organization of the Commission, the MSPB was not an autonomous entity created by law and merely 4 attached for administrative purposes to the Civil Service Commission. In Aida Eugenio v. Civil Service Commission, the Court invalidated a CSC Resolution which had transferred the Career Executive Service Board to the Office for Career Executive Service of the CSC precisely because the Career Executive Service Board was an autonomous entity created by a special law and attached, for administrative purposes only, to the Civil Service Commission; that Board did not fall within the control of the Civil Service Commission. It will be noted that under the provisions of Section 16 (2) (a) and (b) quoted earlier, cases originating outside the Civil Service Commission itself and appealed to the MSPB were, in cases involving division chiefs and higher officials and cases where the penalty imposed was dismissal or separation from the service, subject to further appeal to the Commission itself. At the same time, cases filed originally with the MSPB could also be filed directly with the Commission itself under Section 12 (11) of the Civil Service Law. It was this apparent duplication or layering of functions within the Commission that the Commission sought to rationalize and eliminate by enacting Resolution No. 93-2387 quoted in full earlier.

The change instituted by CSC Resolution No. 93-2387 consisted basically of the following: decision in administrative cases appealable to the Commission pursuant to Section 47 of the present Civil Service Law may now be appealed directly to the Commission itself and not to the MSPB. Administrative cases already pending on appeal before the MSPB or previously brought directly to the MSPB, at the time of the issuance of Resolution No. 93-2387, were required to be elevated to the Commission for final resolution. The functions of the MSPB relating to the determination of administrative disciplinary cases were, in other words, re-allocated to the Commission itself. These changes were prescribed by the Commission in its effort to "streamline the operation of the CSC" which in turn required the "simplification of systems, cutting of red tape and elimination of [an] unnecessary bureaucratic layer." The previous procedure made it difficult for cases to be finally resolved within a reasonable period of time. The change, therefore, was moved by the quite legitimate objective of simplifying the course that administrative disciplinary cases, like those involving petitioner Rubenecia, must take. We consider that petitioner Rubenecia had no vested right to a two-step administrative appeal procedure within the Commission, that is, appeal to an office of the Commission, the MSPB, and thereafter a second appeal to the Civil Service Commission itself (i.e., the Chairman and the two [2] Commissioners of the Civil Service Commission), a procedure which most frequently consumed a prolonged period of time. We note also that Resolution No. 93-2387 did not purport to abolish the MSPB nor to effect the termination of the relationship of public employment between the Commission and any of its officers or employees. At all events, even if Resolution No. 93-2387 had purported to do so, petitioner Rubenecia, who does not claim to be an officer or employee of the MSPB, has no personality or standing to contest such 5 termination of public employment. InFernandez and De Lima v. Hon. Patricia A. Sto. Tomas, etc., et al., the Court upheld Resolution No. 943710 of the Civil Service which effected certain changes in the internal organization and structure of the Commission. The Court said: We consider that Resolution No. 94-3710 has not abolished any public office as that term is used in the law of public officers. It is essential to note that none of the "changes in organization" introduced by Resolution No. 94-3710 carried with it or necessarily involved the termination of the relationship of public employment between the Commission and any of its officers and employees. We find it very difficult to suppose that the 1987 Revised Administrative Code having mentioned fourteen (14) different offices of the CSC, meant to freeze these offices and to cast in concrete, as it were, the internal organization of the Commission until it might please Congress to change such internal organization regardless of the ever changing needs of the civil service as a whole. To the contrary, the legislative authority had expressly authorized the Commission to carry out "changes in the organization," as the need [for such changes] arises. Petitioner Rubenecia also claims that the Civil Service Commission itself (as distinguished from the MSPB) did not acquire jurisdiction over his case because he had not been notified by individual written notice sent by mail that his case had been elevated to the Civil Service Commission as required by Resolution No. 93-2387. We consider this objection unmeritorious. CSC Resolution No. 93-2387, quoted earlier, did not require individual written notice sent by mail to parties in administrative cases pending before the MSPB. Assuming that Rubenecia had not in fact been sent an individual notice, the fact remains that Resolution No. 93-2387 was published in a newspaper of general circulation (The Manila 6 Standard, issue of 16 July 1993 ); the Commission may accordingly be deemed to have complied substantially with the requirement of written notice in its own Resolution. Moreover, petitioner himself had insisted on pleading before the Commission, rather than before the MSPB; he filed before the Commission itself his letter-cum-annexes which effectively was his answer to the Formal Charge instituted before the MSPB. He cannot now be heard to question the jurisdiction of the Commission. II We turn to petitioner's contention that he had been denied due process when the Commission rendered its Resolution No. 94-0533 finding him guilty and ordering his dismissal from the government service. The fundamental rule of due to process requires that a person be accorded notice and an opportunity to be heard. These requisites were respected in the case of petitioner Rubenecia. The Formal Charge prepared by the MSPB and given to petitioner Rubenecia constituted sufficient notice which, in fact, had enabled him to prepare his defense. The Formal Charge contained the essence of the complaint and the documents in support thereof and the conclusion of the MSPB finding a prima facie case against Rubenecia. Rubenecia himself admitted that he had been furnished with copies of an affidavit and 7 testimonies of the principal witnesses against him that were given during the preliminary hearing of the case against Rubenecia. We are also not persuaded by petitioner's complaint that he had not been furnished copies of all the documents that had accompanied the Formal Charge. Rubenecia was given an opportunity by the Investigating Officer, the Regional Director of CSC, to obtain those documents from the CSC Regional Office. Rubenecia did not avail himself of that opportunity and he cannot now be heard to complain that he was not given such documents. At all events, as already noted, he sent a formal letter-answer to Chairman Sto. Tomas controverting the charges against him and submitted voluminous documents in support of his claim of innocence and prayed for dismissal of the Formal Charge. This letter-answer constitutes proof that he did have notice of the accusations against him and was in fact able to present his own defense. Petitioner's answer to the Formal Charge was considered by the Investigating Officer. This Officer, however, concluded in his report that "the 8 evidence presented by respondent [Rubenecia] could not outweigh that of the prosecution as contained in the records.

Finally, the motion for reconsideration filed by Rubenecia before the Commission cured whatever defect might have existed in respect of 9 alleged denial of procedural due process. Denial of due process cannot be successfully invoked by a party who has had the opportunity to be 10 heard on his motion for reconsideration. In the instant case, petitioner was heard not only in respect of his motion for reconsideration; he was also in fact afforded reasonable opportunity to present his case before decision was rendered by the Commission finding him guilty. Rubenecia also claims that the Commission had erred in disregarding the "overwhelming evidence" in his favor. The settled rule in our jurisdiction is that the findings of fact of an administrative agency must be respected, so long as such findings of fact are supported by substantial evidence, even if such evidence might not be overwhelming or even preponderant. It is not the task of an appellate court, like this Court, to weigh once more the evidence submitted before the administrative body and to substitute its own judgment for that of the 11 administrative agency in respect of sufficiency of evidence. In the present case, in any event, after examination of the record of this case, we conclude that the decision of the Civil Service Commission finding Rubenecia guilty of the administrative charges prepared against him, is supported by substantial evidence. In Resolution No. 94-0533, the Commission drew the following conclusions in respect of the charges against petitioner Rubenecia: I. VIOLATION OF CIVIL SERVICE RULES AND REGULATIONS The records show that Rubenecia committed the said offense. He himself admitted that he did not accomplish his DTR but this was upon the suggestion of the Administrative Officer. Rubenecia cannot use as an excuse the alleged suggestion of an Administrative Officer. As the principal of a national high School, he is expected to know the basic civil service law, rules, and regulations. II DISHONESTY The Commission finds Rubenecia liable. He was charged for misrepresenting that he was on "Official Travel" to Baguio City to attend a three-week seminar and making it appear in his CSC Form No. 7 for the month of October 1988 that the has a perfect attendance for that month. Rubenecia in order to rebut the same simply reiterated previous allegation that he attended the SEDP Training in Baguio City during the questioned months without even an attempt on his part to adduce evidence documentary or testimonial that would attest to the truth of his allegation that he was indeed in Baguio during those weeks for training purposes. A mere allegation cannot obviously prevail over a more direct and positive statement of Celedonio Layon, School Division Superintendent, Division of Northern Samar, when the latter certified that he had no official knowledge of the alleged "official travel" of Rubenecia. Moreover, verification with the Bureau of Secondary Schools reveals that no training seminar for school principal was conducted by DECS during that time. It was also proven by records that he caused one Mrs. Cecilia vestra to render service as Secondary School Teacher from January 19, 1990 to August 30, 1991 without any duly issued appointment by the appointing authority. III. NEPOTISM With respect to the charge of Nepotism, Rubenecia alleged that he is not the appointing authority with regard to the appointment of his brother-in-law as Utilityman but merely a recommending authority. With this statement, the Commission finds Rubenecia guilty. It should be noted that under the provision of Sec. 59, of the 1987 Administrative Code, the recommending authority is also prohibited from recommending the appointment to a non-teaching position of his relatives within the prohibited degree. IV. OPPRESSION Rubenecia is also guilty of Oppression. He did not give on time the money benefits due to Ms. Leah Rebadulla and Mr. Rolando Tafalla, both Secondary Teachers of CNHS, specifically their salary differentials for July to December 1987, their salaries for the month of May and half of June 1988; their proportional vacation salaries for the semester of 1987-1988, and the salary of Mr. Tafalla for the month of June, 1987. Rubenecia did not even attempt to present countervailing evidence. Without being specifically denied, they are deemed admitted by Rubenecia. V INSUBORDINATION He is not liable for Insubordination arising from his alleged refusal to obey the "Detail Order" by filing a sick leave and vacation leave successively. The records show that the two applications for leave filed by Rubenecia were duly approved by proper official, hence it cannot be considered an act of Insubordination on the part of Rubenecia when he incurred absences based on an approved application for leave of absence.

Rubenecia is therefore found guilty of Dishonesty, Nepotism, Oppression and Violations of Civil Service Rules and Regulations. WHEREFORE, foregoing premises considered, the Commission hereby resolves to find Ruble Rubenecia guilty of Dishonesty, Nepotism, Oppression and Violation of Civil Service Rules and Ragulations. Accordingly, he is meted, out the 12 penalty of dismissal from the service. We find no basis for overturning the above conclusions as the product merely of arbitrary whims and caprice or of bad faith and malice. We conclude that petitioner Rubenecia has failed to show grave abuse of discretion or any act without or in excess of jurisdiction on the part of public respondent Commission in issuing its Resolution No. 93-2387 dated 29 June 1993 and Resolution No. 94-0533 dated 25 January 1994. WHEREFORE, for all the foregoing, the Petition for Certiorari is hereby DISMISSED for lack of merit. SO ORDERED. Narvasa, C.J., Padilla, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Puno, Vitug, Kapunan, Mendoza and Francisco, JJ., concur. Quiason, J., is on leave.

Footnotes 1 Petitioner cited in this connection Section 48(2) of Book V, Title I, Subtitle A, Chapter 1, of the 1987 Administrative Code, the present Civil Service Law which provides: ". . . If a prima facie case exists, he shall notify the respondent in writing of the charges against the latter, to which shall be attached copies of the complaint, sworn statements and other documents submitted, . . . ." 2 Section 2, P.D. No. 1409. 3 Section 8, P.D. No. 1409. 4 G.R. No. 115863, 31 March 1995. 5 G.R. No. 116418, 27 March 1995. 6 See CSC Resolution No. 94-2857, 31 May 1994, Rollo, p. 36. 7 Petitioner's letter dated 27 August 1992 to Patricia Sto. Tomas, p. 2; Rollo, p. 85. 8 Investigation Report, p. 3; Rollo, p. 268. 9 Medenilla vs. CSC, 194 SCRA 278 [1991]; Remarco Garments Manufacturing vs. Minister of Labor, 135 SCRA 167 [1985]; De Leon vs. Comelec, 129 SCRA 117 [1984]. 10 Mendiola vs. CSC, 221 SCRA 295 [1993]. 11 Assistant Executive Secretary for Legal Affairs of the Office of the President vs. Court of Appeals, 169 SCRA 27 [1989]. 12 Rollo, pp. 33-35.