Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

 

G.R. No. L-66160 May 21, 1990

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.UNION SHIPPING CORPORATION and THE COURT OF TAX APPEALS, respondents.

Artemio M. Lobrin for private respondent.

 

PARAS, J.:

This is a petition for review on certiorari of the December 9, 1983 decision * of the Court of Tax Appeals in CTA Case No. 2989 reversing the Commissioner of Internal Revenue.

In a letter dated December 27, 1974 (Exhibit "A") herein petitioner Commissioner of Internal Revenue assessed against Yee Fong Hong, Ltd. and/or herein private respondent Union Shipping Corporation, the total sum of P583,155.22 as deficiency income taxes due for the years 1971 and 1972. Said letter was received on January 4, 1975, and in a letter dated January 10, 1975 (Exhibit "B"), received by petitioner on January 13, 1975, private respondent protested the assessment.

Petitioner, without ruling on the protest, issued a Warrant of Distraint and Levy (Exhibit "C"), which was served on private respondent's counsel, Clemente Celso, on November 25, 1976.

In a letter dated November 27, 1976 (Exhibit "D"), received by petitioner on November 29, 1976 (Exhibit "D-1") private respondent reiterated its request for reinvestigation of the assessment and for the reconsideration of the summary collection thru the Warrant of Distraint and Levy.

Petitioner, again, without acting on the request for reinvestigation and reconsideration of the Warrant of Distraint and Levy, filed a collection suit before Branch XXI of the then Court of First Instance of Manila and docketed as Civil Case No. 120459 against private respondent. Summons (Exhibit "E") in the said collection case was issued to private respondent on December 28, 1978.

On January 10, 1979, private respondent filed with respondent court its Petition for Review of the petitioner's assessment of its deficiency income taxes in a letter dated December 27, 1974, docketed therein as CTA Case No. 2989 (Rollo, pp. 44-49), wherein it prays that after hearing, judgment be rendered holding that it is not liable for the payment of the income tax herein involved, or which may be due from foreign shipowner Yee Fong Hong, Ltd.; to which petitioner filed his answer on March 29, 1979 (Rollo, pp. 50-53).

Respondent Tax Court, in a decision dated December 9, 1983, ruled in favor of private respondent —

WHEREFORE, the decision of the Commissioner of Internal Revenue appealed from, assessing against and demanding from petitioner the payment of deficiency income tax, inclusive of 50% surcharge, interest and compromise penalties, in the amounts of P73,958.76 and P583,155.22 for the years 1971 and 1972, respectively, is reversed.

Hence, the instant petition.

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

The main issues in this case are: (a) on the procedural aspect, whether or not the Court of Tax Appeals has jurisdiction over this case and (b) on the merits, whether or not Union Shipping

Corporation acting as a mere "husbanding agent" of Yee Fong Hong Ltd. is liable for payment of taxes on the gross receipts or earnings of the latter.

The main thrust of this petition is that the issuance of a warrant of distraint and levy is proof of the finality of an assessment because it is the most drastic action of all media of enforcing the collection of tax, and is tantamount to an outright denial of a motion for reconsideration of an assessment. Among others, petitioner contends that the warrant of distraint and levy was issued after respondent corporation filed a request for reconsideration of subject assessment, thus constituting petitioner's final decision in the disputed assessments (Brief for petitioner, pp. 9 and 12).

Petitioner argues therefore that the period to appeal to the Court of Tax Appeals commenced to run from receipt of said warrant on November 25, 1976, so that on January 10, 1979 when respondent corporation sought redress from the Tax Court, petitioner's decision has long become final and executory.

On this issue, this Court had already laid down the dictum that the Commissioner should always indicate to the taxpayer in clear and unequivocal language what constitutes his final determination of the disputed assessment.

Specifically, this Court ruled:

. . . we deem it appropriate to state that the Commissioner of Internal Revenue should always indicate to the taxpayer in clear and unequivocal language whenever his action on an assessment questioned by a taxpayer constitutes his final determination on the disputed assessment, as contemplated by sections 7 and 11 of Republic Act 1125, as amended. On the basis of this statement indubitably showing that the Commissioner's communicated action is his final decision on the contested assessment, the aggrieved taxpayer would then be able to take recourse to the tax court at

the opportune time. Without needless difficulty, the taxpayer would be able to determine when his right to appeal to the tax court accrues. This rule of conduct would also obviate all desire and opportunity on the part of the taxpayer to continually delay the finality of the assessment — and, consequently, the collection of the amount demanded as taxes — by repeated requests for recomputation and reconsideration. On the part of the Commissioner, this would encourage his office to conduct a careful and thorough study of every questioned assessment and render a correct and definite decision thereon in the first instance. This would also deter the Commissioner from unfairly making the taxpayer grope in the dark and speculate as to which action constitutes the decision appealable to the tax court. Of greater import, this rule of conduct would meet a pressing need for fair play, regularity, and orderliness in administrative action. (Surigao Electric Co., Inc. v. C.T.A., 57 SCRA 523, 528, [1974]).

There appears to be no dispute that petitioner did not rule on private respondent's motion for reconsideration but contrary to the above ruling of this Court, left private respondent in the dark as to which action of the Commissioner is the decision appealable to the Court of Tax Appeals. Had he categorically stated that he denies private respondent's motion for reconsideration and that his action constitutes his final determination on the disputed assessment, private respondent without needless difficulty would have been able to determine when his right to appeal accrues and the resulting confusion would have been avoided.

Much later, this Court reiterated the above-mentioned dictum in a ruling applicable on all fours to the issue in the case at bar, that the reviewable decision of the Bureau of Internal Revenue is that contained in the letter of its

Commissioner, that such constitutes the final decision on the matter which may be appealed to the Court of Tax Appeals and not the warrants of distraint (Advertising Associates, Inc. v. Court of Appeals, 133 SCRA 769 [1984] emphasis supplied). It was likewise stressed that the procedure enunciated is demanded by the pressing need for fair play, regularity and orderliness in administrative action.

Under the circumstances, the Commissioner of Internal Revenue, not having clearly signified his final action on the disputed assessment, legally the period to appeal has not commenced to run. Thus, it was only when private respondent received the summons on the civil suit for collection of deficiency income on December 28, 1978 that the period to appeal commenced to run.

The request for reinvestigation and reconsideration was in effect considered denied by petitioner when the latter filed a civil suit for collection of deficiency income. So. that on January 10, 1979 when private respondent filed the appeal with the Court of Tax Appeals, it consumed a total of only thirteen (13) days well within the thirty day period to appeal pursuant to Section 11 of R.A. 1125.

On the merits, it was found fully substantiated by the Court of Tax Appeals that, respondent corporation is the husbanding agent of the vessel Yee Fong Hong, Ltd. as follows:

Coming to the second issue, petitioner contended and was substantiated by satisfactory uncontradicted testimonies of Clemente Celso, Certified Public Accountant, and Rodolfo C. Cabalquinto, President and General Manager, of petitioner that it is actually and legally the husbanding agent of the vessel of Yee Fong Hong, Ltd. as (1) it neither performed nor transacted any shipping business, for and in representation, of Yee Fong Hong, Ltd. or its vessels or otherwise negotiated or procured cargo to be loaded in the vessels of Yee Fong Hong, Ltd. (p. 21, t.s.n., July 16, 1980);

(2) it never solicited or procured cargo or freight in the Philippines or elsewhere for loading in said vessels of Yee Fong Hong, Ltd. (pp. 21 & 38, ibid.); (3) it had not collected any freight income or receipts for the said Yee Fong Hong, Ltd. (pp. 22 & 38, ibid; pp. 46 & 48, t.s.n., Nov. 14, 1980.); (4) it never had possession or control, actual or constructive, over the funds representing payment by Philippine shippers for cargo loaded on said vessels (pp. 21 & 38, ibid; p. 48, ibid); petitioner never remitted to Yee Fong Hong, Ltd. any sum of money representing freight incomes of Yee Fong Hong, Ltd. (p. 21, ibid.; p. 48, ibid); and (5) that the freight payments made for cargo loaded in the Philippines for foreign destination were actually paid directly by the shippers to the said Yee Fong Hong, Ltd. upon arrival of the goods in the foreign ports. (Rollo, pp. 58-59).

On the same issue, the Commissioner of Internal Revenue Misael P. Vera, on query of respondent's counsel, opined that respondent corporation being merely a husbanding agent is not liable for the payment of the income taxes due from the foreign ship owners loading cargoes in the Philippines (Rollo, p. 63; Exhibit "I", Rollo, pp. 64-66).

Neither can private respondent be liable for withholding tax under Section 53 of the Internal Revenue Code since it is not in possession, custody or control of the funds received by and remitted to Yee Fong Hong, Ltd., a non-resident taxpayer. As correctly ruled by the Court of Tax Appeals, "if an individual or corporation like the petitioner in this case, is not in the actual possession, custody, or control of the funds, it can neither be physically nor legally liable or obligated to pay the so-called withholding tax on income claimed by Yee Fong Hong, Ltd." (Rollo, p. 67).

Finally, it must be stated that factual findings of the Court of Tax Appeals are binding on this

Court (Industrial Textiles Manufacturing Company of the Phil., Inc. (ITEMCOP) v. Commissioner of Internal Revenue, et al. (136 SCRA 549 [1985]). It is well-settled that in passing upon petitions for review of the decisions of the Court of Tax Appeals, this Court is generally confined to questions of law. The findings of fact of said Court are not to be disturbed unless clearly shown to be unsupported by substantial evidence (Commissioner of Internal Revenue v. Manila Machinery & Supply Company, 135 SCRA 8 [1985]).

A careful scrutiny of the records reveals no cogent reason to disturb the findings of the Court of Tax Appeals.

PREMISES CONSIDERED, the instant petition is hereby DISMISSED and the assailed decision of the Court of Tax Appeals is hereby AFFIRMED.

SO ORDERED.

Melencio-Herrera, Padilla, Sarmiento and Regalado, JJ., concur.

 

G.R. No. L-25289 June 28, 1974

SURIGAO ELECTRIC CO., INC., petitioner, vs.THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

CASTRO, J.:p

The Court denies the present petition for review of the decision of the Court of Appeals dated October 1, 1965 in its CTA Case No. 1438, which dismissed the appeal filed by the petitioner Surigao Electric Company, Inc. with the tax court on August 1, 1963 on the ground that it was time-barred.

In November 1961 the petitioner Surigao Electric Co., Inc., grantee of a legislative electric franchise, received a warrant of distraint and levy to enforce the collection from "Mainit Electric" of a deficiency franchise tax plus surcharge in the total amount of P718.59. In a letter to the Commissioner of Internal Revenue, the petitioner contested this warrant, stating that it did not have a franchise in Mainit, Surigao.

Thereafter the Commissioner, by letter dated April 2, 1961, advised the petitioner to take up the matter with the General Auditing Office, enclosing a copy of the 4th Indorsement of the Auditor General dated November 23, 1960. This indorsement indicated that the petitioner's liability for deficiency franchise tax for the period from September 1947 to June 1959 was P21,156.06, excluding surcharge. Subsequently, in a letter to the Auditor General dated August 2, 1962, the petitioner asked for reconsideration of the assessment, admitting liability only for the 2% franchise tax in accordance with its legislative franchise and not at the higher rate of 5% imposed by section 259 of the National Internal Revenue Code, as amended, which latter rate the Auditor General used as basis in computing the petitioner's deficiency franchise tax.

An exchange of correspondence between the petitioner, on the one hand, and the Commissioner and the Auditor General, on the other, ensued, all on the matter of the petitioner's liability for deficiency franchise tax.

The controversy culminated in a revised assessment dated April 29, 1963 (received by the petitioner on May 8, 1963) in the amount of P11,533.53, representing the petitioner's deficiency franchise-tax and surcharges thereon for the period from April 1, 1956 to June 30, 1959. The petitioner then requested a recomputation of the revised assessment in a letter to the Commissioner dated June 6, 1963 (sent by registered mail on June 7, 1963). The Commissioner, however, in a letter dated June 28, 1963 (received by the petitioner on July 16, 1963), denied the request for recomputation.

On August 1, 1963 the petitioner appealed to the Court of Tax Appeals. The tax court dismissed the appeal on October 1, 1965 on the ground that the appeal was filed beyond the thirty-day period of appeal provided by section 11 of Republic Act 1125.

Hence, the present recourse.

The case at bar raises only one issue: whether or not the petitioner's appeal to the Court of Tax Appeals was time-barred. The parties disagree on which letter of the Commissioner embodies the decision or ruling appealable to the tax court.

A close reading of the numerous letters exchanged between the petitioner and the Commissioner clearly discloses that the letter of demand issued by the Commissioner on April 29, 1963 and received by the petitioner on May 8, 1963 constitutes the definite determination of the petitioner's deficiency franchise tax liability or the decision on the disputed assessment and, therefore, the decision appealable to the tax court. This letter of April 29, 1963 was in response to the communications of the petitioner, particularly the letter of August 2, 1962 wherein it assailed the 4th Indorsement's data and findings on its deficiency, franchise tax liability computed at 5% (on the ground that its franchise precludes the imposition of a rate higher than the 2% fixed in its legislative franchise), and the letter of April 24, 1963 wherein it again questioned the assessment and requested for a recomputation (on the ground that the Government could make an assessment only for the period from May 29, 1956 to June 30, 1959). Thus, as early as August 2, 1962, the petitioner already disputed the assessment made by the Commissioner.

Moreover, the letter of demand dated April 29, 1963 unquestionably constitutes the final action taken by the Commissioner on the petitioner's several requests for reconsideration and recomputation. In this letter, the Commissioner not only in effect demanded that the petitioner pay the amount of P11,533.53 but also gave warning that in the event it failed to pay, the said Commissioner would be constrained to enforce the collection thereof by means of the remedies provided by law. The tenor of the letter, specifically, the statement regarding the resort to legal remedies, unmistakably indicates the final nature of the determination made by the Commissioner of the petitioner's deficiency franchise tax liability.

The foregoing-view accords with settled jurisprudence — and this despite the fact that nothing in Republic Act 1125, 1 as amended, even remotely suggests the element truly determinative of the appealability to the Court of Appeals of a ruling of the Commissioner of Internal Revenue. Thus, this Court has considered the following communications sent by the Commissioner to taxpayers as embodying rulings appealable to the tax court: (a) a letter which stated the result of the investigation requested by the taxpayer and the consequent modification of the assessment; 2 (b) letter which denied the request of the taxpayer for the reconsideration cancellation, or withdrawal of the original assessment; 3 (c) a letter which contained a demand on the taxpayer for the payment of the revised or reduced assessment; 4 and (d) a letter which notified the taxpayer of a revision of previous assessments. 5

To sustain the petitioner's contention that the Commissioner's letter of June 28, 1963 denying its request for further amendment of the revised assessment constitutes the ruling appealable to the tax court and that the thirty-day period should, therefore, be counted from July 16, 1963, the day it received the June 28, 1963 letter, would, in effect, leave solely to the petitioner's will the determination of the commencement of the statutory thirty-day period, and place the petitioner — and for that matter, any taxpayer — in a position, to delay at will and on convenience the finality of a tax assessment. This absurd interpretation espoused by the petitioner would result in grave detriment to the interests of the Government, considering that taxes constitute its life-blood

and their prompt and certain availability is an imperative need. 6

The revised assessment embodied in the Commissioner's letter dated April 29, 1963 being, in legal contemplation, the final ruling reviewable by the tax court, the thirty-day appeal period should be counted from May 8, 1963 (the day the petitioner received a copy of the said letter). From May 8, 1963 to June 7, 1963 (the day the petitioner, by registered mail, sent to the Commissioner its letter of June 6, 1963 requesting for further recomputation of the amount demanded from it) saw the lapse of thirty days. The June 6, 1963 request for further recomputation, partaking of a motion for reconsideration, tolled the running of the thirty-day period from June 7, 1963 (the day the petitioner sent its letter by registered mail) to July 16, 1963 (the day the petitioner received the letter of the Commissioner dated June 28, 1963 turning down its request). The prescriptive period commenced to run again on July 16, 1963. The petitioner filed its petition for review with the tax court on August 1, 1963 — after the lapse of an additional sixteen days. The petition for review having been filed beyond the thirty-day period, we rule that the Court of Tax Appeals correctly dismissed the same.

The thirty-day period prescribed by section 11 of Republic Act 1125, as amended, within which a taxpayer adversely affected by a decision of the Commissioner of Internal Revenue should file his appeal with the tax court, is a jurisdictional requirement, 7 and the failure of a taxpayer to lodge his appeal within the prescribed period bars his appeal and renders the questioned decision final and executory. 8

Prescinding from all the foregoing, we deem it appropriate to state that the Commissioner of Internal Revenue should always indicate to the taxpayer in clear and unequivocal language whenever his action on an assessment questioned by a taxpayer constitutes his final determination on the disputed assessment, as contemplated by sections 7 and 11 of Republic Act 1125, as amended. On the basis of this indicium indubitably showing that the Commissioner's communicated action is his final decision on the contested assessment, the aggrieved taxpayer would then be able to take recourse to the tax court at the opportune time. Without needless difficulty, the taxpayer would

be able to determine when his right to appeal to the tax court accrues. This rule of conduct would also obviate all desire and opportunity on the part of the taxpayer to continually delay the finality of the assessment — and, consequently, the collection of the amount demanded as taxes — by repeated requests for recomputation and reconsideration. On the part of the Commissioner, this would encourage his office to conduct a careful and thorough study of every questioned assessment and render a correct and definite decision thereon in the first instance. This would also deter the Commissioner from unfairly making the taxpayer grope in the dark and speculate as to which action constitutes the decision appealable to the tax court. Of greater import, this rule of conduct would meet a pressing need for fair play, regularity, and orderliness in administrative action.

ACCORDINGLY, the decision of the Court of Tax Appeals dated October 1, 1965 is affirmed, at petitioner's cost.

Makalintal, C.J, Makasiar, Esguerra and Muñoz Palma, JJ., concur.

 

 

 

Republic of the PhilippinesSUPREME COURTManila

THIRD DIVISION

G.R. No. 135210      July 11, 2001

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.ISABELA CULTURAL CORPORATION, respondent.

PANGANIBAN, J.:

A final demand letter from the Bureau of Internal Revenue, reiterating to the taxpayer the immediate payment of a tax deficiency assessment previously made, is tantamount to a denial of the taxpayer's request for reconsideration. Such letter amounts to a final decision on a disputed assessment and is thus appealable to the Court of Tax Appeals (CTA).

The Case

Before this Court is a Petition for Review on Certiorari1 pursuant to Rule 45 of the Rules of Court, seeking to set aside the August 19, 1998 Decision2 of the Court of Appeals3 (CA) in CA-GR SP No. 46383 and ultimately to affirm the dismissal of CTA Case No. 5211. The dispositive portion of the assailed Decision reads as follows:

"WHEREFORE, the assailed decision is REVERSED and SET ASIDE. Accordingly, judgment is hereby rendered REMANDING the case to the CTA for proper disposition."4

The Facts

The facts are undisputed. The Court of Appeals quoted the summary of the CTA as follows:

"As succinctly summarized by the Court of Tax appeals (CTA for brevity), the antecedent facts are as follows:

'In an investigation conducted on the 1986 books of account of

[respondent, petitioner] had the preliminary [finding] that [respondent] incurred a total income tax deficiency of P9,985,392.15, inclusive of increments. Upon protest by [respondent's] counsel, the said preliminary assessment was reduced to the amount of P325,869.44, a breakdown of which follows:

Deficiency Income Tax

Deficiency Expanded Withholding Tax

Total

(pp. 187-189, BIR records)'

On February 23, 1990, [respondent] received from [petitioner] an assessment letter, dated February 9, 1990, demanding payment of the amounts of P333,196.86 and P4,897.79 as deficiency income tax and expanded withholding tax inclusive of surcharge and interest, respectively, for the taxable period from January 1, 1986 to December 31, 1986. (pp. 204 and 205, BIR rec.)

In a letter, dated March 22, 1990, filed with the [petitioner's] office on March 23, 1990 (pp. 296-311, BIR rec.), [respondent] requested x x x a reconsideration of the subject assessment.

Supplemental to its protest was a letter, dated April 2, 1990, filed with the [petitioner's] office on April 18, 1990 (pp. 224 & 225, BIR rec.), to which x x x were attached certain documents supportive of its protest, as well as a Waiver of Statute of Limitation, dated April 17, 1990, where it was indicated that [petitioner] would only have until April 5, 1991 within which to asses and collect the taxes that may be found due from [respondent] after the re-investigation.

On February 9, 1995, [respondent] received from [petitioner] a Final Notice Before Seizure, dated December 22, 1994 (p. 340, BIR rec.). In said letter, [petitioner] demanded payment of the subject assessment within ten (10) days from receipt thereof. Otherwise, failure on its part would constrain [petitioner] to collect the subject assessment through summary remedies.

[Respondent] considered said final notice of seizure as [petitioner's] final decision. Hence, the instant petition for review filed with this Court on March 9, 1995.

The CTA having rendered judgment dismissing the petition, [respondent] filed the instant petition anchored on the argument that [petitioner's] issuance of the Final Notice Before Seizure constitutes [its] decision on [respondent's] request for reinvestigation, which the [respondent] may appeal to the CTA."5

Ruling of the Court of Appeals

In its Decision, the Court of Appeals reversed the Court of Tax Appeals. The CA considered the final notice sent by petitioner as the latter's decision, which was appealable to the CTA. The appellate court reasoned that the final Notice before seizure had effectively denied petitioner's request for a reconsideration of the commissioner's assessment. The CA relied on the long-settled tax jurisprudence that a demand letter reiterating payment of delinquent taxes amounted to a decision on a disputed assessment.

Hence, this recourse.6

Issues

In his Memorandum,7 petitioner presents for this Court's consideration a solitary issue:

"Whether or not the Final Notice Before Seizure dated February 9, 1995 signed by Acting Chief Revenue Collection Officer Milagros Acevedo against ICC

constitutes the final decision of the CIR appealable to the CTA."8

The Court's Ruling

The Petition is not meritorious.

Sole Issue:   The Nature of   the Final Notice Before Seizure

The Final Notice Before Seizure sent by the Bureau of Internal Revenue (BIR) to respondent reads as follows:

"On Feb. 9, 1990, [this] Office sent you a letter requesting you to settle the above-captioned assessment. To date, however, despite the lapse of a considerable length of time, we have not been honored with a reply from you.

In this connection, we are giving you this LAST OPPORTUNITY to settle the adverted assessment within ten (10) days after receipt hereof. Should you again fail, and refuse to pay, this Office will be constrained to enforce its collection by summary remedies of Warrant of Levy of Road Property, Distraint of Personal Property or Warrant of Garnishment, and/or simultaneous court action.

Please give this matter your preferential attention.

Very truly yours,

ISIDRO B. TECSON, JR.Revenue District Officer

By:

(Signed)MILAGROS M. ACEVEDOActg. Chief Revenue Collection Officer"9

Petitioner maintains that this Final Notice was a mere reiteration of the delinquent taxpayer's obligation to pay the taxes due. It was supposedly a mere demand that should not

have been mistaken for a decision on a protested assessment. Such decision, the commissioner contends, must unequivocably indicate that it is the resolution of the taxpayer's request for reconsideration and must likewise state the reason therefor.

Respondent, on the other hand, points out that the Final Notice Before Seizure should be considered as a denial of its request for reconsideration of the disputed assessment. The Notice should be deemed as petitioner's last act, since failure to comply with it would lead to the distraint and levy of respondent's properties, as indicated therein.

We agree with respondent. In the normal course, the revenue district officer sends the taxpayer a notice of delinquent taxes, indicating the period covered, the amount due including interest, and the reason for the delinquency. If the taxpayer disagrees with or wishes to protest the assessment, it sends a letter to the BIR indicating its protest, stating the reasons therefor, and submitting such proof as may be necessary. That letter is considered as the taxpayer's request for reconsideration of the delinquent assessment. After the request is filed and received by the BIR, the assessment becomes a disputed assessment on which it must render a decision. That decision is appealable to the Court of Tax Appeals for review.

Prior to the decision on a disputed assessment, there may still be exchanges between the commissioner of internal revenue (CIR) and the taxpayer. The former may ask clarificatory questions or require the latter to submit additional evidence. However, the CIR's position regarding the disputed assessment must be indicated in the final decision. It is this decision that is properly appealable to the CTA for review.

Indisputably, respondent received an assessment letter dated February 9, 1990, stating that it had delinquent taxes due; and it subsequently filed its motion for reconsideration on March 23, 1990. In support of its request for reconsideration, it sent to the CIR additional documents on April 18, 1990. The next communication respondent received was already the Final Notice Before Seizure dated November 10, 1994.

In the light of the above facts, the Final Notice Before Seizure cannot but be considered as the commissioner's decision disposing of the request for reconsideration filed by respondent, who received no other response to its request. Not only was the Notice the only response received; its content and tenor supported the theory that it was the CIR's final act regarding the request for reconsideration. The very title expressly indicated that it was a finalnotice prior to seizure of property. The letter itself clearly stated that respondent was being given "this LAST OPPORTUNITY" to pay; otherwise, its properties would be subjected to distraint and levy. How then could it have been made to believe that its request for reconsideration was still pending determination, despite the actual threat of seizure of its properties?

Furthermore, Section 228 of the National Internal Revenue Code states that a delinquent taxpayer may nevertheless directly appeal a disputed assessment, if its request for reconsideration remains unacted upon 180 days after submission thereof. We quote:

"Sec. 228. Protesting an Assessment. – x x x

Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings.

Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have become final.

If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within (30) days from receipt of

the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise the decision shall become final, executory and demandable."10

In this case, the said period of 180 days had already lapsed when respondent filed its request for reconsideration on March 23, 1990, without any action on the part of the CIR.

Lastly, jurisprudence dictates that a final demand letter for payment of delinquent taxes may be considered a decision on a disputed or protested assessment. In Commissioner of Internal Revenue v. Ayala Securities Corporation, this Court held:

"The letter of February 18, 1963 (Exh. G), in the view of the Court, is tantamount to a denial of the reconsideration or [respondent corporation's] x x x protest o[f] the assessment made by the petitioner, considering that the said letter [was] in itself a reiteration of the demand by the Bureau of Internal Revenue for the settlement of the assessment already made, and for the immediate payment of the sum of P758,687.04 in spite of the vehement protest of the respondent corporation on April 21, 1961. This certainly is a clear indication of the firm stand of petitioner against the reconsideration of the disputed assessment, in view of the continued refusal of the respondent corporation to execute the waiver of the period of limitation upon the assessment in question.

This being so, the said letter amount[ed] to a decision on a disputed or protested assessment and, there, the court a quo did not err in taking cognizance of this case."11

Similarly, in Surigao Electric Co., Inc. v. Court of Tax Appeals12 and again in CIR v. Union Shipping Corp.,13 we ruled:

"x x x. The letter of demand dated April 29, 1963 unquestionably constitutes the final action taken by the commissioner on the petitioner's several requests for

reconsideration and recomputation. In this letter the commissioner not only in effect demanded that the petitioner pay the amount of P11,533.53 but also gave warning that in the event it failed to pay, the said commissioner would be constrained to enforce the collection thereof by means of the remedies provided by law. The tenor of the letter, specifically the statement regarding the resort to legal remedies, unmistakably indicate[d] the final nature of the determination made by the commissioner of the petitioner's deficiency franchise tax liability."

As in CIR v. Union Shipping,14 petitioner failed to rule on the Motion for Reconsideration filed by private respondent, but simply continued to demand payment of the latter's alleged tax delinquency. Thus, the Court reiterated the dictum that the BIR should always indicate to the taxpayer in clear and unequivocal language what constitutes final action on a disputed assessment. The object of this policy is to avoid repeated requests for reconsideration by the taxpayer, thereby delaying the finality of the assessment and, consequently, the collection of the taxes due. Furthermore, the taxpayer would not be groping in the dark, speculating as to which communication or action of the BIR may be the decision appealable to the tax court.15

In the instant case, the second notice received by private respondent verily indicated its nature – that it was final. Unequivocably, therefore, it was tantamount to a rejection of the request for reconsideration.

Commissioner v. Algue16 is not in point here. In that case, the Warrant of Distraint and Levy, issued to the taxpayer without any categorical ruling on its request for reconsideration, was not deemed equivalent to a denial of the request. Because such request could not in fact be found in its records, the BIR cannot be presumed to have taken it into consideration. The request was considered only when the taxpayer gave a copy of it, duly stamp-received by the BIR. Hence, the Warrant was deemed premature.1âwphi1.nêt

In the present case, petitioner does not deny receipt of private respondent's protest letter. As

a matter of fact, it categorically relates the following in its "Statement of Relevant Facts":17

"3. On March 23, 1990, respondent ICC wrote the CIR requesting for a reconsideration of the assessment on the ground that there was an error committed in the computation of interest and that there were expenses which were disallowed (Ibid., pp. 296-311).

"4. On April 2, 1990, respondent ICC sent the CIR additional documents in support of its protest/reconsideration. The letter was received by the BIR on April 18, 1990. Respondent ICC further executed a Waiver of Statute of Limitation (dated April 17, 1990) whereby it consented to the BIR to assess and collect any taxes that may be discovered in the process of reinvestigation, until April 3, 1991 (Ibid., pp. 296-311). A copy of the waiver is hereto attached as Annex 'C'."

Having admitted as a fact private respondent's request for reconsideration, petitioner must have passed upon it prior to the issuance of the Final Notice Before Seizure.

WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED.

SO ORDERED.

Melo, Vitug, Sandoval-Gutierrez, JJ., concur.

Gonzaga-Reyes, on leave.

Republic of the PhilippinesSUPREME COURT

FIRST DIVISION

G.R. No. 148380 December 9, 2005

OCEANIC WIRELESS NETWORK, INC., Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, THE COURT OF TAX APPEALS, and THE COURT OF APPEALS,Respondents.

D E C I S I O N

AZCUNA, J.:

This is a Petition for Review on Certiorari seeking to reverse and set aside the Decision of the Court of Appeals dated October 31, 2000, and its Resolution dated May 3, 2001, in "Oceanic Wireless Network, Inc. v. Commissioner of Internal Revenue" docketed as CA-G.R. SP No. 35581, upholding the Decision of the Court of Tax Appeals dismissing the Petition for Review in CTA Case No. 4668 for lack of jurisdiction.

Petitioner Oceanic Wireless Network, Inc. challenges the authority of the Chief of the Accounts Receivable and Billing Division of the Bureau of Internal Revenue (BIR) National Office to decide and/or act with finality on behalf of the Commissioner of Internal Revenue (CIR) on protests against disputed tax deficiency assessments.

The facts of the case are as follows:

On March 17, 1988, petitioner received from the Bureau of Internal Revenue (BIR) deficiency tax assessments for the taxable year 1984 in the total amount of P8,644,998.71, broken down as follows:

Kind of Tax Assessment No. Amount

Deficiency Income Tax FAR-4-1984-88-001130 P8,381,354.00

Penalties for late payment FAR-4-1984-88-001131 3,000.00

of income and failure to

file quarterly returns

Deficiency Contractor’s FAR-4-1984-88-001132 29,849.06

Tax

Deficiency Fixed Tax FAR-4--88-001133 12,083.65

Deficiency Franchise Tax FAR-4—84-88-001134 ___227,712.00

T o t a l -------- P8,644,998.71

Petitioner filed its protest against the tax assessments and requested a reconsideration or cancellation of the same in a letter to the BIR Commissioner dated April 12, 1988.

Acting in behalf of the BIR Commissioner, then Chief of the BIR Accounts Receivable and Billing Division, Mr. Severino B. Buot, reiterated the tax assessments while denying petitioner’s request for reinvestigation in a letter 1dated January 24, 1991, thus:

"Note: Your request for re-investigation has been denied for failure to submit the necessary supporting papers as per endorsement letter from the office of the Special Operation Service dated 12-12-90."

Said letter likewise requested petitioner to pay the total amount of P8,644,998.71 within ten (10) days from receipt thereof, otherwise the case shall be referred to the Collection Enforcement Division of the BIR National Office for the issuance of a warrant of distraint and levy without further notice.

Upon petitioner’s failure to pay the subject tax assessments within the prescribed period, the Assistant Commissioner for Collection, acting for the Commissioner of Internal Revenue, issued the corresponding warrants of distraint and/or levy and garnishment. These were served on petitioner on October 10, 1991 and October 17, 1991, respectively.2

On November 8, 1991, petitioner filed a Petition for Review with the Court of Tax Appeals (CTA) to contest the issuance of the warrants to enforce the collection of the tax assessments. This was docketed as CTA Case No. 4668.

The CTA dismissed the petition for lack of jurisdiction in a decision dated September 16, 1994, declaring that said petition was filed beyond the thirty (30)-day period reckoned from the time when the demand letter of January 24, 1991 by the Chief of the BIR Accounts Receivable and Billing Division was presumably received by petitioner, i.e., "within a reasonable time from said date in the regular course of mail pursuant to Section 2(v) of Rule 131 of the Rules of Court."3

The decision cited Surigao Electric Co., Inc. v. Court of Tax Appeals4 wherein this Court considered a mere demand letter sent to the taxpayer after his protest of the assessment notice as the final decision of the Commissioner of Internal Revenue on the protest. Hence, the filing of the petition on November 8, 1991 was held clearly beyond the reglementary period.5

The court a quo likewise stated that the finality of the denial of the protest by petitioner against the tax deficiency assessments was bolstered by the subsequent issuance of the warrants of distraint and/or levy and garnishment to enforce the collection of the deficiency taxes. The issuance was not barred by prescription because the mere filing of the letter of protest by petitioner which was given due course by the Bureau of Internal Revenue suspended the running of the prescription period as expressly provided under the then Section 224 of the Tax Code:

SEC. 224. Suspension of Running of the Statute of Limitations. – The running of the Statute of Limitations provided in Section 203 and 223 on the making of assessment and the beginning of distraint or levy or a proceeding in court for collection, in respect of any deficiency, shall be suspended for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty (60) days thereafter; when the taxpayer requests for a reinvestigation which is granted by the Commissioner; when the taxpayer cannot be located in the address given by him in the return

files upon which a tax is being assessed or collected: Provided, That if the taxpayer inform the Commissioner of any change of address, the running of the statute of limitations will not be suspended; when the warrant of distraint and levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and no property could located; and when the taxpayer is out of the Philippines. 6 (Underscoring supplied.)

Petitioner filed a Motion for Reconsideration arguing that the demand letter of January 24, 1991 cannot be considered as the final decision of the Commissioner of Internal Revenue on its protest because the same was signed by a mere subordinate and not by the Commissioner himself.7

With the denial of its motion for reconsideration, petitioner consequently filed a Petition for Review with the Court of Appeals contending that there was no final decision to speak of because the Commissioner had yet to make a personal determination as regards the merits of petitioner’s case.8

The Court of Appeals denied the petition in a decision dated October 31, 2000, the dispositive portion of which reads:

"WHEREFORE, the petition is DISMISSED for lack of merit.

SO ORDERED."

Petitioner’s Motion for Reconsideration was likewise denied in a resolution dated May 3, 2001.

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

I

THE HONORABLE RESPONDENT CA ERRED IN FINDING THAT THE DEMAND LETTER ISSUED BY THE (THEN) ACCOUNTS RECEIVABLE/BILLING DIVISION OF THE BIR NATIONAL OFFICE WAS THE FINAL DECISION OF THE RESPONDENT CIR ON THE DISPUTED ASSESSMENTS, AND HENCE CONSTITUTED THE DECISION APPEALABLE

TO THE HONORABLE RESPONDENT CTA; AND,

II

THE HONORABLE RESPONDENT CA ERRED IN DECLARING THAT THE DENIAL OF THE PROTEST OF THE SUBJECT ALLEGED DEFICIENCY TAX ASSESSMENTS HAD LONG BECOME FINAL AND EXECUTORY FOR FAILURE OF THE PETITIONER TO INSTITUTE THE APPEAL FROM THE DEMAND LETTER OF THE CHIEF OF THE ACCOUNTS RECEIVABLE/BILLING DIVISION, BIR NATIONAL OFFICE, TO THE HONORABLE RESPONDENT CTA, WITHIN THIRTY (30) DAYS FROM RECEIPT THEREOF.

Thus, the main issue is whether or not a demand letter for tax deficiency assessments issued and signed by a subordinate officer who was acting in behalf of the Commissioner of Internal Revenue, is deemed final and executory and subject to an appeal to the Court of Tax Appeals.

We rule in the affirmative.

A demand letter for payment of delinquent taxes may be considered a decision on a disputed or protested assessment. The determination on whether or not a demand letter is final is conditioned upon the language used or the tenor of the letter being sent to the taxpayer.

We laid down the rule that the Commissioner of Internal Revenue should always indicate to the taxpayer in clear and unequivocal language what constitutes his final determination of the disputed assessment, thus:

. . . we deem it appropriate to state that the Commissioner of Internal Revenue should always indicate to the taxpayer in clear and unequivocal language whenever his action on an assessment questioned by a taxpayer constitutes his final determination on the disputed assessment, as contemplated by Sections 7 and 11 of Republic Act No. 1125, as amended. On the basis of his statement indubitably showing that the Commissioner’s communicated action is his final decision on the contested assessment, the aggrieved taxpayer would then be able to take recourse to the tax

court at the opportune time. Without needless difficulty, the taxpayer would be able to determine when his right to appeal to the tax court accrues.

The rule of conduct would also obviate all desire and opportunity on the part of the taxpayer to continually delay the finality of the assessment – and, consequently, the collection of the amount demanded as taxes – by repeated requests for recomputation and reconsideration. On the part of the Commissioner, this would encourage his office to conduct a careful and thorough study of every questioned assessment and render a correct and definite decision thereon in the first instance. This would also deter the Commissioner from unfairly making the taxpayer grope in the dark and speculate as to which action constitutes the decision appealable to the tax court. Of greater import, this rule of conduct would meet a pressing need for fair play, regularity, and orderliness in administrative action.10

In this case, the letter of demand dated January 24, 1991, unquestionably constitutes the final action taken by the Bureau of Internal Revenue on petitioner’s request for reconsideration when it reiterated the tax deficiency assessments due from petitioner, and requested its payment. Failure to do so would result in the "issuance of a warrant of distraint and levy to enforce its collection without further notice."11 In addition, the letter contained a notation indicating that petitioner’s request for reconsideration had been denied for lack of supporting documents.

The above conclusion finds support in Commissioner of Internal Revenue v. Ayala Securities Corporation,12 where we held:

The letter of February 18, 1963 (Exh. G), in the view of the Court, is tantamount to a denial of the reconsideration or [respondent corporation’s]…protest o[f] the assessment made by the petitioner, considering that the said letter [was] in itself a reiteration of the demand by the Bureau of Internal Revenue for the settlement of the assessment already made, and for the immediate payment of the sum of P758,687.04 in spite of the vehement protest of the respondent corporation on April 21, 1961. This certainly is a clear indication of the firm stand of petitioner against the reconsideration of the disputed assessment…This being so, the said

letter amount[ed] to a decision on a disputed or protested assessment, and, there, the court a quo did not err in taking cognizance of this case.

Similarly, in Surigao Electric Co., Inc v. Court of Tax Appeals,13 and in CIR v. Union Shipping Corporation,14 we held:

". . . In this letter, the commissioner not only in effect demanded that the petitioner pay the amount of P11,533.53 but also gave warning that in the event it failed to pay, the said commissioner would be constrained to enforce the collection thereof by means of the remedies provided by law. The tenor of the letter, specifically the statement regarding the resort to legal remedies, unmistakably indicate[d] the final nature of the determination made by the commissioner of the petitioner’s deficiency franchise tax liability."

The demand letter received by petitioner verily signified a character of finality. Therefore, it was tantamount to a rejection of the request for reconsideration. As correctly held by the Court of Tax Appeals, "while the denial of the protest was in the form of a demand letter, the notation in the said letter making reference to the protest filed by petitioner clearly shows the intention of the respondent to make it as [his] final decision."15

This now brings us to the crux of the matter as to whether said demand letter indeed attained finality despite the fact that it was issued and signed by the Chief of the Accounts Receivable and Billing Division instead of the BIR Commissioner.

The general rule is that the Commissioner of Internal Revenue may delegate any power vested upon him by law to Division Chiefs or to officials of higher rank. He cannot, however, delegate the four powers granted to him under the National Internal Revenue Code (NIRC) enumerated in Section 7.

As amended by Republic Act No. 8424, Section 7 of the Code authorizes the BIR Commissioner to delegate the powers vested in him under the pertinent provisions of the Code to any subordinate official with the rank equivalent to a division chief or higher, except the following:

(a) The power to recommend the promulgation of rules and regulations by the Secretary of Finance;

(b) The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau;

(c) The power to compromise or abate under Section 204(A) and (B) of this Code, any tax deficiency: Provided, however, that assessments issued by the Regional Offices involving basic deficiency taxes of five hundred thousand pesos (P500,000) or less, and minor criminal violations as may be determined by rules and regulations to be promulgated by the Secretary of Finance, upon the recommendation of the Commissioner, discovered by regional and district officials, may be compromised by a regional evaluation board which shall be composed of the Regional Director as Chairman, the Assistant Regional Director, heads of the Legal, Assessment and Collection Divisions and the Revenue District Officer having jurisdiction over the taxpayer, as members; and

(d) The power to assign or reassign internal revenue officers to establishments where articles subject to excise tax are produced or kept.

It is clear from the above provision that the act of issuance of the demand letter by the Chief of the Accounts Receivable and Billing Division does not fall under any of the exceptions that have been mentioned as non-delegable.

Section 6 of the Code further provides:

"SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement. –

(A) Examination of Returns and Determination of Tax Due. - After a return has been filed as required under the provisions of this Code, the Commissioner or his duly authorized representative may authorize the examination of any taxpayer and the assessment of the correct amount of tax; Provided, however, That failure to file a return shall not prevent the

Commissioner from authorizing the examination of any taxpayer.

The tax or any deficiency tax so assessed shall be paid upon notice and demand from the Commissioner or from his duly authorized representative. . . ." (Emphasis supplied)

Thus, the authority to make tax assessments may be delegated to subordinate officers. Said assessment has the same force and effect as that issued by the Commissioner himself, if not reviewed or revised by the latter such as in this case.16

A request for reconsideration must be made within thirty (30) days from the taxpayer’s receipt of the tax deficiency assessment, otherwise, the decision becomes final, unappealable and therefore, demandable. A tax assessment that has become final, executory and enforceable for failure of the taxpayer to assail the same as provided in Section 228 can no longer be contested, thus:

"SEC. 228. Protesting of Assessment. – When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings…Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final.

If the protest is denied in whole or in part, or is not acted upon within one hundred (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180) - day period; otherwise, the decision shall become final, executory and demandable."

Here, petitioner failed to avail of its right to bring the matter before the Court of Tax Appeals within the reglementary period upon the receipt of the demand letter reiterating the assessed

delinquent taxes and denying its request for reconsideration which constituted the final determination by the Bureau of Internal Revenue on petitioner’s protest. Being a final disposition by said agency, the same would have been a proper subject for appeal to the Court of Tax Appeals.

The rule is that for the Court of Tax Appeals to acquire jurisdiction, an assessment must first be disputed by the taxpayer and ruled upon by the Commissioner of Internal Revenue to warrant a decision from which a petition for review may be taken to the Court of Tax Appeals. Where an adverse ruling has been rendered by the Commissioner of Internal Revenue with reference to a disputed assessment or a claim for refund or credit, the taxpayer may appeal the same within thirty (30) days after receipt thereof.17

We agree with the factual findings of the Court of Tax Appeals that the demand letter may be presumed to have been duly directed, mailed and was received by petitioner in the regular course of the mail in the absence of evidence to the contrary. This is in accordance with Section 2(v), Rule 131 of the Rules of Court, and in this case, since the period to appeal has commenced to run from the time the letter of demand was presumably received by petitioner within a reasonable time after January 24, 1991, the period of thirty (30) days to appeal the adverse decision on the request for reconsideration had already lapsed when the petition was filed with the Court of Tax Appeals only on November 8, 1991. Hence, the Court of Tax Appeals properly dismissed the petition as the tax delinquency assessment had long become final and executory.

WHEREFORE, premises considered, the Decision of the Court of Appeals dated October 31, 2000 and its Resolution dated May 3, 2001 in CA-G.R. SP No. 35581 are hereby AFFIRMED. The petition is accordinglyDENIED for lack of merit.

G.R. No. 166387             January 19, 2009

COMMISSIONER OF INTERNAL REVENUE, Petitioners, vs.ENRON SUBIC POWERCORPORATION, Respondents.

R E S O L U T I O N

CORONA, J.:

In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Commissioner of Internal Revenue (CIR) assails the November 24, 2004 decision1 of the Court of Appeals (CA) annulling the formal assessment notice issued by the CIR against respondent Enron Subic Power Corporation (Enron) for failure to state the legal and factual bases for such assessment.

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

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

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

In a decision dated September 12, 2001, the CTA granted Enron’s petition and ordered the

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

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

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

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

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

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

A notice of assessment is:

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

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

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

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

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

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

Both the CTA and the CA concluded that the deficiency tax assessment merely itemized the deductions disallowed and included these in the

gross income. It also imposed the preferential rate of 5% on some items categorized by Enron as costs. The legal and factual bases were, however, not indicated.

The CIR insists that an examination of the facts shows that Enron was properly apprised of its tax deficiency. During the pre-assessment stage, the CIR advised Enron’s representative of the tax deficiency, informed it of the proposed tax deficiency assessment through a preliminary five-day letter and furnished Enron a copy of the audit working paper14 allegedly showing in detail the legal and factual bases of the assessment. The CIR argues that these steps sufficed to inform Enron of the laws and facts on which the deficiency tax assessment was based.

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

The law requires that the legal and factual bases of the assessment be stated in the formal letter of demand and assessment notice. Thus, such cannot be presumed. Otherwise, the express provisions of Article 228 of the NIRC and RR No. 12-99 would be rendered nugatory. The alleged “factual bases” in the advice, preliminary letter and “audit working papers” did not suffice. There was no going around the mandate of the law that the legal and factual bases of the assessment be stated in writing in the formal letter of demand accompanying the assessment notice.

We note that the old law merely required that the taxpayer be notified of the assessment made by the CIR. This was changed in 1998 and the taxpayer must now be informed not only of the

law but also of the facts on which the assessment is made.16 Such amendment is in keeping with the constitutional principle that no person shall be deprived of property without due process.17 In view of the absence of a fair opportunity for Enron to be informed of the legal and factual bases of the assessment against it, the assessment in question was void. We reiterate our ruling in Reyes v. Almanzor, et al.:18

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

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

No costs.

Republic of the PhilippinesSUPREME COURTManila

SECOND DIVISION

G.R. No. 154068             August 3, 2007

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.ROSEMARIE ACOSTA, as represented by Virgilio A. Abogado, respondent.

D E C I S I O N

QUISUMBING, J.:

Assailed in this petition for review are the Decision1 and Resolution2 dated February 13, 2002 and May 29, 2002, respectively, of the Court of Appeals in CA-G.R. SP No. 55572 which had reversed the Resolution3 dated August 4, 1999 of the Court of Tax Appeals in C.T.A. Case No. 5828 and ordered the latter to resolve respondent’s petition for review.

The facts are as follows:

Respondent is an employee of Intel Manufacturing Phils., Inc. (Intel). For the period January 1, 1996 to December 31, 1996, respondent was assigned in a foreign country. During that period, Intel withheld the taxes due on respondent’s compensation income and remitted to the Bureau of Internal Revenue (BIR) the amount ofP308,084.56.

On March 21, 1997, respondent and her husband filed with the BIR their Joint Individual Income Tax Return for the year 1996. Later, on June 17, 1997, respondent, through her representative, filed an amended return and a Non-Resident Citizen Income Tax Return, and paid the BIR P17,693.37 plus interests in the amount of P14,455.76. On October 8, 1997, she filed another amended return indicating an overpayment of P358,274.63.

Claiming that the income taxes withheld and paid by Intel and respondent resulted in an overpayment ofP340,918.92,4 respondent filed on April 15, 1999 a petition for review docketed as C.T.A. Case No. 5828 with the Court of Tax Appeals (CTA). The Commissioner of Internal Revenue (CIR) moved to dismiss the petition for failure of respondent to file the mandatory written claim for refund before the CIR.

In its Resolution dated August 4, 1999, the CTA dismissed respondent’s petition. For one, the CTA ruled that respondent failed to file a written claim for refund with the CIR, a condition precedent to the filing of a petition for review before the CTA.5 Second, the CTA noted that respondent’s omission, inadvertently or otherwise, to allege in her petition the date of filing the final adjustment return, deprived the court of its jurisdiction over the subject matter of the case.6 The decretal portion of the CTA’s resolution states:

WHEREFORE, in view of all the foregoing, Respondent’s Motion to Dismiss is GRANTED. Accordingly[,] the Petition for Review is hereby DISMISSED.

SO ORDERED.7

Upon review, the Court of Appeals reversed the CTA and directed the latter to resolve respondent’s petition for review. Applying Section 204(c)8 of the 1997 National Internal

Revenue Code (NIRC), the Court of Appeals ruled that respondent’s filing of an amended return indicating an overpayment was sufficient compliance with the requirement of a written claim for refund.9 The decretal portion of the Court of Appeals’ decision reads:

WHEREFORE, finding the petition to be meritorious, this Court GRANTS it due course and REVERSES the appealed Resolutions and DIRECTS the Court of Tax Appeal[s] to resolve the petition for review on the merits.

SO ORDERED.10

Petitioner sought reconsideration, but it was denied. Hence, the instant petition raising the following questions of law:

I.

WHETHER OR NOT THE 1997 TAX REFORM ACT CAN BE APPLIED RETROACTIVELY.

II.

WHETHER OR NOT THE CTA HAS JURISDICTION TO TAKE [COGNIZANCE] OF RESPONDENT’S PETITION FOR REVIEW.11

While the main concern in this controversy is the CTA’s jurisdiction, we must first resolve two issues. First, does the amended return filed by respondent indicating an overpayment constitute the written claim for refund required by law, thereby vesting the CTA with jurisdiction over this case? Second, can the 1997 NIRC be applied retroactively?

Petitioner avers that an amended return showing an overpayment does not constitute the written claim for refund required under Section 23012 of the 1993 NIRC13 (old Tax Code). He claims that an actual written claim for refund is necessary before a suit for its recovery may proceed in any court.

On the other hand, respondent contends that the filing of an amended return indicating an overpayment ofP358,274.63 constitutes a written claim for refund pursuant to the clear

proviso stated in the last sentence of Section 204(c) of the 1997 NIRC (new Tax Code), to wit:

x x x x

…Provided, however, That a return filed showing an overpayment shall be considered as a written claim for credit or refund.

x x x x

Along the same vein, respondent invokes the liberal application of technicalities in tax refund cases, conformably with our ruling in BPI-Family Savings Bank, Inc. v. Court of Appeals.14 We are, however, unable to agree with respondent’s submission on this score.

The applicable law on refund of taxes pertaining to the 1996 compensation income is Section 230 of the old Tax Code, which was the law then in effect, and not Section 204(c) of the new Tax Code, which was effective starting only on January 1, 1998.

Noteworthy, the requirements under Section 230 for refund claims are as follows:

1. A written claim for refund or tax credit must be filed by the taxpayer with the Commissioner;

2. The claim for refund must be a categorical demand for reimbursement;

3. The claim for refund or tax credit must be filed, or the suit or proceeding therefor must be commenced in court within two (2) years from date of payment of the tax or penalty regardless of any supervening cause.15 (Emphasis ours.)

In our view, the law is clear. A claimant must first file a written claim for refund, categorically demanding recovery of overpaid taxes with the CIR, before resorting to an action in court. This obviously is intended, first, to afford the CIR an opportunity to correct the action of subordinate officers; and second, to notify the government that such taxes have been questioned, and the notice should then be borne in mind in

estimating the revenue available for expenditure.16

Thus, on the first issue, we rule against respondent’s contention. Entrenched in our jurisprudence is the principle that tax refunds are in the nature of tax exemptions which are construed strictissimi juris against the taxpayer and liberally in favor of the government. As tax refunds involve a return of revenue from the government, the claimant must show indubitably the specific provision of law from which her right arises; it cannot be allowed to exist upon a mere vague implication or inference17 nor can it be extended beyond the ordinary and reasonable intendment of the language actually used by the legislature in granting the refund.18 To repeat, strict compliance with the conditions imposed for the return of revenue collected is a doctrine consistently applied in this jurisdiction.19

Under the circumstances of this case, we cannot agree that the amended return filed by respondent constitutes the written claim for refund required by the old Tax Code, the law prevailing at that time. Neither can we apply the liberal interpretation of the law based on our pronouncement in the case of BPI-Family Savings Bank, Inc. v. Court of Appeals, as the taxpayer therein filed a written claim for refund aside from presenting other evidence to prove its claim, unlike this case before us.

On the second issue, petitioner argues that the 1997 NIRC cannot be applied retroactively as the instant case involved refund of taxes withheld on a 1996 income. Respondent, however, points out that when the petition was filed with the CTA on April 15, 1999, the 1997 NIRC was already in effect, hence, Section 204(c) should apply, despite the fact that the refund being sought pertains to a 1996 income tax. Note that the issue on the retroactivity of Section 204(c) of the 1997 NIRC arose because the last paragraph of Section 204(c) was not found in Section 230 of the old Code. After a thorough consideration of this matter, we find that we cannot give retroactive application to Section 204(c) abovecited. We have to stress that tax laws are prospective in operation, unless the language of the statute clearly provides otherwise.20

Moreover, it should be emphasized that a party seeking an administrative remedy must not

merely initiate the prescribed administrative procedure to obtain relief, but also pursue it to its appropriate conclusion before seeking judicial intervention in order to give the administrative agency an opportunity to decide the matter itself correctly and prevent unnecessary and premature resort to court action.21 This the respondent did not follow through. Additionally, it could not escape notice that at the time respondent filed her amended return, the 1997 NIRC was not yet in effect. Hence, respondent had no reason at that time to think that the filing of an amended return would constitute the written claim for refund required by applicable law.

Furthermore, as the CTA stressed, even the date of filing of the Final Adjustment Return was omitted, inadvertently or otherwise, by respondent in her petition for review. This omission was fatal to respondent’s claim, for it deprived the CTA of its jurisdiction over the subject matter of the case.

Finally, we cannot agree with the Court of Appeals’ finding that the nature of the instant case calls for the application of remedial laws. Revenue statutes are substantive laws and in no sense must their application be equated with that of remedial laws. As well said in a prior case, revenue laws are not intended to be liberally construed.22 Considering that taxes are the lifeblood of the government and in Holmes’s memorable metaphor, the price we pay for civilization, tax laws must be faithfully and strictly implemented.

WHEREFORE, the petition is GRANTED. Both the assailed Decision and Resolution dated February 13, 2002 and May 29, 2002, respectively, of the Court of Appeals in CA-G.R. SP No. 55572 are REVERSED and SET ASIDE. The Resolution dated August 4, 1999 of the Court of Tax Appeals in C.T.A. Case No. 5828 is herebyREINSTATED.

No pronouncement as to costs.

SO ORDERED.

Carpio, Carpio-Morales, Tinga, Velasco, Jr., JJ., concur.

Republic of the PhilippinesSUPREME COURTManila

THIRD DIVISION

G.R. No. 138485      September 10, 2001

DR. FELISA L. VDA. DE SAN AGUSTIN, in substitution of JOSE Y. FERIA, in his capacity as Executor of the Estate of JOSE SAN AGUSTIN, petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, respondent.

VITUG,, J.:

Before the Court is a petition for review seeking to set aside the decision of 24 February 1999 of the Court of Appeals, as well as its resolution of 27 Apri11999, in CA-G.R. SP No. 34156, which has reversed that of the Court of Tax Appeals in CTA Case No.4956, entitled "Jose V. Feria, in his capacity as Executor of the Estate of Jose San Agustin versus Commissioner of Internal Revenue." The tax court's decision has modified the deficiency assessment of the Commission of Internal Revenue for surcharge, interests and other penalties imposed against the estate of the late Jose San Agustin.

The facts of the case narrated by the appellate court would appear, by and large, to be uncontroverted; thus viz:

"Atty. Jose San Agustin of 2904 Kakarong St., Olympia, Makati died on June 27, 1990 leaving his wife Dra. Felisa L. San Agustin as sole heir. He left a holographic will executed on April 21, 1980 giving all his estate to his widow, and naming retired Justice Jose Y. Feria as Executor thereof.

"Probate proceedings were instituted on August 22, 1990, in the Regional Trial Court (RTC) of Makati, Branch 139, docketed as Sp. Proc. No. M-2554. Pursuantly, notice of decedent's death was sent to the Commissioner of Internal Revenue on August 30, 1990.1âwphi1.nêt

"On September 3, 1990, an estate tax return reporting an estate tax due of P1,676,432.00 was filed on behalf of the estate, with a request for an extension of two years for the payment of the tax, inasmuch as the decedent's widow ( did) not personally have sufficient funds, and that the payment (would) have to come from the estate.

"In his letter/answer, dated September 4, 1990, BIR Deputy Commissioner Victor A. Deoferio, Jr., granted the heirs an extension of only six (6) months, subject to the imposition of penalties and interests under Sections 248 and 249 of the National Internal Revenue Code, as amended.

"In the probate proceedings, on October 11, 1990 the RTC allowed the will and appointed Jose Feria as Executor of the estate. On December 5, 1990, the executor submitted to the probate court an inventory of the estate with a motion for authority to withdraw funds for the payment of the estate tax.

Such authority was granted by the probate court on March 5, 1991 .Thereafter, on March 8, 1991 , the executor paid the estate tax in the amount of P1,676,432 as reported in the Tax Return filed with the BIR. This was well within the six (6) months extension period granted by the BIR.

"On September 23, 1991, the widow of the deceased, Felisa L. San Agustin, received a Pre-Assessment Notice from the BIR, dated August 29, 1991, showing a deficiency estate tax of P538,509.50, which, including surcharge, interest and penalties, amounted to P976,540.00.

"On October 1, 1991, within the ten-day period given in the pre-assessment notice, the executor filed a letter with the petitioner Commissioner expressing readiness to pay the basic deficiency estate tax of P538,509.50 as soon as the Regional Trial Court approves withdrawal thereof, but, requesting that the surcharge, interest, and other

penalties, amounting to P438,040.38 be waived, considering that the assessed deficiency arose only on account of the difference in zonal valuation used by the Estate and the BIR, and that the estate tax due per return of P1,676,432.00 was already paid in due time within the extension period.

"On October 4, 1991, the Commissioner issued an Assessment Notice reiterating the demand in the pre- assessment notice and requesting payment on or before thirty (30) days upon receipt thereof.

"In a letter, dated October 31, 1991, the executor requested the Commissioner a reconsideration of the assessment of P976,549.00 and waiver of the surcharge, interest, etc.

"On December 18, 1991, the Commissioner accepted payment of the basic deficiency tax in the amount of P538,509.50 through its Receivable Accounts Billing Division.

"The request for reconsideration was not acted upon until January 21, 1993, when the executor received a letter, dated September 21, 1992, signed by the Commissioner, stating that there is no legal justification for the waiver of the interests, surcharge and compromise penalty in this case, and requiring full payment of P438,040.38 representing such charges within ten (10) days from receipt thereof.

"In view thereof, the respondent estate paid the amount of P438,040.38 under protest on January 25, 1993.

"On February 18, 1993, a Petition for Review was filed by the executor with the CT A with the prayer that the Commissioner's letter/decision, dated September 21, 1992 be reversed and that a refund of the amount of P438,040.38 be ordered .

"The Commissioner opposed the said petition, alleging that the CTA's

jurisdiction was not properly invoked inasmuch as no claim for a tax refund of the deficiency tax collected was filed with the Bureau of Internal Revenue before the petition was filed, in violation of Sections 204 and 230 of the National Internal Revenue Code. Moreover, there is no statutory basis for the refund of the deficiency surcharges, interests and penalties charged by the Commissioner upon the estate of the decedent.

"Upholding its jurisdiction over the dispute, the CTA rendered its Decision, dated April 21, 1994, modifying the CIR's assessment for surcharge, interests and other penalties from P438,040.38 to P13,462.74, representing interest on the deficiency estate tax, for which reason the CTA ordered the reimbursement to the respondent estate the balance of P423,577.64, to wit:

"WHEREFORE, respondent's deficiency assessment for surcharge, interests, and other penalties is hereby modified and since petitioner has clearly paid the full amount of P438,040.38, respondent is hereby ordered to refund to the Estate of Jose San Agustin the overpayment amounting to P423,577.64."1

On 30 May 1994, the decision of the Court of Tax Appeals was appealed by the Commissioner of Internal Revenue to the Court of Appeals. There, the petition for review raised the following issues:

"1. Whether respondent Tax Court has jurisdiction to take cognizance of the case considering the failure of private respondent to comply with the mandatory requirements of Sections 204 and 230 of the National Internal Revenue Code.

"2. Whether or not respondent Tax Court was correct in ordering the refund to the Estate of Jose San Agustin the reduced amount of P423,577.64 as alleged overpaid surcharge, interests and compromise penalty imposed on

the basic deficiency estate tax of P538,509.50 due on the transmission of the said Estate to the sole heir in 1990."2

In its decision of 24 February 1999, the Court of Appeals granted the petition of the Commissioner of Internal Revenue and held that the Court of Tax Appeals did not acquire jurisdiction over the subject matter and that, accordingly, its decision was null and void.

Hence, the instant petition where petitioner submits that -

"1. The filing of a claim for refund [is] not essential before the filing of the petition for review.

"2. The imposition by the respondent of surcharge, interest and penalties on the deficiency estate tax is not in accord with the law and therefore illegal."3

The Court finds the petition partly meritorious.

The case has a striking resemblance to the controversy in Roman Catholic Archbishop of Cebu vs. Collector of Internal Revenue.4

The petitioner in that case paid under protest the sum of P5,201.52 by way of income tax, surcharge and interest and, forthwith, filed a petition for review before the Court of Tax Appeals. Then respondent Collector (now Commissioner) of Internal Revenue set up several defenses, one of which was that petitioner had failed to first file a written claim for refund, pursuant to Section 306 of the Tax Code, of the amounts paid. Convinced that the lack of a written claim for refund was fatal to petitioner's recourse to it, the Court of Tax Appeals dismissed the petition for lack of jurisdiction. On appeal to this Court, the tax court's ruling was reversed; the Court held:

"We agree with petitioner that Section 7 of Republic Act No.1125, creating the Court of Tax Appeals, in providing for appeals from -

'(1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments, refunds of internal revenue

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

allows an appeal from a decision of the Collector in cases involving' disputed assessments' as distinguished from cases involving' refunds of internal revenue taxes, fees or other charges, x x'; that the present action involves a disputed assessment'; because from the time petitioner received assessments Nos. 17-EC-00301-55 and 17-AC-600107-56 disallowing certain deductions claimed by him in his income tax returns for the years 1955 and 1956, he already protested and refused to pay the same, questioning the correctness and legality of such assessments; and that the petitioner paid the disputed assessments under protest before filing his petition for review with the Court a quo, only to forestall the sale of his properties that had been placed under distraint by the respondent Collector since December 4, 1957. To hold that the taxpayer has now lost the right to appeal from the ruling on, the disputed assessment but must prosecute his appeal under section 306 of the Tax Code, which requires a taxpayer to file a claim for refund of the taxes paid as a condition precedent to his right to appeal, would in effect require of him to go through a useless and needless ceremony that would only delay the ! disposition of the case, for the Collector (now Commissioner) would cer1ainly disallow the claim for refund in the same way as he disallowed the protest against the assessment. The law, should not be interpreted as to result in absurdities."5

The Court sees no cogent reason to abandon the above dictum and to require a useless formality that can serve the interest of neither the government nor the taxpayer. The tax court has aptly acted in taking cognizance of the taxpayer's appeal to it.

On the second issue, the National Internal Revenue Code, relative to the imposition of surcharges, interests, and penalties, provides thusly:

"Sec. 248. Civil Penalties. -

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

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

"(2) Unless otherwise authorized by the Commissioner, filing a return with an internal revenue officer other than those with whom the return is required to be filed; or

"(3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; or

"(4) Failure to pay the full or part of the amount of tax shown on any return required to be filed under the provisions of this Code or rules and regulations, or the full amount of tax due for which no return is required to be filed, on or before the date prescribed for its payment."

"Sec.249. Interest. -

"(A) In General. -There shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed by rules and regulations, from the date prescribed for payment until the amount is fully paid.

"(B) Deficiency Interest. - Any deficiency in the tax due, as the term is defined in this Code, shall be subject to the interest prescribed in Subsection (A) hereof, which interest shall be assessed and collected from the date prescribed

for its payment until the full payment thereof.

"(C) Delinquency Interest. -In case of failure to pay:

"(1) The amount of the tax due on any return to be filed, or

"(2) The amount of the tax due for which no return is required, or

"(3) A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner, there shall be assessed and collected on the unpaid amount, interest at the rate prescribed in Subsection (A) hereof until the amount is fully paid, which interest shall form part of the tax.

"(D) Interest on Extended Payment. -If any person required to pay the tax is qualified and elects to pay the tax on installment under the provisions of this Code, but fails to pay the tax or any installment hereof, or any part of such amount or installment on or before the date prescribed for its payment, or where the Commissioner has authorized an extension of time within which to pay a tax or a deficiency tax or any part thereof, there shall be assessed and collected interest at the rate hereinabove prescribed on the tax or deficiency tax or any part thereof unpaid from the date of notice and demand until it is paid."

It would appear that, as early as 23 September 1991, the estate already received a pre-assessment notice indicating a deficiency estate tax of P538,509.50. Within the ten-day period given in the pre-assessment notice, respondent Commissioner received a letter from petitioner expressing the latter's readiness to pay the basic deficiency estate tax of P538,509.50 as soon as the trial court would have approved the withdrawal of that sum from the estate but requesting that the surcharge, interests and penalties be waived. On 04 October 1991, however, petitioner received from the Commissioner notice insisting payment of the tax due on or before the lapse of thirty (30) days

from receipt thereof. The deficiency estate tax of P538,509.50 was not paid until 19 December 1991.6

The delay in the payment of the deficiency tax within the time prescribed for its payment in the notice of assessment justifies the imposition of a 25% surcharge in consonance with Section 248A(3) of the Tax Code. The basic deficiency tax in this case being P538,509.50, the twenty-five percent thereof comes to P134,627.37. Section 249 of the Tax Code states that any deficiency in the tax due would be subject to interest at the rate of twenty percent (20%) per annum, which interest shall be assessed and collected from the date prescribed for its payment until full payment is made. The computation of interest by the Court of Tax Appeals -

"Deficiency estate tax

P538,509.50

x Interest Rate20% per annum

x Terms11/2 mo./12 mos

(11/04/91 to 12/19/91)

= P13,462.74"7

conforms with the law, i.e., computed on the deficiency tax from the date prescribed for its payment until it is paid.

The Court of Tax Appeals correctly held that the compromise penalty of P20,000.00 could not be imposed on petitioner, a compromise being, by its nature, mutual in essence. The payment made under protest by petitioner could only signify that there was no agreement that had effectively been reached between the parties.

Regrettably for petitioner, the need for an authority from the probate court in the payment of the deficiency estate tax, over which respondent Commissioner has hardly any control, is not one that can negate the application of the Tax Code provisions aforequoted. Taxes, the lifeblood of the government, are meant to be paid without delay and often oblivious to contingencies or conditions.

In. sum, the tax liability of the estate includes a surcharge of P134,627.37 and interest of P13,462.74 or a total of P148,090.00.

WHEREFORE, the instant petition is partly GRANTED. The deficiency assessment for surcharge, interest and penalties is modified and recomputed to be in the amount of P148,090.00 surcharge of P134,627.37 and interest of P13,462.74. Petitioner estate having since paid the sum of P438,040.38, respondent Commissioner is hereby ordered to refund to the Estate of Jose San Agustin the overpaid amount of P289,950.38. No costs.

SO ORDERED.1âwphi1.nêt

Melo, Panganiban, Gonzaga-Reyes, Sandoval-Gutierrez, JJ., concur

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 144653            August 28, 2001

BANK OF THE PHILIPPINE ISLANDS, petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, respondents.

MENDOZA, J.:

This is a petition for review on certiorari of the decision, dated April 14, 2000, of the Court of Appeals,1 affirming the decision of the Court of Tax Appeals (which denied petitioner Bank of the Philippine Islands' claim for tax refund for 1985), and the appeals court's resolution, dated August 21, 2000, denying reconsideration.

The facts are as follows:

Prior to its merger with petitioner Bank of the Philippine Islands (BPI) on July 1985, The Family Bank and Trust Co. (FBTC) earned income consisting of rentals from its leased properties and interest from its treasury notes for the period January 1 to June 30, 1985. As required by the Expanded Withholding Tax Regulation, the lessees of FBTC withheld 5 percent of the rental income, in the amount of P118,609.17, while the Central Bank, from which the treasury notes were purchased by FBTC, withheld P55,456.60 from the interest earned thereon. Creditable withholding taxes in the total amount of P174,065.77 were remitted to respondent Commissioner of Internal Revenue.

FBTC, however, suffered a new loss of about P64,000,000.00 during the period in question. It also had an excess credit of P2,146,072.57 from the previous year. Thus, upon its dissolution in 1985, FBTC had a refundable of P2,320,138.34, representing that year's tax credit of P174,065.77 and the previous year's excess credit of P2,146,072.57.

As FBTC's successor-in-interest, petitioner BPI claimed this amount as tax refund, but

respondent Commissioner of Internal Revenue refunded only the amount of P2,146,072.57, leaving a balance of P174,065.77. Accordingly, petitioner filed a petition for review in the Court of Tax Appeals on December 29, 1987, seeking the refund of the aforesaid amount.2 However, in its decision rendered on July 19, 1994, the Court of Tax Appeals dismissed petitioner's petition for review and denied its claim for refund on the ground that the claim had already prescribed.3 In its resolution, dated August 4, 1995, the Court of Tax Appeals denied petitioner's motion for reconsideration.4

Petitioner appealed to the Court of Appeals, but, in its decision rendered on April 14, 2000, the appeals court affirmed the decision of the CTA.5 The appeals court subsequently denied petitioner's motion for reconsideration.6 Hence this petition.

The sole issue in this case is whether petitioner's claim is barred by prescription. The resolution of this question requires determination of when the two-year period of prescription under §292 of the Tax Code started to run. This provision states:

Recovery of tax erroneously or illegally collected. – No suit or proceedings shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such

payment appears clearly to have been erroneously paid.

There is no dispute that FBTC ceased operations on June 30, 1985 upon its merger with petitioner BPI. The merger was approved by the Securities and Exchange Commission on July 1, 1985. Petitioner contends, however that its claim for refund has yet prescribed because the two-year prescriptive period commenced to run only after it had filed FBTC's Final Adjustment Return on April 15 1986, pursuant to §46(a) of the National Internal Revenue Code of 1977 (the law applicable at the time of this transaction) which provided that –

Corporation returns. – (a) Requirement. – Every corporation, subject to the tax herein imposed, except foreign corporations not engaged in trade or business in the Philippines shall render, in duplicate, a true and accurate quarterly income tax return and final or adjustment return in accordance with the provisions of Chapter X of this Title. The return shall be filed by the president, vice-president, or other principal officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer.

On the other hand, the Court of Tax Appeals ruled that the prescriptive period should be counted from July 31, 1985, 30 days after the approval by the SEC of the plan of dissolution in view of §78 of the Code which provided that –

Every corporation shall, within thirty days after the adoption by the corporation of a resolution or plan for the dissolution of the corporation or for the liquidation of the whole or any part of its capital stock, including corporations which have been notified of the possible involuntary dissolution by the Securities and Exchange Commission, render a correct return to the Commission of Internal Revenue, verified under oath, setting forth the terms of such resolution or plan and such other information as the Minister of Finance shall, by regulations, prescribe. The dissolving corporation prior to the issuance of the Certificate of Dissolution by the Securities and Exchange

Commission shall secure a certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange Commission.

Failure to render the return and secure the certificate of tax clearance as above-mentioned shall subject the officer (s) of the corporation required by law to file the return under Section 46(a) of this Code, to a fine of not less than Five Thousand Pesos or imprisonment of not less than two years and shall make them liable for all outstanding or unpaid tax liabilities of the dissolving corporation.

Its ruling was sustained by the Court of Appeals.

After due consideration of the parties' arguments, we are of the opinion that, in case of the dissolution of a corporation, the period of prescription should be reckoned from the date of filing of the return required by §78 of the Tax Code. Accordingly, we hold that petitioner's claim for refund is barred by prescription.

First. Generally speaking, it is the Final Adjustment Return, in which amounts of the gross receipts and deductions have been audited and adjusted, which is reflective of the results of the operations of a business enterprise. It is only when the return, covering the whole year, is filed that the taxpayer will be able to ascertain whether a tax is still due or a refund can be claimed based on the adjusted and audited figures.7 Hence, this Court has ruled that at the earliest, the two-year prescriptive period for claiming a refund commences to run on the date of filing of the adjusted final tax return.8

In the case at bar, however, the Court of Tax Appeals, applying §78 of the Tax Code, held:

Before this Court can be rule on the issue of prescription, it is noteworthy to point out that based on the financial statements of FBTC and the independent auditor's opinion (Exh. "A-7" to "A-17"), FBTC operates on a calendar year basis. Its twelve (12) months accounting period was shortened at the time it was merged with

BPI. Thereby, losing its corporate existence on July 1, 1985 when the Articles of Merger was approved by the Security and Exchange Commission. Thus, respondent('s) stand that FBTC operates on a fiscal year basis, based on its income tax return, holds no ground. Third Court believes that FBTC is operating on a calendar year period based on the audited financial statements and the opinion thereof. The fiscal period ending June 30, 1985 on the upper left corner of the income tax return can be concluded as an error on the part of FBTC. It should have been for the six month period ending June 30, 1985. It should also be emphasized that "where one corporation succeeds another both are separate entities and the income earned by the predecessor corporation before organization of its successor is not income to the successor" (Mertens, Law of Federal Income Taxation, Vol. 7 S 38.36).

Ruling now on the issue of prescription, this Court finds that the petition for review is filed out of time. FBTC, after the end of its corporate life on June 30, 1985, should have filed its income tax return within thirty days after the cessation of its business or thirty days after the approval of the Articles of Merger. This is bolstered by Sec. 78 of the tax Code and under Sec. 244 of Revenue Regulation No. 2…9

As the FBTC did not file its quarterly income tax returns for the year 1985, there was no need for it to file a Final adjustment Return because there was nothing for it to adjust or to audit. After it ceased operations on June 30, 1985, its taxable year was shortened to six months, from January 1, 1985 to June 30, 1985 The situation of FBTC is precisely what was contemplated under §78 of the Tax Code. It thus became necessary for FBTC to file its income tax return within 30 days after approval by the SEC of its plan or resolution of dissolution. Indeed, it would be absurd for FBTC to wait until the fifteenth day of April, or almost 10 months after it ceased its operations, before filing its income tax return.

Thus, §46(a) of the Tax Code applies only to instances in which the corporation remains

subsisting and its business operations are continuing. In instances in which the corporation is contemplating dissolution, §78 of the Tax Code applies. It is a rule of statutory construction that "[w]here there is in the same statute a particular enactment and also a general one which in its most comprehensive sense would include what is embraced in the former, the particular enactment must be operative, and the general enactment must be taken to affect only such cases within its general language as are not within the provisions of the particular enactment.10

Petitioner argues that to hold, as the Court of Tax Appeals and the Court of Appeals do, that §78 applies in case a corporation contemplates dissolution would lead to absurd results. It contends that it is not feasible for the certified public accountants to complete their report and audited financial statements, which are required to be submitted together with the plan of dissolution to the SEC, within the period contemplated by §78. It maintains that, in turn, the SEC would not have sufficient time to process the papers considering that §78 also requires the submission of a tax clearance certificate before the SEC can approve the plan of dissolution.

As the Court of Tax Appeals observed, however, petitioner could have asked for an extension of time of file its income tax return under §47 of the NIRC which provides:

Extension of time to file returns. – The Commissioner of Internal Revenue may, in meritorious cases, grant a reasonable extension of time for filing returns of income (or final and adjustment returns in the case of corporations), subject to the provisions of section fifty-one of this Code.

Petitioner further argues that the filing of a Final Adjustment Return would fall due on July 30, 1985, even before the due date for filing the quarterly return. This argument begs the question. It assumes that a quarterly return was required when the fact is that, because its taxable year was shortened, the FBTC did not have to file a quarterly return. In fact, petitioner presented no evidence that the FBTC ever filed such quarterly return in 1985.

Finally, petitioner cites a hypothetical situation wherein the directors of a corporation would convene on June 30, 2000 to plan the dissolution of the corporation on December 31, 2000, but would submit the plan for dissolution earlier with the SEC, which, in turn, would approve the same on October 1, 2000. Following §78 of the Tax Code, the corporation would be required to submit its complete return on October 31, 2000, although its actual dissolution would take place only on December 31, 2000.

Suffice it to say that such a situation may likewise be remedied by resort to §47 of the Tax Code. The corporation can ask for an extension of time to file a complete income tax return until December 31, 2000, when it would cease operations. This would obviate any difficulty which may arise out of the discrepancies not covered by §78 of the Tax Code.

In any case, as held in Commissioner of Internal Revenue v. Santos,11 "Debatable questions are for the legislature to decide. The courts do not sit to resolve the merits of conflicting issues."

Second. Petitioner contends that what §78 required was an information return, not an income tax return. It cites Revenue Memorandum Circular No. 14-85, of then Acting Commissioner of Internal Revenue Ruben B. Ancheta, referring to an "information return" in interpreting Executive Order No. 1026, which amended §78.12

The contention has no merit. The circular in question must be considered merely as an administrative interpretation of the law which in no case is binding on the courts.13 The opinion in question cannot be given any effect inasmuch as it is contrary to 244 of Revenue Regulation No. 2, as amended, which was issued by the Minister of Finance pursuant to the authority to him by §78 of the Tax Code. This provision states:

SEC. 244. Return of corporations contemplating dissolution or retiring from business. – All corporations, partnership joint accounts and associations, contemplating dissolution or retiring from business without formal dissolution shall, within 30 days after the approval of such resolution authorizing

their dissolution, and within the same period after their retirement from business, file their income tax returns covering the profit earned or business done by them from the beginning of the year up to the date of such dissolution or retirement and pay the corresponding income tax due thereon upon demand by the Commissioner of Internal Revenue …

This regulation prevails over the memorandum circular of the Acting Commissioner of Internal Revenue, which petitioner invokes.

Thus, as required by §244 of Revenue Regulation No. 2, any corporation contemplating dissolution must submit tax return on the income earned by it from the beginning of the year up to the date of its dissolution or retirement and pay the corresponding tax due upon demand by the Commissioner of Internal Revenue. Nothing in §78 of the Tax Code limited the return to be filed by the corporation concerned to a mere information return.

It is noteworthy that §78 of the Tax Code was substantially reproduced first in §45 (c), of the amendments to the same tax Code, and later in §52 (C) of the National Internal Revenue Code of 1997. Through all the re-enactments of the law, there has been no change in the authority granted to the Secretary (formerly Minister) of Finance to require corporations to submit such other information as he may prescribe. Indeed, Revenue Regulation No. 2 had been in existence prior to these amendments. Had Congress intended only information returns, it would have expressly provided so.

Third. Considering that §78 of the Tax Code, in relation to §244 of Revenue Regulation No. 2 applies to FBTC, the two-year prescriptive period should be counted from July 30, 1985, i.e., 30 days after the approval by the SEC of its plan for dissolution. In accordance with §292 of the Tax Code, July 30, 1985 should be considered the date of payment by FBTC of the taxes withheld on the earned income. Consequently, the two-year period of prescription ended on July 30, 1987. As petitioner's claim for tax refund before the Court of Tax Appeals was filed only on December 29, 1987, it is clear that the claim is barred by prescription.

WHEREFORE, the petition is DENIED for lack of merit.1âwphi1.nêt

SO ORDERED.

Bellosillo, Quisumbing, Buena, and De Leon, Jr., JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

 

G.R. No. 117254 January 21, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.COURT OF APPEALS, COURT OF TAX APPEALS and BANK OF THE PHILIPPINE ISLANDS as LIQUIDATOR OF PARAMOUNT ACCEPTANCE CORPORATION, respondent.

 

MENDOZA, J.:

This is a petition for review on certiorari of the decision, dated September 19, 1994, of the Court of Appeals affirming the decision of the Court of Tax Appeals which ordered petitioner to refund P65,259.00 as overpaid income tax.

The facts are stated in the following portion of the decision of the CTA which the Court of Appeals quoted with approval:

Petitioner, Bank of the Philippine Islands (BPI for short) is a bank and trust corporation duly organized and existing under Philippine laws. It acts as the liquidator of Paramount Acceptance Corporation after its dissolution on March 31, 1986.

On April 2, 1986, Paramount Acceptance Corporation

(Paramount for brevity) filed its Corporate Annual Income Tax Return, for calendar year ending December 31, 1985, declaring a Net Income of P3,324,802.00 (Exh. A). The income tax due thereon is P1,153,681.00. However, Paramount paid the BIR its quarterly income tax, to wit:

CR/ROR Date Bank Amount Exh.

6817293 5/30/85 DBP P308,779.00 C

5613316 8/29/85 DBP 626,000.00 C-1

7720471 11/29/85 DBP 284,161.00 C-2

——————

TOTAL P1,218,940.00

==========

After deducting Paramount's total quarterly income tax payments of P1,218,940.00 from its income tax of P1,153,681.00, the return showed a refundable amount of P65,259.00. The appropriate box in the return was marked with a cross (x) indicating "To be refunded" he amount of P65,29,00.

n April 14, 1988, petitioner BPI, as liquidator of Paramount, through counsel filed a letter dated April 12, 1988 reiterating its claim for refund of P65,259.00 as overpaid income tax for the calendar year 1985. The following day or on April 15, 1988. BPI filed the instant petition with this Court in order to toll the running of the prescriptive period for filing a claim for refund of overpaid income taxes.

The question is whether the two-year period of prescription for filing a claim for refund, as provided in §230 of the National Internal Revenue Code, is to be counted from April 2, 1986 when the corporate income tax return was actually filed or from April l5, 1986 when, according to §70(b) of the NIRC, the final

adjustment return could still be filed without incurring any penalty. The aforesaid §230 of the NLRC 1 provides that such period must be counted "from the date of payment of the tax." But, given the facts as stated above, when was the corporate income tax paid in this case?

The Court of Tax Appeals rendered a decision decision the considering the two year period of prescription to have commenced to run from April 15, 1986, the last day for filing the corporate income tax return, and, since the claim for refund was filed on April 14, 1988 and the action was brought on April 15, 1988, it held that prescription had not set in. Accordingly, the CTA ordered as follows:

WHEREFORE, the respondent [petitioner herein] is hereby ordered to REFUND in favor of petitioner, the sum of P65,259.00, representing overpaid income tax of Paramount Acceptance Corporation for the calendar year 1985.

No pronouncement as to costs.

SO ORDERED. 2

On appeal, its decision was affirmed by the Court of Appeals. Said the appellate court: 3

We agree with the respondent court's ruling that the date of payment of the tax as prescribed under the Tax Code is the date when the corporate income tax return is required to be filed. . . .

The Supreme Court has laid down the rule regarding the computation of the prescriptive period that the two-year period should be computed from the time of filing of the Adjustment Returns or Annual Income Tax Return and final payment of income tax: it is only when the Adjustment Return covering the whole year is filed that the taxpayer would know whether a

tax is still due or a refund can be claimed based on the adjusted and audited figures (Commissioner of Internal Revenue vs. TMX Sales Inc., 205 SCRA 184). The two-year prescriptive period within which to claim a refund commences to run, at the earliest, on the date of the filing of the adjusted final tax return (Commissioner of Internal Revenue vs. Asia Australia Express Ltd., G.R. No. 85956). The "date of payment" from which to reckon the two-year period, in the case of a corporation whose taxable year is on a calendar basis, is the 15th day of the fourth month (April 15th) following the close of the fiscal year, and the filing of the final adjustment return on April 15th, following the close of the preceding taxable year, is such "date of payment" (ACCRA Investments Corp. vs. Court of Appeals, 204 SCRA 957).

In this case, BPI filed its final adjustment return on April 2, 1985. No taxes were paid then because the returns showed that the quarterly taxes already paid exceeded the income tax due by P65,259.00. As correctly put by BPI, it is only on April 15 that the previous year's income tax becomes due and payable and the taxpayer is still free to make amendments or adjustments on its return, without penalty, until April 15, 1986 (See Section 80, N.I.R.C.). Thus the final payment of income tax should be deemed to be on April 15, 1986, when the previous year's income tax became due and payable and when the quarterly corporate income taxes may be considered paid. Accordingly the administrative claim and court proceeding for tax refund were timely filed.

Petitioner disagrees with the foregoing decision of the Court of Appeals. He contends that the two-year prescriptive period should be computed from April 2, 1984, when the final adjustment return was actually filed, because that is the time of payment of the tax, within the meaning of §230 of the NIRC.

We agree.

The conclusions reached by the appellate court are contrary to the very rulings cited by it. In Commissioner of Internal Revenue v. TMX Sales, Inc., 4 this Court, in rejecting the contention that the period of prescription should be counted from the date of payment of the quarterly tax, held:

. . . [T]he filing of a quarterly income tax return required in Section 85 [now Section 68] and implemented per BIR Form 1702-Q and payment of quarterly income tax should only be considered mere installments of the annual tax due. These quarterly tax payment which are computed based on the cumulative figures of gross receipts and deductions in order to arrive at a net taxable income, should be treated as advances or portions of the annual income tax due, to be adjusted at the end of the calendar or fiscal year. This is reinforced by Section 87 [now Section 69] which provides for the filing of adjustment returns and final payment of income tax. Consequently, the two-year prescriptive period provided in Section 292 [now Section 230 of the Tax Code] should be computed from the time of filing the Adjustment Return or Annual Income Tax Return and final payment of income tax.

On the other hand, in ACCRA Invesments Corporation v. Court of Appeals, 5 where the question was whether the two-year period of prescription should be reckoned from the end of the taxable year (in that case December 31, 1981), we explained why the period should be

counted from the filing of the final adjustment return, thus: 6

Clearly, there is the need to file a return first before a claim for refund can proper inasmuch as the respondent Commissioner by his own rules and regulations mandates that the corporate taxpayer opting to ask for a refund must show in its final adjustment return the income it received from all sources and the amount of withholding taxes remitted by its withholding agents to the Bureau of Internal Revenue. The petitioner corporation filed its final adjustment return for its 1981 taxable year on April 15, 1982. In our Resolution dated April 10, 1989 in the case of Commissioner of Internal Revenue v. Asia Australia Express, Ltd. (G.R. No. 85956), we ruled that the two-year prescriptive period within which to claim a refund commences to run, at the earliest, on the date of the filing of the adjusted final tax return. Hence, the petitioner corporation had until April 15, 1984 within which to file its claim for refund.

xxx xxx xxx

It bears emphasis at this point that the rationale in computing the two-year prescriptive period with respect to the petitioner corporation's claim for refund from the time it filed is final adjustment return is the fact that it was only then that ACCRAIN could ascertain whether it made profits or incurred losses in its business operations. The "date of payments", therefore, in ACCRAIN's case was when its tax liability, if any, fell due upon its filing of its final adjustment return on April 15, 1982.

Finally, in Commissioner of Internal Revenue v. Philippine American Life Insurance Co., 7 we held:

Clearly, the prescriptive period of two years should commence to run only from the time that the refund is ascertained, which can only be determined after a final adjustment return is accomplished. In the present case, this date is April 16, 1984, and two years from this date would be April 16, 1986. The record shows that the claim for refund was filed on December 10, 1985 and the petition for review was brought before the CTA on January 2, 1986. Both dates are within the two-year reglementary period. Private respondent being a corporation, Section 292 [now Section 230] cannot serve as the sole basis for determining the two-year prescriptive period for refunds. As we have earlier stated in the TMX Sales case. Sections 68, 69, and 70 on Quarterly Corporate Income Tax Payment and Sectibn 321 should be construed in conjunction with it.

Sec. 49(a) of the NIRC provides that —

§9. Payment and assessment of income tax for individuals and corporations.

(a) Payment of tax—(1) In general. — The total amount of tax imposed by this Title shall be paid by the person subject thereto at the time the return is filed. . . .

On the other hand, §70(b) of the same Code provides that —

§70 (b) Title of filing the income return — The corporate quarterly declaration shall be filed within sisty (60) days following the close of each of the first three quarters of the

taxable year. The final adjustment return shall be filed on or before the 15th day of the 4th month following the close of the fiscal year, as the case may be.

Thus, it can be deduced from the foregoing that, in the contest of §230, which provides for a two-year period of prescription counted "from the date of payment of the tax" for actions for refund of corporate income tax, the two-year period should be computed from the time of actual filing of the Adjustment Return or Annual Income Tax Return. This is so because at that point, it can already be determined whether there has been an overpayment by the taxpayer. Moreover, under §49(a) of the NIRC, payment is made at the time the return is filed.

In the case at bar, Paramount filed its corporate annual income tax return on April 2, 1986. However, private respondent BPI, as liquidator of Paramount, filed a written claim for refund only on April 14, 1988 and a petition for refund only on April 15, 1988. Both claim and action for refund were thus barred by prescription.

The foregoing conclusion makes it unnecessary for us to pass on the other issues raised in this case by petitioner.

WHEREFORE, the decision of the Court of Appeals is REVERSED and the petition for refund filed by private respondent is DISMISSED on the ground that it is barred by prescription.1âwphi1.nêt

SO ORDERED.

Bellosillo, Puno, Quisumbing and Buena, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-17406           November 29, 1965

FINLEY J. GIBBS and DIANE P. GIBBS, petitioners, vs.COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

Ozaeta, Gibbs & Ozaeta for petitioners.Office of the Solicitor General for respondents.

REGALA, J.:

This is a petition for review of two resolutions of the Court of Tax Appeals dated June 18, 1960 and August 23, 1960 in CTA Case No. 584, dismissing for lack of jurisdiction the petitioners' claims for refund and tax credit against the respondent Commissioner of Internal Revenue.

The facts upon which the respondent court entered the aforementioned resolutions are:

On February 6, 1965, the respondent Commissioner of Internal Revenue issued against the petitioners, "Finley J. Gibbs and Diane P. Gibbs, c/o Francisco Collantes, Rm. 301, Cepoc Bldg., Dasmariñas, Manila" Deficiency Income Tax Assessment Notice No. AR-5416-55/50 for P16,873.00 for the tax year 1950 with the demand that the said amount should be paid on or before March 15, 1956. On March 14, 1956, Allison J. Gibbs, signing as attorney-in-fact for Finley J. Gibbs, his brother, acknowledged receipt of the above assessment notice and notified the respondent Commissioner that Finley J. Gibbs was then living in Atherton, California, with office at 200 Bush Street, San Francisco 4 and that the latter was notified by him of the said deficiency assessment. In the same letter, Allison J. Gibbs questioned the disallowance of the items which gave rise to the deficiency assessment and requested for a correction of it. On August 26, 1956, however, the respondent Commissioner denied the request.

As regards the tax liability of your brother, Mr. Finley J. Gibbs, in the sum of P16,873.00, exclusive of surcharge and interest for the year 1951, please be informed that inasmuch as the facts obtaining in his case are similar in all fours with that of your case, the arguments above are applicable to the case of your said brother.

In view of the foregoing, you are hereby requested for the last time to pay the said amount of P12,284.00 exclusive of surcharge and interest, to the City Treasurer, Manila, within ten (10) days from your receipt hereof in order that this case may be closed. You are further requested to urge your brother to pay the abovementioned amount immediately upon your receipt hereof in order that his case may also be closed.

Having deemed the above reply of August 28, 1956, as the "final decision" of the respondent Commissioner on the matter, Allison J. Gibbs wrote on October 3, 1956, the following correspondence to the latter:

I consider your final decision, dated August 28, 1956, to be contrary to law but to demonstrate my good faith I herewith send you my Check No. 213082 drawn on the Chartered Bank of India, Australia & China payable to you in the sum of P16,873.00 in full payment of your original deficiency assessment No. AR-5416-55-50. Kindly acknowledge receipt.

At the same time, Allison J. Gibbs, demanded refund of the above payment:

I demand the immediate refund of this payment for the reasons heretofore given you. Unless refunded on or before the fourth of October I will file a Petition for Review with the Court of Tax Appeals and charge you with my damages of six percent (6%) interest per annum plus attorney's fees of twenty five percent (25%) of the amount involved. (Emphasis supplied, Letter of October 3, 1956.)

On October 26, 1956, the respondent Commissioner denied the above demand for refund.

With reference to your letters both dated October 3, 1956, requesting the refund of the sums of P12,284.00 and P16,873.00, as alleged erroneous payments of your income tax liability and that of your brother, Finley J. Gibbs, respectively, both for the year 1950, I regret to have to inform you that for reasons stated in our letter dated August 28, 1956, this Office finds no justifiable basis to grant your said request.

The above letter of October 26, 1956, denying the petitioners' claim for refund was admittedly received by the office of Allison J. Gibbs on November 14, 1956.

On September 29, 1958, Allison J. Gibbs, signing as counsel for Finley J. Gibbs, wrote another letter addressed to the respondent Commissioner to "reiterate our client's demand for refund of the P16,873.00 he paid on October 3, 1956 on the ground that your deficiency Assessment No. AR-5416-55/50 was illegal ... ." This letter also opined that the previous letter of October 26, 1956, of the respondent Commissioner was not "a ruling on our client's claim for refund of P16,873.00." Finally, this letter likewise asserted certain claims for tax credits arising allegedly from some previous overpayment made by the petitioner to the respondent Commissioner of Internal Revenue. The correspondence closed with the notice that should the demand for refund be uneffected on or before October 1, 1958, a petition for that purpose would be filed with the Court of Tax Appeals. The respondent Commissioner never replied to this letter of September 29, 1958.

On October 1, 1958, the petitioners filed with the respondent court a "Petition for Review and Refund of Income Tax with Motion for Suspension of Collection of Additional Taxes," alleging, in the main, its claims for refund and tax credit discussed above. To this petition, the respondent Commissioner filed an Answer on November 10, 1956 to claim, among others, the following special and affirmative defenses:

A. That this Honorable Court has no jurisdiction to take judicial cognizance of the petition for review on the ground that the petition for review was filed beyond thirty (30) days from the date of receipt of respondent's decision, dated October 26, 1956, denying the claim for refund as prescribed by Section 11 of Republic Act No. 1125;

B. That this Honorable Court has no jurisdiction over the cause of action with respect to the credit of the amounts stated in the petition for review for the reason that the request for credit and the petition for review praying for the credit of said amounts have been filed beyond two (2) years from the dates of payment of the amounts sought to be credited in the petition for review.

Acting on a motion dated November 17, 1958 filed by the respondent Commissioner for a preliminary hearing on the question of the lower court's jurisdiction as above contested, the respondent court, after due hearing and reception of evidence, sustained the above objection to its jurisdiction and upheld the respondent Commissioner's claim that the two causes of action asserted by the petitioner were barred by prescription. To this end, the respondent court promulgated two orders: the Resolution of June 18, 1960 dismissing CTA Case No. 584 for lack of jurisdiction and the Resolution of August 23, 1960 dismissing for lack of merit the petitioners' motion for reconsideration filed therefor. These are the two orders sought to be reviewed in the instant petition for review.

The petitioners contend that the respondent court erred in ruling that their petition for review was filed outside the 30-day period prescribed by Section 8 of Republic Act No. 1125 because (a) there is neither evidence nor record that the petitioners received a copy of the letter of October 26, 1956 denying their claim for refund, and (b) the aforesaid letter of October 26, 1956 is not a denial of their claim for refund.

Anent the insistence of the petitioners that they never received a copy of the letter of October 26, 1956 denying their claim for refund, suffice it to say that while they themselves personally might not have received a copy of it, Allison J.

Gibbs, as their attorney-in-fact and actually as their counsel, received a copy of the same.

Of course, the petitioners maintain that Allison J. Gibbs, at least until September 30, 1957, acted merely as agent or attorney-in-fact of the petitioners and never as their legal counsel. In support of this, it is argued that prior to October 26, 1956, Allison J. Gibbs had explicitly qualified his signature to all his correspondences regarding the disputed assessment as "attorney-in-fact." Furthermore, it is urged that as might be seen on the face of the assessment notice itself, the real legal counsel of the petitioners in the matter of the said assessment was Atty. Francisco Collantes.

That Allison J. Gibbs was not merely the agent of the petitioners in the matter under litigation, contrary to all that is alleged above, is demonstrated, however, by the following circumstances obtaining in this case:

1. Allison J. Gibbs acknowledged for the petitioners receipt of the deficiency income tax assessment, formally protested the same in writing, paid the assessment and likewise formally demanded in writing its refund.

2. As far back as 1952, Allison J. Gibbs' Law office had been representing the petitioners as the latter's counsel.

3. Atty. Francisco Collantes, to whom the assessment notice was admittedly addressed, at the time of the said assessment, was a staff lawyer in the firm of Gibbs and Chuidian, of which Allison J. Gibbs was a principal partner.

We find all the above as ample evidence of the lawyer-client-relationship of the petitioners herein and Allison J, Gibbs. Besides, it should be recalled that among the charges which Allison J. Gibbs claimed he would collect if his demand for refund for the petitioners were not effected by the respondent Commissioner was "attorney's fees of twenty five percent (25%) of the amount involved." (Letter of October 3, 1956.) How, then, may this statement be reconciled with the present denial that Allison was indeed the petitioners' counsel when he wrote the said letter of October 3, 1956?

There can be no question, therefore, that the receipt of the October 26, 1956 letter-decision of the respondent Commissioner by Allison J. Gibbs was receipt of the same by the petitioners, the former being then the latter's legal counsel. In the premises, the respondent court cannot be considered to have erred, therefore, in computing the 30-day prescriptive period in question from the date the said letter was received by Allison J. Gibbs.

On the other hand, the petitioners' claim that the letter of October 26, 1956 was not a denial of their claim for refund is patently unmeritorious. The letter in question clearly stated that "for reasons stated in our letter dated August 28, 1956, this Office finds no justifiable basis to grant your said request." Considering that even Allison J. Gibbs deemed the August 28, 1956 correspondence as the Commissioner's "final decision" on the controversy, it is difficult to see how the petitioners can now argue that the said letter of October 26, 1956, was not a denial of their claim for refund.

Parenthetically, it may be observed, that in view of our finding that the respondent court had no jurisdiction over the petition for review because it was filed beyond the 30-day period, hence, there is no need for extensive discussion of the second issue, namely: Whether the withholding tax credits amount to payment for the purpose of determining the two-year period as provided for by Section 306 of the Internal Revenue Code.

The petitioners maintain that the respondent court erred in ruling that their claim for tax credit had already expired since it pertained to tax payments made in 1951 and the protest and claim for demand therefor was made only in 1958. The petitioners insist that they could not be deemed to have paid their 1951 tax obligation until February 19, 1957, because they merely contributed to the withholding tax system in 1951 and claimed certain refunds against their contribution at the end of the said tax year and they received notice of the resolution on their claim for such refund only on February 19, 1957. In other words, the petitioners' thesis is to the effect that income tax assessments against which claims for refund have been lodged and which are covered by taxes withheld at the source shall be considered paid, not at the time such tax obligations fall due, but, only when the claims for refund against the assessments are

finally resolved by the authorities. By the petitioners' own formulation of their argument —

Petitioners also respectfully contend that the statute of limitation of two years prescribed in Section 306 of the NIRC does not start to run until respondent Commissioner has acted on the claim for refund or credit by the non-resident taxpayer and so notified the taxpayer because until then the withholding tax cannot be treated as a payment by the alien-resident taxpayer; until then it is a mere deposit held by respondent Commissioner for the account of the non-resident alien taxpayer.

This Court cannot subscribe to the petitioners' view.

Payment is a mode of extinguishing obligations (Art. 1231, Civil Code) and it means not only the delivery of money but also the performance, in any other manner, of an obligation (id., Art. 1231). A taxpayer, resident or non-resident, who contributes to the withholding tax system, does so not really to deposit an amount to the Commissioner of Internal Revenue, but, in truth, to perform and extinguish his tax obligation for the year concerned. In other words, he is paying his tax liabilities for that year. Consequently, a taxpayer whose income is withheld at the source will be deemed to have paid his tax liability when the same falls due at the end of the tax year. It is from this latter date then, or when the tax liability falls due, that the two-year prescriptive period under Section 306 of the Revenue Code starts to run with respect to payments effected through the withholding tax system. It is of no consequence whatever that a claim for refund or credit against the amount withheld at the source may have been presented and may have remained unresolved since, as this Court has previously explained in the case of Gibbs vs. Collector of Internal Revenue, G.R. No. L-13453, February 29, 1960 —

... Section 306 of the National Internal Revenue Code should be construed together with Section 11 of Republic Act No. 1125. In fine, a taxpayer who has paid the tax, whether under protest or not, and who is claiming a refund of the same, must comply with the requirement of both sections, that is, he must file a

claim for refund with the Collector of Internal Revenue within 2 years from the date of his payment of the tax, as required by Section 306 of the National Internal Revenue Code, and appeal to the Court of Tax Appeals within 30 days from receipt of the Collector's decision or ruling denying his claim for refund, as required by Section 11 of Republic Act No. 1125. If, however, the Collector takes time in deciding the claim, and the period of two years is about to end, the suit or proceeding must be started in the Court of Tax Appeals before the end of the two-year period without awaiting the decision of the Collector. This is so because of the positive requirement of Section 306 and the doctrine that delay of the Collector in rendering decision does not extend the peremptory period fixed by the statute. (U.S. v. Michel 282 U.S. 656, 51 S. Ct. 284; P. J. Kiener & Co., Ltd., v. David, L-5163, April 22, 1953; College of Oral and Dental Surgery vs. CTA, G.R. No. L-10446, Jan. 28, 1958. Emphasis supplied).

WHEREFORE, the instant petition for review is hereby dismissed, with costs against the petitioners.

Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., and Zaldivar, JJ.,concur.Barrera, J., is on leave.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-13453             February 29, 1960

ALLISON J. GIBBS and ESTHER K. GIBBS, petitioners, vs.COLLECTOR OF INTERNAL REVENUE and COURT of TAX APPEALS, respondents.

Ozaeta, Gibbs and Ozaeta for the petitioners.Office of the Solicitor General Edilberto Barot, Solicitor Felicisimo R. Rosete and Special Atty. Jose G. Azurin for the respondents.

BARRERA, J.:

From the resolution of respondent Court of Tax Appeals (in C.T.A. Case No. 418) dismissing, for lack of jurisdiction, their petition for review and refund of income taxes paid, petitioners Allison J. Gibbs and Esther K. Gibbs, interposed the present petition for review.

On March 14, 1956, petitioners protested the deficiency income tax assessment in the amount of P12,284.00, exclusive of surcharge and interest, for the year 1950, issued against them by the respondent Collector of Internal Revenue, on the ground that said deficiency assessment was based on a disallowance of bad debts and losses claimed in their income tax return for 1950.

On August 28, 1956, respondent Collector rejected petitioners' protest and reiterated his demand. On October 3, 1956, petitioners sent a check in the amount of P12,284.00 (Check No. C-643963) to respondent Collector as payment of said deficiency assessment, at the same time demanding the immediate refund of the amount paid.

On October 26, 1956, respondent Collector denied the request for refund, and required petitioners to pay the amounts of P1,469.04 and P1,997.26 as surcharge, interest, and compromise penalty. Notice of said denial was received by petitioners on November 14, 1956.

On September 27, 1957, petitioners filed with respondent Court a petition for review and refund, with a motion for suspension of collection of penalties. On October 7, 1957, respondent Collector filed a motion to dismiss, on the ground that the petition was filed beyond the 30-day period provided under Section 11, in relation to Section 7, of Republic Act No. 1125, which motion, was opposed by petitioners on October 24, 1957.

On December 2, 1957, respondent court dismissed the petition, in a resolution which, in part, reads:

Petitioners paid the tax in question on October 3, 1956, at the same time asking for the refund of the same. He received the letter of respondent denying said request for refund on November 14, 1956. Pursuant to Section 11 of Republic Act No. 1125, petitioners had only 30 days from November 14, 1956, or up to December 15, 1956, within which to file their appeal to this Court. However, petitioners appealed from the aforesaid decision of respondent only on September 27, 1957, more than ten (10) months from November 14, 1956. Obviously, the appeal has been filed beyond the 30-day period set by law.

Petitioners contend that Section 306 of the Revenue Code provides that judicial proceedings may be instituted for recovery of an internal revenue tax within two years from the date of payment. This was so before the enactment of Republic Act No. 1125 . . .petitioners should have appealed to this Court within 30 days from November 14, 1956, that is, not later than December 15, 1956, pursuant to Section 11 of Republic Act No. 1125. As the appeal was filed on September 27, 1957, we have no jurisdiction to entertain the same.

On December 11, 1957, petitioners filed a motion for reconsideration of said order, but the same was denied by respondent court on January 31, 1958. Hence, this petition for review.

The only issue to be resolved in this case is whether or not petitioners' appeal (petition for review and refund) from the decision of respondent Collector of Internal Revenue, was filed with respondent Court of Tax Appeals within the statutory period.

Section 7 of Republic Act No. 1125,1 in part, provides:

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

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

And Section 11 of the same Act, in part, states that:

SEC. 11. Who may appeal; effect of appeal.—Any person, association or corporation adversely affected by a decision or ruling of the Collector of Internal Revenue, the Collector of Customs or any provincial or city Board of Assessment Appeals may file an appeal in the Court of Tax Appeals within thirty days after the receipt of such decision or ruling. . . . (Emphasis supplied.)

It is not disputed that petitioners received on November 14, 1956, notice of respondent Collector's decision denying their request for a refund of the deficiency assessment paid by them. Pursuant to the above-quoted provision of Section 11 of Republic Act 1125, they had 30 days from said date within which to file their appeal (petition for review and refund) with respondent court. However, they filed said appeal only on September 27, 1957, or more than ten (10) months thereafter, much beyond the aforementioned 30-day period within which to file the same. Consequently, respondent court had acquired no jurisdiction to entertain said

appeal and the dismissal of the same was proper.

Petitioners, however, contend that although their appeal was filed beyond said 30-day period, respondent court still had jurisdiction over the same, by virtue of the provision of Section 306 of the National Internal Revenue Code,2 which reads:

SEC. 306. Recovery of tax erroneously or illegally collected.—No suit or proceeding shall be maintained in any court for the recovery of any national internal-revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Collector of Internal Revenue; but such suit or proceeding may be maintained, whether or not such tax penalty, or sum has been paid under protest or duress. It any case, no such suit or proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty. (Emphasis supplied.)

The contention is devoid of any merit. In the case of Johnston Lumber Co., Inc. vs. Court of Tax Appeals, et al.101 Phil., 654; 54 Off. Gaz. [16] 5226, we held:

It is the contention of petitioner that the aforequoted provisions cannot stand side by side because, whereas Section 306 of the Tax Code required the filing of a claim before an action in court may be maintained, Republic Act No. 1125 which confers jurisdiction upon the Court of Tax Appeals to take cognizance of appeals from the decisions of the Collector of Internal Revenue does not require any more the filing of said claim but merely provides that said appeal may be filed within 30 days from receipt of such decision or ruling.

A careful analysis of the provisions of both enactments would negative the

assertion of petitioner. The specific provision of Republic Act No. 1125 regarding appeal (Section 11) was intended to cope with a situation where the taxpayer, upon receipt of a decision or ruling of the Collector of Internal Revenue, elects to appeal to the Court of Tax Appeals instead of paying the tax. For this reason, the latter part of said Section 11, provides that no such appeal would suspend the payment of the tax demanded by the Government, unless for special reasons, the Court of Tax Appeals would deem it fit to restrain said collection. Section 306, of the Tax Code, on the other hand, contemplates of a case wherein the taxpayerpaid the tax, whether under protest or not, and later on decides to go to court for its recovery. We can, therefore, conclude that where payment has already been made and the taxpayer is merely asking for its refund, he must first file with the Collector of Internal Revenue a claim for refund before taking the matter to the Court, as required by Section 306 of the National Internal Revenue Code and that appeals from decisions or rulings of the Collector of Internal Revenue to the Court of Tax Appeals must always be perfected within 30 days after the receipt of the decision or ruling that is being appealed, as required by Section 11 of Republic Act No. 1125. We see no conflict between the aforementioned sections of said laws. (Emphasis supplied.)

Under the above ruling, it is clear that Section 306 of the National Internal Revenue Code should be construed together with Section 11 of Republic Act No. 1125. In fine, a taxpayer who has paid the tax, whether under protest or not, and who is claiming a refund of the same, must comply with the requirements of both sections, that is, he must file a claim for refund with the Collector of Internal Revenue within 2 years from the date of his payment of the tax, as required by said Section 306 of the National Internal Revenue Code, and appeal to the Court of Tax Appeals within 30 days from receipt of the Collector's decision or ruling denying his claim for refund, as required by said Section 11 of Republic Act No. 1125. If, however, the Collector takes time in deciding the claim, and the period of two years is about to end, the suit

or proceeding must be started in the Court of Tax Appeals before the end of the two-year period without awaiting the decision of the Collector. This is so because of the positive requirement of Section 306 and the doctrine that delay of the Collector in rendering decision does not extend the peremptory period fixed by the statute.3

In the case of a taxpayer who has not yet paid the tax and who is protesting the assessment made by the Collector of Internal Revenue, he must file his appeal with the Court of Tax Appeals within 30 days from his receipt of the Collector's assessment, as required by said Section 11 of Republic Act No. 1125. Otherwise, his failure to comply with said statutory requirement would bar his appeal and deprive the Court of Tax Appeals of its jurisdiction to entertain or determine the same.

We do not find the cases of Collector of Internal Revenue vs. Avelino, et al. (100 Phil., 327; 53 Off. Gaz. 645) and Collector of Internal Revenue vs. Zulueta, et al. (100 Phil., 872; 53 Off. Gaz. [19] 6532) invoked by petitioners applicable to the instant case. The issue presented in both cited cases was whether or not the Court of Tax Appeals may enjoin the Collector of Internal Revenue from collecting through summary administrative methods, the income tax liabilities of Messrs. Avelino and Zulueta, 3 years after the filing of their income tax returns, and not whether their petition for review was seasonably filed with said court, in accordance with Section 11 of Republic Act No. 1125, or Section 306 of the National Internal Revenue Code. Furthermore, the instant case involves a refund of taxes paid, while the cited cases involved the legality of the collection of taxes by summary administrative methods.

Appellants, in their supplemental brief, urge two additional grounds for the revocation of respondent court's decision. It is claimed that since the letter-decision dated October 26, 1956 denying their request for refund of the deficiency income tax paid by them, was signed not by the Collector, but merely by the Deputy Collector of Internal Revenue, it could not be considered as a final decision on their said request. They cite as authority, Section 309 of the National Internal Revenue Code reading partly:

SEC. 309. Authority of Collector to make compromise and to refund taxes.— The Collector of Internal Revenue may compromise any civil or other case arising under this Code or other law or part of law administered by the Bureau of Internal Revenue, may credit or refund taxes erroneously or illegally received, or penalties imposed without authority, and may remit before payment any tax that appears to be unjustly assessed or excessive.

x x x           x x x           x x x

The authority of the Collector of Internal Revenue to credit or refund taxes or penalties, under this section can only be exercised if the claim for credit or refund is made in writing and filed with him within two years after the payment of the tax or penalty. (Emphasis supplied.)

and No. 9 of Paragraph 4, Section 7, as amended, of the Internal Revenue Manual on Audit and Investigation Procedure and General Circular No. V-182, providing:

9. The authority to remit before payment any tax that appears to be unjustly assessed or excessive, or credit or refund taxes erroneously or illegally received under Section 309 of the National Internal Revenue Code shall be exercised exclusively by the Collector of Internal Revenue. (Emphasis supplied.)

Appellants contend that under the above-quoted provisions, only the Collector has the authority to deal in refund cases. This is fallacious. In the first place, the cited provisions refer to the authority of the Collector of Internal Revenue to compromise, or to credit or refund taxes erroneously or illegally received, that is, when the action, in a manner of speaking, is against the Government. In such case, the authority is vested exclusively in the Collector himself. The purpose is to assure that no improper compromise, credit, or refund is made to the prejudice of the Government. But in the case before us, the action taken by the Deputy Collector in his letter of October 26, 1956, was precisely to deny the request for refund and demand the payment of the deficiency tax from petitioners. Certainly, this is well within the

authority of the Deputy Collector and is final and binding unless revoked by the Collector.

The other point raised that the letter of October 26 is not final because in addition to denying the refund it demanded payment of surcharges and interests is, likewise, without merit. The ruling in the case of St. Stephen's Association, et al. vs. Collector of Internal Revenue (104 Phil., 314; 55 Off. Gaz. [13] 2243) cited by petitioners, is inapplicable to the instant case, for there the Collector wrote two letters to the taxpayers, one on April 6, 1955, denying their first request for the withdrawal and cancellation of the assessment, and another on July 11, 1955, denying their second request and stating in its last paragraph: "This decision becomes final thirty days after your receipt hereof unless an appeal is taken to the Court of Tax Appeals within the same period, in accordance with the provisions of Republic Act No. 1125." Undoubtedly, this second letter, and not the first was the final decision of the Collector in that case, because it finally resolved the then pending petition for reconsideration filed by the taxpayers. In the instant case, after the letter of October 26, 1956 denying petitioners' request for refund, no further action was taken either by petitioners or the Collector, both parties treating the letter-decision as final. In fact, petitioner's next move was to file their petition for review and refund with respondent court. The Collector, on the other hand, consequent to his understanding that said letter-decision was final, filed his motion to dismiss with respondent court, on the ground that petitioners' petition was filed out of time and, therefore, the court acquired no jurisdiction to entertain the same.

Wherefore, finding no error in the decision of the court a quo, the same is hereby affirmed, with costs against the petitioners. So ordered.

Paras, C. J., Bengzon, Montemayor, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Endencia, and Gutierrez David, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. 162155               August 28, 2007

COMMISSIONER OF INTERNAL REVENUE and ARTURO V. PARCERO in his official capacity as Revenue District Officer of Revenue District No. 049 (Makati), Petitioners, vs.PRIMETOWN PROPERTY GROUP, INC., Respondent.

D E C I S I O N

CORONA, J.:

This petition for review on certiorari1 seeks to set aside the August 1, 2003 decision2 of the Court of Appeals (CA) in CA-G.R. SP No. 64782 and its February 9, 2004 resolution denying reconsideration.3

On March 11, 1999, Gilbert Yap, vice chair of respondent Primetown Property Group, Inc., applied for the refund or credit of income tax respondent paid in 1997. In Yap's letter to petitioner revenue district officer Arturo V. Parcero of Revenue District No. 049 (Makati) of the Bureau of Internal Revenue (BIR),4 he explained that the increase in the cost of labor and materials and difficulty in obtaining financing for projects and collecting receivables caused the real estate industry to slowdown.5 As a consequence, while business was good during the first quarter of 1997, respondent suffered losses amounting to P71,879,228 that year.6

According to Yap, because respondent suffered losses, it was not liable for income taxes.7 Nevertheless, respondent paid its quarterly corporate income tax and remitted creditable withholding tax from real estate sales to the BIR in the total amount of P26,318,398.32.8 Therefore, respondent was entitled to tax refund or tax credit.9

On May 13, 1999, revenue officer Elizabeth Y. Santos required respondent to submit additional documents to support its claim.10 Respondent complied but its claim was not acted upon. Thus, on April 14, 2000, it filed a petition for review11 in the Court of Tax Appeals (CTA).

On December 15, 2000, the CTA dismissed the petition as it was filed beyond the two-year prescriptive period for filing a judicial claim for tax refund or tax credit.12 It invoked Section 229 of the National Internal Revenue Code (NIRC):

Sec. 229. Recovery of Taxes Erroneously or Illegally Collected. -- No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment:Provided, however, That the Commissioner may, even without a claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid. (emphasis supplied)

The CTA found that respondent filed its final adjusted return on April 14, 1998. Thus, its right to claim a refund or credit commenced on that date.13

The tax court applied Article 13 of the Civil Code which states:

Art. 13. When the law speaks of years, months, days or nights, it shall be understood that years are of three hundred sixty-five days each; months, of thirty days; days, of twenty-four hours, and nights from sunset to sunrise.

If the months are designated by their name, they shall be computed by the number of days which they respectively have.

In computing a period, the first day shall be excluded, and the last included. (emphasis supplied)

Thus, according to the CTA, the two-year prescriptive period under Section 229 of the NIRC for the filing of judicial claims was equivalent to 730 days. Because the year 2000 was a leap year, respondent's petition, which was filed 731 days14 after respondent filed its final adjusted return, was filed beyond the reglementary period.15

Respondent moved for reconsideration but it was denied.16 Hence, it filed an appeal in the CA.17

On August 1, 2003, the CA reversed and set aside the decision of the CTA.18 It ruled that Article 13 of the Civil Code did not distinguish between a regular year and a leap year. According to the CA:

The rule that a year has 365 days applies, notwithstanding the fact that a particular year is a leap year.19

In other words, even if the year 2000 was a leap year, the periods covered by April 15, 1998 to April 14, 1999 and April 15, 1999 to April 14, 2000 should still be counted as 365 days each or a total of 730 days. A statute which is clear and explicit shall be neither interpreted nor construed.20

Petitioners moved for reconsideration but it was denied.21 Thus, this appeal.

Petitioners contend that tax refunds, being in the nature of an exemption, should be strictly construed against claimants.22 Section 229 of the NIRC should be strictly applied against respondent inasmuch as it has been consistently held that the prescriptive period (for the filing of tax refunds and tax credits) begins to run on the day claimants file their final adjusted returns.23 Hence, the claim should have been filed on or before April 13, 2000 or within 730 days, reckoned from the time respondent filed its final adjusted return.

The conclusion of the CA that respondent filed its petition for review in the CTA within the two-year prescriptive period provided in Section 229 of the NIRC is correct. Its basis, however, is not.

The rule is that the two-year prescriptive period is reckoned from the filing of the final adjusted return.24 But how should the two-year prescriptive period be computed?

As already quoted, Article 13 of the Civil Code provides that when the law speaks of a year, it is understood to be equivalent to 365 days. In National Marketing Corporation v. Tecson,25 we ruled that a year is equivalent to 365 days regardless of whether it is a regular year or a leap year.26

However, in 1987, EO27 292 or the Administrative Code of 1987 was enacted. Section 31, Chapter VIII, Book I thereof provides:

Sec. 31. Legal Periods. — "Year" shall be understood to be twelve calendar months; "month" of thirty days, unless it refers to a specific calendar month in which case it shall be computed according to the number of days the specific month contains; "day", to a day of twenty-four hours and; "night" from sunrise to sunset. (emphasis supplied)

A calendar month is "a month designated in the calendar without regard to the number of days it may contain."28 It is the "period of time running from the beginning of a certain numbered day up to, but not including, the corresponding numbered day of the next month, and if there is not a sufficient number of days in the next month, then up to and including the last day of that month."29 To illustrate, one calendar month from December 31, 2007 will be from January 1, 2008 to January 31, 2008; one calendar month from January 31, 2008 will be from February 1, 2008 until February 29, 2008.30

A law may be repealed expressly (by a categorical declaration that the law is revoked and abrogated by another) or impliedly (when the provisions of a more recent law cannot be reasonably reconciled with the previous one).31Section 27, Book VII (Final Provisions) of the Administrative Code of 1987 states:

Sec. 27. Repealing clause. — All laws, decrees, orders, rules and regulation, or portions thereof, inconsistent with this Code are hereby repealed or modified accordingly.

A repealing clause like Sec. 27 above is not an express repealing clause because it fails to identify or designate the laws to be abolished.32 Thus, the provision above only impliedly repealed all laws inconsistent with the Administrative Code of 1987.1avvphi1

Implied repeals, however, are not favored. An implied repeal must have been clearly and unmistakably intended by the legislature. The test is whether the subsequent law encompasses entirely the subject matter of the former law and they cannot be logically or reasonably reconciled.33

Both Article 13 of the Civil Code and Section 31, Chapter VIII, Book I of the Administrative Code of 1987 deal with the same subject matter — the computation of legal periods. Under the Civil Code, a year is equivalent to 365 days whether it be a regular year or a leap year. Under the Administrative Code of 1987, however, a year is composed of 12 calendar months. Needless to state, under the Administrative Code of 1987, the number of days is irrelevant.

There obviously exists a manifest incompatibility in the manner of computing legal periods under the Civil Code and the Administrative Code of 1987. For this reason, we hold that Section 31, Chapter VIII, Book I of the Administrative Code of 1987, being the more recent law, governs the computation of legal periods. Lex posteriori derogat priori.

Applying Section 31, Chapter VIII, Book I of the Administrative Code of 1987 to this case, the two-year prescriptive period (reckoned from the time respondent filed its final adjusted return34 on April 14, 1998) consisted of 24 calendar months, computed as follows:

Year 1 1st calendar month April 15, 1998

  2nd calendar month May 15, 1998

  3rd calendar month June 15, 1998

  4th calendar month July 15, 1998

  5th calendar month August 15, 1998 to September 14, 1998

  6th calendar month September 15, 1998 to October 14, 1998

  7th calendar month October 15, 1998 to November 14, 1998

  8th calendar month November 15, 1998 to December 14, 1998

  9th calendar month December 15, 1998 to January 14, 1999

  10th calendar month January 15, 1999 to February 14, 1999

  11th calendar month February 15, 1999 to March 14, 1999

  12th calendar month March 15, 1999 to April 14, 1999

Year 2 13th calendar month April 15, 1999 to May 14, 1999

  14th calendar month May 15, 1999 to June 14, 1999

  15th calendar month June 15, 1999 to July 14, 1999

  16th calendar month July 15, 1999 to August 14, 1999

  17th calendar month August 15, 1999 to September 14, 1999

  18th calendar month September 15, 1999 to October 14, 1999

  19th calendar month October 15, 1999 to November 14, 1999

  20th calendar month November 15, 1999 to December 14, 1999

  21st calendar month December 15, 1999 to January 14, 2000

  22nd calendar month January 15, 2000 to February 14, 2000

  23rd calendar month February 15, 2000 to March 14, 2000

  24th calendar month March 15, 2000 to April 14, 2000

We therefore hold that respondent's petition (filed on April 14, 2000) was filed on the last day of the 24th calendar month from the day respondent filed its final adjusted return. Hence, it was filed within the reglementary period.

Accordingly, the petition is hereby DENIED. The case is REMANDED to the Court of Tax Appeals which is ordered to expeditiously proceed to hear C.T.A. Case No. 6113 entitled Primetown Property Group, Inc. v. Commissioner of Internal Revenue and Arturo V. Parcero.

No costs.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. Nos. 141104 & 148763             June 8, 2007

ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION, petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, respondent.

D E C I S I O N

CHICO-NAZARIO, J.:

Before this Court are the consolidated cases involving the unsuccessful claims of herein petitioner Atlas Consolidated Mining and Development Corporation (petitioner corporation) for the refund/credit of the input Value Added Tax (VAT) on its purchases of capital goods and on its zero-rated sales in the taxable quarters of the years 1990 and 1992, the denial of which by the Court of Tax Appeals (CTA), was affirmed by the Court of Appeals.

Petitioner corporation is engaged in the business of mining, production, and sale of various mineral products, such as gold, pyrite, and copper concentrates. It is a VAT-registered taxpayer. It was initially issued VAT Registration No. 32-A-6-002224, dated 1 January 1988, but it had to register anew with the appropriate revenue district office (RDO) of the Bureau of Internal Revenue (BIR) when it moved its principal place of business, and it was re-issued VAT Registration No.             32-0-004622      , dated 15 August 1990.1

G.R. No. 141104

Petitioner corporation filed with the BIR its VAT Return for the first quarter of 1992.2 It alleged that it likewise filed with the BIR the corresponding application for the refund/credit of its input VAT on its purchases of capital goods and on its zero-rated sales in the amount of P26,030,460.00.3 When its application for refund/credit remained unresolved by the BIR, petitioner corporation filed on 20 April 1994 its

Petition for Review with the CTA, docketed as CTA Case No. 5102. Asserting that it was a "zero-rated VAT person," it prayed that the CTA order herein respondent Commissioner of Internal Revenue (respondent Commissioner) to refund/credit petitioner corporation with the amount of P26,030,460.00, representing the input VAT it had paid for the first quarter of 1992. The respondent Commissioner opposed and sought the dismissal of the petition for review of petitioner corporation for failure to state a cause of action. After due trial, the CTA promulgated its Decision4 on 24 November 1997 with the following disposition –

WHEREFORE, in view of the foregoing, the instant claim for refund is hereby DENIED on the ground of prescription, insufficiency of evidence and failure to comply with Section 230 of the Tax Code, as amended. Accordingly, the petition at bar is hereby DISMISSED for lack of merit.

The CTA denied the motion for reconsideration of petitioner corporation in a Resolution5 dated 15 April 1998.

When the case was elevated to the Court of Appeals as CA-G.R. SP No. 47607, the appellate court, in its Decision,6 dated 6 July 1999, dismissed the appeal of petitioner corporation, finding no reversible error in the CTA Decision, dated 24 November 1997. The subsequent motion for reconsideration of petitioner corporation was also denied by the Court of Appeals in its Resolution,7 dated 14 December 1999.

Thus, petitioner corporation comes before this Court, via a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court, assigning the following errors committed by the Court of Appeals –

I

THE COURT OF APPEALS ERRED IN AFFIRMING THE REQUIREMENT OF REVENUE REGULATIONS NO. 2-88 THAT AT LEAST 70% OF THE SALES OF THE [BOARD OF INVESTMENTS (BOI)]-REGISTERED FIRM MUST CONSIST OF EXPORTS FOR ZERO-RATING TO APPLY.

II

THE COURT OF APPEALS ERRED IN AFFIRMING THAT PETITIONER FAILED TO SUBMIT SUFFICIENT EVIDENCE SINCE FAILURE TO SUBMIT PHOTOCOPIES OF VAT INVOICES AND RECEIPTS IS NOT A FATAL DEFECT.

III

THE COURT OF APPEALS ERRED IN RULING THAT THE JUDICIAL CLAIM WAS FILED BEYOND THE PRESCRIPTIVE PERIOD SINCE THE JUDICIAL CLAIM WAS FILED WITHIN TWO (2) YEARS FROM THE FILING OF THE VAT RETURN.

IV

THE COURT OF APPEALS ERRED IN NOT ORDERING CTA TO ALLOW THE RE-OPENING OF THE CASE FOR PETITIONER TO PRESENT ADDITIONAL EVIDENCE.8

G.R. No. 148763

G.R. No. 148763 involves almost the same set of facts as in G.R. No. 141104 presented above, except that it relates to the claims of petitioner corporation for refund/credit of input VAT on its purchases of capital goods and on its zero-rated sales made in the last three taxable quarters of 1990.

Petitioner corporation filed with the BIR its VAT Returns for the second, third, and fourth quarters of 1990, on 20 July 1990, 18 October 1990, and 20 January 1991, respectively. It submitted separate applications to the BIR for the refund/credit of the input VAT paid on its purchases of capital goods and on its zero-rated sales, the details of which are presented as follows –

Date of Application Period Covered

21 August 1990 2nd Quarter, 1990

21 November 1990 3rd Quarter, 1990

19 February 1991 4th Quarter, 1990

When the BIR failed to act on its applications for refund/credit, petitioner corporation filed with the CTA the following petitions for review –

Date Filed Period Covered CTA Case No.

20 July 1992 2nd Quarter, 1990

9 October 1992 3rd Quarter, 1990

14 January 1993 4th Quarter, 1990

which were eventually consolidated. The respondent Commissioner contested the foregoing Petitions and prayed for the dismissal thereof. The CTA ruled in favor of respondent Commissioner and in its Decision,9 dated 30 October 1997, dismissed the Petitions mainly on the ground that the prescriptive periods for filing the same had expired. In a Resolution,10 dated 15 January 1998, the CTA denied the motion for reconsideration of petitioner corporation since the latter presented no new matter not already discussed in the court's prior Decision. In the same Resolution, the CTA also denied the alternative prayer of petitioner corporation for a new trial since it did not fall under any of the grounds cited under Section 1, Rule 37 of the Revised Rules of Court, and it was not supported by affidavits of merits required by Section 2 of the same Rule.

Petitioner corporation appealed its case to the Court of Appeals, where it was docketed as CA-G.R. SP No. 46718. On 15 September 2000, the Court of Appeals rendered its Decision,11 finding that although petitioner corporation timely filed its Petitions for Review with the CTA, it still failed to substantiate its claims for the refund/credit of its input VAT for the last three quarters of 1990. In its Resolution,12 dated 27 June 2001, the appellate court denied the motion for reconsideration of petitioner corporation, finding no cogent reason to reverse its previous Decision.

Aggrieved, petitioner corporation filed with this Court another Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court, docketed as G.R. No. 148763, raising the following issues –

A.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER'S CLAIM IS BARRED UNDER REVENUE REGULATIONS NOS. 2-88 AND 3-88 I.E., FOR FAILURE TO PTOVE [sic] THE 70% THRESHOLD FOR ZERO-RATING TO APPLY AND FOR FAILURE TO ESTABLISH THE FACTUAL BASIS FOR THE INSTANT CLAIM.

B.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN FINDING THAT THERE IS NO BASIS TO GRANT PETITIONER'S MOTION FOR NEW TRIAL.

There being similarity of parties, subject matter, and issues, G.R. Nos. 141104 and 148763 were consolidated pursuant to a Resolution, dated 4 September 2006, issued by this Court. The ruling of this Court in these cases hinges on how it will resolve the following key issues: (1) prescription of the claims of petitioner corporation for input VAT refund/credit; (2) validity and applicability of Revenue Regulations No. 2-88 imposing upon petitioner corporation, as a requirement for the VAT zero-rating of its sales, the burden of proving that the buyer companies were not just BOI-registered but also exporting 70% of their total annual production; (3) sufficiency of evidence presented by petitioner corporation to establish that it is indeed entitled to input VAT refund/credit; and (4) legal ground for granting the motion of petitioner corporation for re-opening of its cases or holding of new trial before the CTA so it could be given the opportunity to present the required evidence.

Prescription

The prescriptive period for filing an application for tax refund/credit of input VAT on zero-rated sales made in 1990 and 1992 was governed by Section 106(b) and (c) of the Tax Code of 1977, as amended, which provided that –

SEC. 106. Refunds or tax credits of input tax. – x x x.

(b) Zero-rated or effectively zero-rated sales. – Any person, except those covered by paragraph (a) above, whose sales are zero-rated may, within two years after the close of the quarter when such sales were made, apply for the issuance of a tax credit certificate or refund of the input taxes attributable to such sales to the extent that such input tax has not been applied against output tax.

x x x x

(e) Period within which refund of input taxes may be made by the Commissioner. – The Commissioner shall refund input taxes within 60 days from the date the application for refund was filed with him or his duly authorized representative. No refund of input taxes shall be allowed unless the VAT-registered person files an application for refund within the period prescribed in paragraphs (a), (b) and (c) as the case may be.

By a plain reading of the foregoing provision, the two-year prescriptive period for filing the application for refund/credit of input VAT on zero-rated sales shall be determined from the close of the quarter when such sales were made.

Petitioner contends, however, that the said two-year prescriptive period should be counted, not from the close of the quarter when the zero-rated sales were made, but from the date of filing of the quarterly VAT return and payment of the tax due 20 days thereafter, in accordance with Section 110(b) of the Tax Code of 1977, as amended, quoted as follows –

SEC. 110. Return and payment of value-added tax. – x x x.

(b) Time for filing of return and payment of tax. – The return shall be filed and the tax paid within 20 days following the end of each quarter specifically prescribed for a VAT-registered person under regulations to be promulgated by the Secretary of Finance: Provided, however, That any person whose registration is cancelled in accordance

with paragraph (e) of Section 107 shall file a return within 20 days from the cancellation of such registration.

It is already well-settled that the two-year prescriptive period for instituting a suit or proceeding for recovery of corporate income tax erroneously or illegally paid under Section 23013 of the Tax Code of 1977, as amended, was to be counted from the filing of the final adjustment return. This Court already set out in ACCRA Investments Corporation v. Court of Appeals,14 the rationale for such a rule, thus –

Clearly, there is the need to file a return first before a claim for refund can prosper inasmuch as the respondent Commissioner by his own rules and regulations mandates that the corporate taxpayer opting to ask for a refund must show in its final adjustment return the income it received from all sources and the amount of withholding taxes remitted by its withholding agents to the Bureau of Internal Revenue. The petitioner corporation filed its final adjustment return for its 1981 taxable year on April 15, 1982. In our Resolution dated April 10, 1989 in the case of Commissioner of Internal Revenue v. Asia Australia Express, Ltd. (G.R. No. 85956), we ruled that the two-year prescriptive period within which to claim a refund commences to run, at the earliest, on the date of the filing of the adjusted final tax return. Hence, the petitioner corporation had until April 15, 1984 within which to file its claim for refund.

Considering that ACCRAIN filed its claim for refund as early as December 29, 1983 with the respondent Commissioner who failed to take any action thereon and considering further that the non-resolution of its claim for refund with the said Commissioner prompted ACCRAIN to reiterate its claim before the Court of Tax Appeals through a petition for review on April 13, 1984, the respondent appellate court manifestly committed a reversible error in affirming the holding of the tax court that ACCRAIN's claim for refund was barred by prescription.

It bears emphasis at this point that the rationale in computing the two-year prescriptive period with respect to the petitioner corporation's claim for refund from the time it filed its final adjustment return is the fact that it was only then that ACCRAIN could ascertain whether it made profits or incurred losses in its business operations. The "date of payment", therefore, in ACCRAIN's case was when its tax liability, if any, fell due upon its filing of its final adjustment return on April 15, 1982.

In another case, Commissioner of Internal Revenue v. TMX Sales, Inc.,15 this Court further expounded on the same matter –

A re-examination of the aforesaid minute resolution of the Court in the Pacific Procon case is warranted under the circumstances to lay down a categorical pronouncement on the question as to when the two-year prescriptive period in cases of quarterly corporate income tax commences to run. A full-blown decision in this regard is rendered more imperative in the light of the reversal by the Court of Tax Appeals in the instant case of its previous ruling in the Pacific Procon case.

Section 292 (now Section 230) of the National Internal Revenue Code should be interpreted in relation to the other provisions of the Tax Code in order to give effect the legislative intent and to avoid an application of the law which may lead to inconvenience and absurdity. In the case of People vs. Rivera (59 Phil. 236 [1933]), this Court stated that statutes should receive a sensible construction, such as will give effect to the legislative intention and so as to avoid an unjust or an absurd conclusion. INTERPRETATIO TALIS IN AMBIGUIS SEMPER FRIENDA EST, UT EVITATUR INCONVENIENS ET ABSURDUM. Where there is ambiguity, such interpretation as will avoid inconvenience and absurdity is to be adopted. Furthermore, courts must give effect to the general legislative intent that can be discovered from or is

unraveled by the four corners of the statute, and in order to discover said intent, the whole statute, and not only a particular provision thereof, should be considered. (Manila Lodge No. 761, et al. vs. Court of Appeals, et al. 73 SCRA 162 [1976) Every section, provision or clause of the statute must be expounded by reference to each other in order to arrive at the effect contemplated by the legislature. The intention of the legislator must be ascertained from the whole text of the law and every part of the act is to be taken into view. (Chartered Bank vs. Imperial, 48 Phil. 931 [1921]; Lopez vs. El Hoger Filipino, 47 Phil. 249, cited in Aboitiz Shipping Corporation vs. City of Cebu, 13 SCRA 449 [1965]).

Thus, in resolving the instant case, it is necessary that we consider not only Section 292 (now Section 230) of the National Internal Revenue Code but also the other provisions of the Tax Code, particularly Sections 84, 85 (now both incorporated as Section 68), Section 86 (now Section 70) and Section 87 (now Section 69) on Quarterly Corporate Income Tax Payment and Section 321 (now Section 232) on keeping of books of accounts. All these provisions of the Tax Code should be harmonized with each other.

x x x x

Therefore, the filing of a quarterly income tax returns required in Section 85 (now Section 68) and implemented per BIR Form 1702-Q and payment of quarterly income tax should only be considered mere installments of the annual tax due. These quarterly tax payments which are computed based on the cumulative figures of gross receipts and deductions in order to arrive at a net taxable income, should be treated as advances or portions of the annual income tax due, to be adjusted at the end of the calendar or fiscal year. This is reinforced by Section 87 (now Section 69) which provides for the filing of adjustment returns and final payment of income tax. Consequently, the two-year

prescriptive period provided in Section 292 (now Section 230) of the Tax Code should be computed from the time of filing the Adjustment Return or Annual Income Tax Return and final payment of income tax.

In the case of Collector of Internal Revenue vs. Antonio Prieto (2 SCRA 1007 [1961]), this Court held that when a tax is paid in installments, the prescriptive period of two years provided in Section 306 (Section 292) of the National Internal Revenue Code should be counted from the date of the final payment. This ruling is reiterated in Commissioner of Internal Revenue vs. Carlos Palanca (18 SCRA 496 [1966]), wherein this Court stated that where the tax account was paid on installment, the computation of the two-year prescriptive period under Section 306 (Section 292) of the Tax Code, should be from the date of the last installment.

In the instant case, TMX Sales, Inc. filed a suit for a refund on March 14, 1984. Since the two-year prescriptive period should be counted from the filing of the Adjustment Return on April 15,1982, TMX Sales, Inc. is not yet barred by prescription.

The very same reasons set forth in the afore-cited cases concerning the two-year prescriptive period for claims for refund of illegally or erroneously collected income tax may also apply to the Petitions at bar involving the same prescriptive period for claims for refund/credit of input VAT on zero-rated sales.

It is true that unlike corporate income tax, which is reported and paid on installment every quarter, but is eventually subjected to a final adjustment at the end of the taxable year, VAT is computed and paid on a purely quarterly basis without need for a final adjustment at the end of the taxable year. However, it is also equally true that until and unless the VAT-registered taxpayer prepares and submits to the BIR its quarterly VAT return, there is no way of knowing with certainty just how much input VAT16 the taxpayer may apply against its output VAT;17 how much output VAT it is due to pay for

the quarter or how much excess input VAT it may carry-over to the following quarter; or how much of its input VAT it may claim as refund/credit. It should be recalled that not only may a VAT-registered taxpayer directly apply against his output VAT due the input VAT it had paid on its importation or local purchases of goods and services during the quarter; the taxpayer is also given the option to either (1) carry over any excess input VAT to the succeeding quarters for application against its future output VAT liabilities, or (2) file an application for refund or issuance of a tax credit certificate covering the amount of such input VAT.18 Hence, even in the absence of a final adjustment return, the determination of any output VAT payable necessarily requires that the VAT-registered taxpayer make adjustments in its VAT return every quarter, taking into consideration the input VAT which are creditable for the present quarter or had been carried over from the previous quarters.

Moreover, when claiming refund/credit, the VAT-registered taxpayer must be able to establish that it does have refundable or creditable input VAT, and the same has not been applied against its output VAT liabilities – information which are supposed to be reflected in the taxpayer's VAT returns. Thus, an application for refund/credit must be accompanied by copies of the taxpayer's VAT return/s for the taxable quarter/s concerned.

Lastly, although the taxpayer's refundable or creditable input VAT may not be considered as illegally or erroneously collected, its refund/credit is a privilege extended to qualified and registered taxpayers by the very VAT system adopted by the Legislature. Such input VAT, the same as any illegally or erroneously collected national internal revenue tax, consists of monetary amounts which are currently in the hands of the government but must rightfully be returned to the taxpayer. Therefore, whether claiming refund/credit of illegally or erroneously collected national internal revenue tax, or input VAT, the taxpayer must be given equal opportunity for filing and pursuing its claim.

For the foregoing reasons, it is more practical and reasonable to count the two-year prescriptive period for filing a claim for refund/credit of input VAT on zero-rated sales from the date of filing of the return and payment

of the tax due which, according to the law then existing, should be made within 20 days from the end of each quarter. Having established thus, the relevant dates in the instant cases are summarized and reproduced below –

Period Covered Date of Filing(Return w/

BIR)

Date of Filing(Application w/

BIR)

2nd Quarter, 1990 20 July 1990 21 August 1990

3rd Quarter, 1990 18 October 1990 21 November 1990

4th Quarter, 1990 20 January 1991 19 February 1991

1st Quarter, 1992 20 April 1992

The above table readily shows that the administrative and judicial claims of petitioner corporation for refund of its input VAT on its zero-rated sales for the last three quarters of 1990 were all filed within the prescriptive period.

However, the same cannot be said for the claim of petitioner corporation for refund of its input VAT on its zero-rated sales for the first quarter of 1992. Even though it may seem that petitioner corporation filed in time its judicial claim with the CTA, there is no showing that it had previously filed an administrative claim with the BIR. Section 106(e) of the Tax Code of 1977, as amended, explicitly provided that no refund of input VAT shall be allowed unless the VAT-registered taxpayer filed an application for refund with respondent Commissioner within the two-year prescriptive period. The application of petitioner corporation for refund/credit of its input VAT for the first quarter of 1992 was not only unsigned by its supposed authorized representative, Ma. Paz R. Semilla, Manager-Finance and Treasury, but it was not dated, stamped, and initialed by the BIR official who purportedly received the same. The CTA, in its Decision,19 dated 24 November 1997, in CTA Case No. 5102, made the following observations –

This Court, likewise, rejects any probative value of the Application for Tax Credit/Refund of VAT Paid (BIR Form No. 2552) [Exhibit "B'] formally offered in evidence by the petitioner on account of the fact that it does not bear

the BIR stamp showing the date when such application was filed together with the signature or initial of the receiving officer of respondent's Bureau. Worse still, it does not show the date of application and the signature of a certain Ma. Paz R. Semilla indicated in the form who appears to be petitioner's authorized filer.

A review of the records reveal that the original of the aforecited application was lost during the time petitioner transferred its office (TSN, p. 6, Hearing of December 9, 1994). Attempt was made to prove that petitioner exerted efforts to recover the original copy, but to no avail. Despite this, however, We observe that petitioner completely failed to establish the missing dates and signatures abovementioned. On this score, said application has no probative value in demonstrating the fact of its filing within two years after the [filing of the VAT return for the quarter] when petitioner's sales of goods were made as prescribed under Section 106(b) of the Tax Code. We believe thus that petitioner failed to file an application for refund in due form and within the legal period set by law at the administrative level. Hence, the case at bar has failed to satisfy the requirement on the prior filing of an application for refund with the respondent before the commencement of a judicial claim for refund, as prescribed under Section 230 of the Tax Code. This fact constitutes another one of the many reasons for not granting petitioner's judicial claim.

As pointed out by the CTA, in serious doubt is not only the fact of whether petitioner corporation timely filed its administrative claim for refund of its input VAT for the first quarter of 1992, but also whether petitioner corporation actually filed such administrative claim in the first place. For failing to prove that it had earlier filed with the BIR an application for refund/credit of its input VAT for the first quarter of 1992, within the period prescribed by law, then the case instituted by petitioner corporation with the CTA for the refund/credit of the very same tax cannot prosper.

Revenue Regulations No. 2-88 and the 70% export requirement

Under Section 100(a) of the Tax Code of 1977, as amended, a 10% VAT was imposed on the gross selling price or gross value in money of goods sold, bartered or exchanged. Yet, the same provision subjected the following sales made by VAT-registered persons to 0% VAT –

(1) Export sales; and

(2) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero-rate.

"Export Sales" means the sale and shipment or exportation of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported, or foreign currency denominated sales. "Foreign currency denominated sales", means sales to nonresidents of goods assembled or manufactured in the Philippines, for delivery to residents in the Philippines and paid for in convertible foreign currency remitted through the banking system in the Philippines.

These are termed zero-rated sales. A zero-rated sale is still considered a taxable transaction for VAT purposes, although the VAT rate applied is 0%. A sale by a VAT-registered taxpayer of goods and/or services taxed at 0% shall not result in any output VAT, while the input VAT on its purchases of goods or services related to such zero-rated sale shall be available as tax credit or refund.20

Petitioner corporation questions the validity of Revenue Regulations No. 2-88 averring that the said regulations imposed additional requirements, not found in the law itself, for the zero-rating of its sales to Philippine Smelting and Refining Corporation (PASAR) and Philippine Phosphate, Inc. (PHILPHOS), both of which are registered not only with the BOI, but also with the then Export Processing Zone Authority (EPZA).21

The contentious provisions of Revenue Regulations No. 2-88 read –

SEC. 2. Zero-rating. – (a) Sales of raw materials to BOI-registered exporters. – Sales of raw materials to export-oriented BOI-registered enterprises whose export sales, under rules and regulations of the Board of Investments, exceed seventy percent (70%) of total annual production, shall be subject to zero-rate under the following conditions:

"(1) The seller shall file an application with the BIR, ATTN.: Division, applying for zero-rating for each and every separate buyer, in accordance with Section 8(d) of Revenue Regulations No. 5-87. The application should be accompanied with a favorable recommendation from the Board of Investments."

"(2) The raw materials sold are to be used exclusively by the buyer in the manufacture, processing or repacking of his own registered export product;

"(3) The words "Zero-Rated Sales" shall be prominently indicated in the sales invoice. The exporter (buyer) can no longer claim from the Bureau of Internal Revenue or any other government office tax credits on their zero-rated purchases;

(b) Sales of raw materials to foreign buyer. – Sales of raw materials to a nonresident foreign buyer for delivery to a resident local export-oriented BOI-registered enterprise to be used in manufacturing, processing or repacking of the said buyer's goods and paid for in foreign currency, inwardly remitted in accordance with Central Bank rules and regulations shall be subject to zero-rate.

It is the position of the respondent Commissioner, affirmed by the CTA and the Court of Appeals, that Section 2 of Revenue Regulations No. 2-88 should be applied in the

cases at bar; and to be entitled to the zero-rating of its sales to PASAR and PHILPHOS, petitioner corporation, as a VAT-registered seller, must be able to prove not only that PASAR and PHILPHOS are BOI-registered corporations, but also that more than 70% of the total annual production of these corporations are actually exported. Revenue Regulations No. 2-88 merely echoed the requirement imposed by the BOI on export-oriented corporations registered with it.

While this Court is not prepared to strike down the validity of Revenue Regulations No. 2-88, it finds that its application must be limited and placed in the proper context. Note that Section 2 of Revenue Regulations No. 2-88 referred only to the zero-rated sales of raw materials to export-oriented BOI-registered enterprises whose export sales, under BOI rules and regulations, should exceed seventy percent (70%) of their total annual production.

Section 2 of Revenue Regulations No. 2-88, should not have been applied to the zero-rating of the sales made by petitioner corporation to PASAR and PHILPHOS. At the onset, it must be emphasized that PASAR and PHILPHOS, in addition to being registered with the BOI, were also registered with the EPZA and located within an export-processing zone. Petitioner corporation does not claim that its sales to PASAR and PHILPHOS are zero-rated on the basis that said sales were made to export-oriented BOI-registered corporations, but rather, on the basis that the sales were made to EPZA-registered enterprises operating within export processing zones. Although sales to export-oriented BOI-registered enterprises and sales to EPZA-registered enterprises located within export processing zones were both deemed export sales, which, under Section 100(a) of the Tax Code of 1977, as amended, shall be subject to 0% VAT distinction must be made between these two types of sales because each may have different substantiation requirements.

The Tax Code of 1977, as amended, gave a limited definition of export sales, to wit: "The sale and shipment or exportation of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported, or foreign currency denominated sales." Executive Order No. 226, otherwise known as

the Omnibus Investments Code of 1987 - which, in the years concerned (i.e., 1990 and 1992), governed enterprises registered with both the BOI and EPZA, provided a more comprehensive definition of export sales, as quoted below:

"ART. 23. "Export sales" shall mean the Philippine port F.O.B. value, determined from invoices, bills of lading, inward letters of credit, landing certificates, and other commercial documents, of export products exported directly by a registered export producer or the net selling price of export product sold by a registered export producer or to an export trader that subsequently exports the same: Provided, That sales of export products to another producer or to an export trader shall only be deemed export sales whenactually exported by the latter, as evidenced by landing certificates of similar commercial documents: Provided, further, That without actual exportation the following shall be considered constructively exportedfor purposes of this provision: (1) sales to bonded manufacturing warehouses of export-oriented manufacturers; (2) sales to export processing zones; (3) sales to registered export traders operating bonded trading warehouses supplying raw materials used in the manufacture of export products under guidelines to be set by the Board in consultation with the Bureau of Internal Revenue and the Bureau of Customs; (4) sales to foreign military bases, diplomatic missions and other agencies and/or instrumentalities granted tax immunities, of locally manufactured, assembled or repacked products whether paid for in foreign currency or not: Provided, further, That export sales of registered export trader may include commission income; and Provided, finally, That exportation of goods on consignment shall not be deemed export sales until the export products consigned are in fact sold by the consignee.

Sales of locally manufactured or assembled goods for household and personal use to Filipinos abroad and other non-residents of the Philippines as

well as returning Overseas Filipinos under the Internal Export Program of the government and paid for in convertible foreign currency inwardly remitted through the Philippine banking systems shall also be considered export sales. (Underscoring ours.)

The afore-cited provision of the Omnibus Investments Code of 1987 recognizes as export sales the sales of export products to another producer or to an export trader, provided that the export products are actually exported. For purposes of VAT zero-rating, such producer or export trader must be registered with the BOI and is required to actually export more than 70% of its annual production.

Without actual exportation, Article 23 of the Omnibus Investments Code of 1987 also considers constructive exportation as export sales. Among other types of constructive exportation specifically identified by the said provision are sales to export processing zones. Sales to export processing zones are subjected to special tax treatment. Article 77 of the same Code establishes the tax treatment of goods or merchandise brought into the export processing zones. Of particular relevance herein is paragraph 2, which provides that "Merchandise purchased by a registered zone enterprise from the customs territory and subsequently brought into the zone, shall be considered as export sales and the exporter thereof shall be entitled to the benefits allowed by law for such transaction."

Such tax treatment of goods brought into the export processing zones are only consistent with the Destination Principle and Cross Border Doctrine to which the Philippine VAT system adheres. According to the Destination Principle,22 goods and services are taxed only in the country where these are consumed. In connection with the said principle, the Cross Border Doctrine23 mandates that no VAT shall be imposed to form part of the cost of the goods destined for consumption outside the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT, while those destined for use or consumption within the Philippines shall be imposed with 10% VAT.24 Export processing zones25 are to be managed as a separate

customs territory from the rest of the Philippines and, thus, for tax purposes, are effectively considered as foreign territory. For this reason, sales by persons from the Philippine customs territory to those inside the export processing zones are already taxed as exports.

Plainly, sales to enterprises operating within the export processing zones are export sales, which, under the Tax Code of 1977, as amended, were subject to 0% VAT. It is on this ground that petitioner corporation is claiming refund/credit of the input VAT on its zero-rated sales to PASAR and PHILPHOS.

The distinction made by this Court in the preceding paragraphs between the zero-rated sales to export-oriented BOI-registered enterprises and zero-rated sales to EPZA-registered enterprises operating within export processing zones is actually supported by subsequent development in tax laws and regulations. In Revenue Regulations No. 7-95, the Consolidated VAT Regulations, as amended,26 the BIR defined with more precision what are zero-rated export sales –

(1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

(2) The sale of raw materials or packaging materials to a non-resident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

(3) The sale of raw materials or packaging materials to an export-oriented enterprise whose export sales

exceed seventy percent (70%) of total annual production;

Any enterprise whose export sales exceed 70% of the total annual production of the preceding taxable year shall be considered an export-oriented enterprise upon accreditation as such under the provisions of the Export Development Act (R.A. 7844) and its implementing rules and regulations;

(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and

(5) Those considered export sales under Articles 23 and 77 of Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987, and other special laws, e.g. Republic Act No. 7227, otherwise known as the Bases Conversion and Development Act of 1992.

The Tax Code of 1997, as amended,27 later adopted the foregoing definition of export sales, which are subject to 0% VAT.

This Court then reiterates its conclusion that Section 2 of Revenue Regulations No. 2-88, which applied to zero-rated export sales to export-oriented BOI-registered enterprises, should not be applied to the applications for refund/credit of input VAT filed by petitioner corporation since it based its applications on the zero-rating of export sales to enterprises registered with the EPZA and located within export processing zones.

Sufficiency of evidence

There can be no dispute that the taxpayer-claimant has the burden of proving the legal and factual bases of its claim for tax credit or refund, but once it has submitted all the required documents, it is the function of the BIR to assess these documents with purposeful dispatch.28 It therefore falls upon herein petitioner corporation to first establish that its sales qualify for VAT zero-rating under the existing laws (legal basis), and then to present sufficient evidence that said sales were actually made and resulted in refundable or creditable

input VAT in the amount being claimed (factual basis).

It would initially appear that the applications for refund/credit filed by petitioner corporation cover only input VAT on its purportedly zero-rated sales to PASAR and PHILPHOS; however, a more thorough perusal of its applications, VAT returns, pleadings, and other records of these cases would reveal that it is also claiming refund/credit of its input VAT on purchases of capital goods and sales of gold to the Central Bank of the Philippines (CBP).

This Court finds that the claims for refund/credit of input VAT of petitioner corporation have sufficient legal bases.

As has been extensively discussed herein, Section 106(b)(2), in relation to Section 100(a)(2) of the Tax Code of 1977, as amended, allowed the refund/credit of input VAT on export sales to enterprises operating within export processing zones and registered with the EPZA, since such export sales were deemed to be effectively zero-rated sales.29 The fact that PASAR and PHILPHOS, to whom petitioner corporation sold its products, were operating inside an export processing zone and duly registered with EPZA, was never raised as an issue herein. Moreover, the same fact was already judicially recognized in the case Atlas Consolidated Mining & Development Corporation v. Commissioner of Internal Revenue.30 Section 106(c) of the same Code likewise permitted a VAT-registered taxpayer to apply for refund/credit of the input VAT paid on capital goods imported or locally purchased to the extent that such input VAT has not been applied against its output VAT. Meanwhile, the effective zero-rating of sales of gold to the CBP from 1989 to 199131 was already affirmed by this Court in Commissioner of Internal Revenue v. Benguet Corporation,32 wherein it ruled that –

At the time when the subject transactions were consummated, the prevailing BIR regulations relied upon by respondent ordained that gold sales to the Central Bank were zero-rated. The BIR interpreted Sec. 100 of the NIRC in relation to Sec. 2 of E.O. No. 581 s. 1980 which prescribed that gold sold to the Central Bank shall be considered export and therefore shall be subject to

the export and premium duties. In coming out with this interpretation, the BIR also considered Sec. 169 of Central Bank Circular No. 960 which states that all sales of gold to the Central Bank are considered constructive exports. x x x.

This Court now comes to the question of whether petitioner corporation has sufficiently established the factual bases for its applications for refund/credit of input VAT. It is in this regard that petitioner corporation has failed, both in the administrative and judicial level.

Applications for refund/credit of input VAT with the BIR must comply with the appropriate revenue regulations. As this Court has already ruled, Revenue Regulations No. 2-88 is not relevant to the applications for refund/credit of input VAT filed by petitioner corporation; nonetheless, the said applications must have been in accordance with Revenue Regulations No. 3-88, amending Section 16 of Revenue Regulations No. 5-87, which provided as follows –

SECTION 16. Refunds or tax credits of input tax. –

x x x x

(c) Claims for tax credits/refunds. – Application for Tax Credit/Refund of Value-Added Tax Paid (BIR Form No. 2552) shall be filed with the Revenue District Office of the city or municipality where the principal place of business of the applicant is located or directly with the Commissioner, Attention: VAT Division.

A photocopy of the purchase invoice or receipt evidencing the value added tax paid shall be submitted together with the application. The original copy of the said invoice/receipt, however, shall be presented for cancellation prior to the issuance of the Tax Credit Certificate or refund. In addition, the following documents shall be attached whenever applicable:

x x x x

"3. Effectively zero-rated sale of goods and services.

"i) photo copy of approved application for zero-rate if filing for the first time.

"ii) sales invoice or receipt showing name of the person or entity to whom the sale of goods or services were delivered, date of delivery, amount of consideration, and description of goods or services delivered.

"iii) evidence of actual receipt of goods or services.

"4. Purchase of capital goods.

"i) original copy of invoice or receipt showing the date of purchase, purchase price, amount of value-added tax paid and description of the capital equipment locally purchased.

"ii) with respect to capital equipment imported, the photo copy of import entry document for internal revenue tax purposes and the confirmation receipt issued by the Bureau of Customs for the payment of the value-added tax.

"5. In applicable cases,

where the applicant's zero-rated transactions are regulated by certain government agencies, a statement therefrom showing the amount and description of sale of goods and

services, name of persons or entities (except in case of exports) to whom the goods or services were sold, and date of transaction shall also be submitted.

In all cases, the amount of refund or tax credit that may be granted shall be limited to the amount of the value-added tax (VAT) paid directly and entirely attributable to the zero-rated transaction during the period covered by the application for credit or refund.

Where the applicant is engaged in zero-rated and other taxable and exempt sales of goods and services, and the VAT paid (inputs) on purchases of goods and services cannot be directly attributed to any of the aforementioned transactions, the following formula shall be used to determine the creditable or refundable input tax for zero-rated sale:

Amount of Zero-rated SaleTotal Sales

XTotal Amount of Input Taxes

=Amount Creditable/Refundable

In case the application for refund/credit of input VAT was denied or remained unacted upon by the BIR, and before the lapse of the two-year prescriptive period, the taxpayer-applicant may already file a Petition for Review before the CTA. If the taxpayer's claim is supported by voluminous documents, such as receipts, invoices, vouchers or long accounts, their presentation before the CTA shall be governed by CTA Circular No. 1-95, as amended, reproduced in full below –

In the interest of speedy administration of justice, the Court hereby promulgates the following rules governing the presentation of voluminous documents and/or long accounts, such as receipts, invoices and vouchers, as evidence to establish certain facts pursuant to Section 3(c), Rule 130 of the Rules of Court and the doctrine enunciated in Compania Maritima vs. Allied Free Workers Union (77 SCRA 24), as well as Section 8 of Republic Act No. 1125:

1. The party who desires to introduce as evidence such voluminous documents must, after motion and approval by the Court, present:

(a) a Summary containing, among others, a chronological listing of the numbers, dates and amounts covered by the invoices or receipts and the amount/s of tax paid; and (b) a Certification of an independent Certified Public Accountant attesting to the correctness of the contents of the summary after making an examination, evaluation and audit of the voluminous receipts and invoices. The name of the accountant or partner of the firm in charge must be stated in the motion so that he/she can be commissioned by the Court to conduct the audit and, thereafter, testify in Court relative to such summary and certification pursuant to Rule 32 of the Rules of Court.

2. The method of individual presentation of each and every receipt, invoice or account for marking, identification and comparison with the originals thereof need not be done before the Court or Clerk of Court anymore after the introduction of the summary and CPA certification. It is enough that the receipts, invoices, vouchers or other documents covering the said accounts or payments to be introduced in evidence must be pre-marked by the party concerned and submitted to the Court in order to be made accessible to the adverse party who desires to check and verify the correctness of the summary and CPA certification. Likewise, the originals of the voluminous receipts, invoices or accounts must be ready for verification and comparison in case doubt on the authenticity thereof is raised during the hearing or resolution of the formal offer of evidence.

Since CTA Cases No. 4831, 4859, 4944,33 and 5102,34 were still pending before the CTA when

the said Circular was issued, then petitioner corporation must have complied therewith during the course of the trial of the said cases.

In Commissioner of Internal Revenue v. Manila Mining Corporation,35 this Court denied the claim of therein respondent, Manila Mining Corporation, for refund of the input VAT on its supposed zero-rated sales of gold to the CBP because it was unable to substantiate its claim. In the same case, this Court emphasized the importance of complying with the substantiation requirements for claiming refund/credit of input VAT on zero-rated sales, to wit –

For a judicial claim for refund to prosper, however, respondent must not only prove that it is a VAT registered entity and that it filed its claims within the prescriptive period. It must substantiate the input VAT paid by purchase invoices or official receipts.

This respondent failed to do.

Revenue Regulations No. 3-88 amending Revenue Regulations No. 5-87 provides the requirements in claiming tax credits/refunds.

x x x x

Under Section 8 of RA1125, the CTA is described as a court of record. As cases filed before it are litigatedde novo, party litigants should prove every minute aspect of their cases. No evidentiary value can be given the purchase invoices or receipts submitted to the BIR as the rules on documentary evidence require that these documents must be formally offered before the CTA.

This Court thus notes with approval the following findings of the CTA:

x x x [S]ale of gold to the Central Bank should not be subject to the 10% VAT-output tax but this does not ipso fact mean that [the seller] is entitled to the amount of refund sought as it is required by law to

present evidence showing the input taxes it paid during the year in question. What is being claimed in the instant petition is the refund of the input taxes paid by the herein petitioner on its purchase of goods and services. Hence, it is necessary for the Petitioner to show proof that it had indeed paid the input taxes during the year 1991. In the case at bar, Petitioner failed to discharge this duty. It did not adduce in evidence the sales invoice, receipts or other documents showing the input value added tax on the purchase of goods and services.

x x x

Section 8 of Republic Act 1125 (An Act Creating the Court of Tax Appeals) provides categorically that the Court of Tax Appeals shall be a court of record and as such it is required to conduct a formal trial (trial de novo) where the parties must present their evidence accordingly if they desire the Court to take such evidence into consideration. (Emphasis and italics supplied)

A "sales or commercial invoice" is a written account of goods sold or services rendered indicating the prices charged therefor or a list by whatever name it is known which is used in the ordinary course of business evidencing sale and transfer or agreement to sell or transfer goods and services.

A "receipt" on the other hand is a written acknowledgment of the fact of payment in money or other settlement between seller and buyer of goods, debtor or creditor, or person rendering services and client or customer.

These sales invoices or receipts issued by the supplier are necessary to substantiate the actual amount or quantity of goods sold and their selling price, and taken collectively are the best

means to prove the input VAT payments.36

Although the foregoing decision focused only on the proof required for the applicant for refund/credit to establish the input VAT payments it had made on its purchases from suppliers, Revenue Regulations No. 3-88 also required it to present evidence proving actual zero-rated VAT sales to qualified buyers, such as (1) photocopy of the approved application for zero-rate if filing for the first time; (2) sales invoice or receipt showing the name of the person or entity to whom the goods or services were delivered, date of delivery, amount of consideration, and description of goods or services delivered; and (3) the evidence of actual receipt of goods or services.

Also worth noting in the same decision is the weight given by this Court to the certification by the independent certified public accountant (CPA), thus –

Respondent contends, however, that the certification of the independent CPA attesting to the correctness of the contents of the summary of suppliers' invoices or receipts which were examined, evaluated and audited by said CPA in accordance with CTA Circular No. 1-95 as amended by CTA Circular No. 10-97 should substantiate its claims.

There is nothing, however, in CTA Circular No. 1-95, as amended by CTA Circular No. 10-97, which either expressly or impliedly suggests that summaries and schedules of input VAT payments, even if certified by an independent CPA, suffice as evidence of input VAT payments.

x x x x

The circular, in the interest of speedy administration of justice, was promulgated to avoid the time-consuming procedure of presenting, identifying and marking of documents before the Court. It does not relieve respondent of its imperative task of pre-marking photocopies of sales receipts and invoices andsubmitting the same to

the court after the independent CPA shall have examined and compared them with the originals. Without presenting these pre-marked documents as evidence – from which the summary and schedules were based, the court cannot verify the authenticity and veracity of the independent auditor's conclusions.

There is, moreover, a need to subject these invoices or receipts to examination by the CTA in order to confirm whether they are VAT invoices. Under Section 21 of Revenue Regulation, No. 5-87, all purchases covered by invoices other than a VAT invoice shall not be entitled to a refund of input VAT.

x x x x

While the CTA is not governed strictly by technical rules of evidence, as rules of procedure are not ends in themselves but are primarily intended as tools in the administration of justice, the presentation of the purchase receipts and/or invoices is not mere procedural technicality which may be disregarded considering that it is the only means by which the CTA may ascertain and verify the truth of the respondent's claims.

The records further show that respondent miserably failed to substantiate its claims for input VAT refund for the first semester of 1991. Except for the summary and schedules of input VAT payments prepared by respondent itself, no other evidence was adduced in support of its claim.

As for respondent's claim for input VAT refund for the second semester of 1991, it employed the services of Joaquin Cunanan & Co. on account of which it (Joaquin Cunanan & Co.) executed a certification that:

We have examined the information shown below concerning the input tax payments made by the Makati Office of Manila Mining

Corporation for the period from July 1 to December 31, 1991. Our examination included inspection of the pertinent suppliers' invoices and official receipts and such other auditing procedures as we considered necessary in the circumstances. x x x

As the certification merely stated that it used "auditing procedures considered necessary" and not auditing procedures which are in accordance with generally accepted auditing principles and standards, and that the examination was made on "input tax payments by the Manila Mining Corporation," without specifying that the said input tax payments are attributable to the sales of gold to the Central Bank, this Court cannot rely thereon and regard it as sufficient proof of the respondent's input VAT payments for the second semester.37

As for the Petition in G.R. No. 141104, involving the input VAT of petitioner corporation on its zero-rated sales in the first quarter of 1992, this Court already found that the petitioner corporation failed to comply with Section 106(b) of the Tax Code of 1977, as amended, imposing the two-year prescriptive period for the filing of the application for refund/credit thereof. This bars the grant of the application for refund/credit, whether administratively or judicially, by express mandate of Section 106(e) of the same Code.

Granting arguendo that the application of petitioner corporation for the refund/credit of the input VAT on its zero-rated sales in the first quarter of 1992 was actually and timely filed, petitioner corporation still failed to present together with its application the required supporting documents, whether before the BIR or the CTA. As the Court of Appeals ruled –

In actions involving claims for refund of taxes assessed and collected, the burden of proof rests on the taxpayer. As clearly discussed in the CTA's decision, petitioner failed to substantiate its claim for tax refunds. Thus:

"We note, however, that in the cases at bar, petitioner has relied totally on Revenue Regulations No. 2-88 in determining compliance with the documentary requirements for a successful refund or issuance of tax credit. Unmentioned is the applicable and specific amendment later introduced by Revenue Regulations No. 3-88 dated April 7, 1988 (issued barely after two months from the promulgation of Revenue Regulations No. 2-88 on February 15, 1988), which amended Section 16 of Revenue Regulations No. 5-87 on refunds or tax credits of input tax. x x x.

x x x x

"A thorough examination of the evidence submitted by the petitioner before this court reveals outright the failure to satisfy documentary requirements laid down under the above-cited regulations. Specifically, petitioner was not able to present the following documents, to wit:

"a) sales invoices or receipts;

"b) purchase invoices or receipts;

"c) evidence of actual receipt of goods;

"d) BOI statement showing the amount and description of sale of goods, etc.

"e) original or attested copies of invoice or receipt on capital equipment locally purchased; and

"f) photocopy of import entry document and confirmation receipt on imported capital equipment.

"There is the need to examine the sales invoices or receipts in order to ascertain the actual amount or quantity of goods sold and their selling price. Without them, this Court cannot verify the correctness of petitioner's claim inasmuch as the regulations require that the input taxes being sought for refund should be limited to the portion that is directly and entirely attributable to the particular zero-rated transaction. In this instance, the best evidence of such transaction are the said sales invoices or receipts.

"Also, even if sales invoices are produced, there is the further need to submit evidence that such goods were actually received by the buyer, in this case, by CBP, Philp[h]os and PASAR.

x x x x

"Lastly, this Court cannot determine whether there were actual local and imported purchase of capital goods as well as domestic purchase of non-capital goods without the required purchase invoice or receipt, as the case may be, and confirmation receipts.

"There is, thus, the imperative need to submit before this Court the original or attested photocopies of petitioner's invoices or receipts, confirmation receipts and import entry documents in order that a full ascertainment of the claimed amount may be achieved.

"Petitioner should have taken the foresight to introduce in evidence all of the missing documentsabovementioned. Cases filed before this Court are litigated de novo. This means that party litigants should endeavor to prove at the first instance every minute aspect of their cases strictly in accordance with the Rules of Court, most especially on documentary evidence." (pp. 37-42, Rollo)

Tax refunds are in the nature of tax exemptions. It is regarded as in derogation of the sovereign authority, and should be construed in strictissimi juris against the person or entity claiming the exemption. The taxpayer who claims for exemption must justify his claim by the clearest grant of organic or statute law and should not be permitted to stand on vague implications (Asiatic Petroleum Co. v. Llanes, 49 Phil. 466; Northern Phil. Tobacco Corp. v. Mun. of Agoo, La Union, 31 SCRA 304; Reagan v. Commissioner, 30 SCRA 968; Asturias Sugar Central, Inc. v. Commissioner of Customs, 29 SCRA 617; Davao Light and Power Co., Inc. v. Commissioner of Customs, 44 SCRA 122).

There is no cogent reason to fault the CTA's conclusion that the SGV's certificate is "self-destructive", as it finds comfort in the very SGV's stand, as follows:

"It is our understanding that the above procedure are sufficient for the purpose of the Company. We make no presentation regarding the sufficiency of these procedures for such purpose. We did not compare the total of the input tax claimed each quarter against the pertinent VAT returns and books of accounts. The above procedures do not constitute an audit made in accordance with generally accepted auditing

standards. Accordingly, we do not express an opinion on the company's claim for input VAT refund or credit. Had we performed additional procedures, or had we made an audit in accordance with generally accepted auditing standards, other matters might have come to our attention that we would have accordingly reported on."

The SGV's "disclaimer of opinion" carries much weight as it is petitioner's independent auditor. Indeed, SGV expressed that it "did not compare the total of the input tax claimed each quarter against the VAT returns and books of accounts."38

Moving on to the Petition in G.R. No. 148763, concerning the input VAT of petitioner corporation on its zero-rated sales in the second, third, and fourth quarters of 1990, the appellate court likewise found that petitioner corporation failed to sufficiently establish its claims. Already disregarding the declarations made by the Court of Appeals on its erroneous application of Revenue Regulations No. 2-88, quoted hereunder is the rest of the findings of the appellate court after evaluating the evidence submitted in accordance with the requirements under Revenue Regulations No. 3-88 –

The Secretary of Finance validly adopted Revenue Regulations [No.] x x x 3-98 pursuant to Sec. 245 of the National Internal Revenue Code, which recognized his power to "promulgate all needful rules and regulations for the effective enforcement of the provisions of this Code." Thus, it is incumbent upon a taxpayer intending to file a claim for refund of input VATs or the issuance of a tax credit certificate with the BIR x x x to prove sales to such buyers as required by Revenue Regulations No. 3-98. Logically, the same evidence should be presented in support of an action to recover taxes which have been paid.

x x x Neither has [herein petitioner corporation] presented sales invoices or receipts showing sales of gold, copper

concentrates, and pyrite to the CBP, [PASAR], and [PHILPHOS], respectively, and the dates and amounts of the same, nor any evidence of actual receipt by the said buyers of the mineral products. It merely presented receipts of purchases from suppliers on which input VATs were allegedly paid. Thus, the Court of Tax Appeals correctly denied the claims for refund of input VATs or the issuance of tax credit certificates of petitioner [corporation]. Significantly, in the resolution, dated 7 June 2000, this Court directed the parties to file memoranda discussing, among others, the submission of proof for "its [petitioner's] sales of gold, copper concentrates, and pyrite to buyers." Nevertheless, the parties, including the petitioner, failed to address this issue, thereby necessitating the affirmance of the ruling of the Court of Tax Appeals on this point.39

This Court is, therefore, bound by the foregoing facts, as found by the appellate court, for well-settled is the general rule that the jurisdiction of this Court in cases brought before it from the Court of Appeals, by way of a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court, is limited to reviewing or revising errors of law; findings of fact of the latter are conclusive.40 This Court is not a trier of facts. It is not its function to review, examine and evaluate or weigh the probative value of the evidence presented.41

The distinction between a question of law and a question of fact is clear-cut. It has been held that "[t]here is a question of law in a given case when the doubt or difference arises as to what the law is on a certain state of facts; there is a question of fact when the doubt or difference arises as to the truth or falsehood of alleged facts."42

Whether petitioner corporation actually made zero-rated sales; whether it paid input VAT on these sales in the amount it had declared in its returns; whether all the input VAT subject of its applications for refund/credit can be attributed to its zero-rated sales; and whether it had not previously applied the input VAT against its output VAT liabilities, are all questions of fact which could only be answered after reviewing, examining, evaluating, or weighing the probative

value of the evidence it presented, and which this Court does not have the jurisdiction to do in the present Petitions for Review on Certiorari under Rule 45 of the revised Rules of Court.

Granting that there are exceptions to the general rule, when this Court looked into questions of fact under particular circumstances,43 none of these exist in the instant cases. The Court of Appeals, in both cases, found a dearth of evidence to support the claims for refund/credit of the input VAT of petitioner corporation, and the records bear out this finding. Petitioner corporation itself cannot dispute its non-compliance with the requirements set forth in Revenue Regulations No. 3-88 and CTA Circular No. 1-95, as amended. It concentrated its arguments on its assertion that the substantiation requirements under Revenue Regulations No. 2-88 should not have applied to it, while being conspicuously silent on the evidentiary requirements mandated by other relevant regulations.

Re-opening of cases/holding of new trial before the CTA

This Court now faces the final issue of whether the prayer of petitioner corporation for the re-opening of its cases or holding of new trial before the CTA for the reception of additional evidence, may be granted. Petitioner corporation prays that the Court exercise its discretion on the matter in its favor, consistent with the policy that rules of procedure be liberally construed in pursuance of substantive justice.

This Court, however, cannot grant the prayer of petitioner corporation.

An aggrieved party may file a motion for new trial or reconsideration of a judgment already rendered in accordance with Section 1, Rule 37 of the revised Rules of Court, which provides –

SECTION 1. Grounds of and period for filing motion for new trial or reconsideration. – Within the period for taking an appeal, the aggrieved party may move the trial court to set aside the judgment or final order and grant a new trial for one or more of the following causes materially affecting the substantial rights of said party:

(a) Fraud, accident, mistake or excusable negligence which ordinary prudence could not have guarded against and by reason of which such aggrieved party has probably been impaired in his rights; or

(b) Newly discovered evidence, which he could not, with reasonable diligence, have discovered and produced at the trial, and which if presented would probably alter the result.

Within the same period, the aggrieved party may also move fore reconsideration upon the grounds that the damages awarded are excessive, that the evidence is insufficient to justify the decision or final order, or that the decision or final order is contrary to law.

In G.R. No. 148763, petitioner corporation attempts to justify its motion for the re-opening of its cases and/or holding of new trial before the CTA by contending that the "[f]ailure of its counsel to adduce the necessary evidence should be construed as excusable negligence or mistake which should constitute basis for such re-opening of trial as for a new trial, as counsel was of the belief that such evidence was rendered unnecessary by the presentation of unrebutted evidence indicating that respondent [Commissioner] has acknowledged the sale of [sic] PASAR and [PHILPHOS] to be zero-rated." 44 The CTA denied such motion on the ground that it was not accompanied by an affidavit of merit as required by Section 2, Rule 37 of the revised Rules of Court. The Court of Appeals affirmed the denial of the motion, but apart from this technical defect, it also found that there was no justification to grant the same.

On the matter of the denial of the motion of the petitioner corporation for the re-opening of its cases and/or holding of new trial based on the technicality that said motion was unaccompanied by an affidavit of merit, this Court rules in favor of the petitioner corporation. The facts which should otherwise be set forth in a separate affidavit of merit may, with equal effect, be alleged and incorporated in the motion itself; and this will be deemed a substantial compliance with the formal requirements of the law, provided, of course, that the movant, or other individual with personal knowledge of the

facts, take oath as to the truth thereof, in effect converting the entire motion for new trial into an affidavit.45 The motion of petitioner corporation was prepared and verified by its counsel, and since the ground for the motion was premised on said counsel's excusable negligence or mistake, then the obvious conclusion is that he had personal knowledge of the facts relating to such negligence or mistake. Hence, it can be said that the motion of petitioner corporation for the re-opening of its cases and/or holding of new trial was in substantial compliance with the formal requirements of the revised Rules of Court.

Even so, this Court finds no sufficient ground for granting the motion of petitioner corporation for the re-opening of its cases and/or holding of new trial.

In G.R. No. 141104, petitioner corporation invokes the Resolution,46 dated 20 July 1998, by the CTA in another case, CTA Case No. 5296, involving the claim of petitioner corporation for refund/credit of input VAT for the third quarter of 1993. The said Resolution allowed the re-opening of CTA Case No. 5296, earlier dismissed by the CTA, to give the petitioner corporation the opportunity to present the missing export documents.

The rule that the grant or denial of motions for new trial rests on the discretion of the trial court,47 may likewise be extended to the CTA. When the denial of the motion rests upon the discretion of a lower court, this Court will not interfere with its exercise, unless there is proof of grave abuse thereof.48

That the CTA granted the motion for re-opening of one case for the presentation of additional evidence and, yet, deny a similar motion in another case filed by the same party, does not necessarily demonstrate grave abuse of discretion or arbitrariness on the part of the CTA. Although the cases involve identical parties, the causes of action and the evidence to support the same can very well be different. As can be gleaned from the Resolution, dated 20 July 1998, in CTA Case No. 5296, petitioner corporation was claiming refund/credit of the input VAT on its zero-rated sales, consisting of actual export sales, to Mitsubishi Metal Corporation in Tokyo, Japan. The CTA took into account the presentation by petitioner

corporation of inward remittances of its export sales for the quarter involved, its Supply Contract with Mitsubishi Metal Corporation, its 1993 Annual Report showing its sales to the said foreign corporation, and its application for refund. In contrast, the present Petitions involve the claims of petitioner corporation for refund/credit of the input VAT on its purchases of capital goods and on its effectively zero-rated sales to CBP and EPZA-registered enterprises PASAR and PHILPHOS for the second, third, and fourth quarters of 1990 and first quarter of 1992. There being a difference as to the bases of the claims of petitioner corporation for refund/credit of input VAT in CTA Case No. 5926 and in the Petitions at bar, then, there are resulting variances as to the evidence required to support them.

Moreover, the very same Resolution, dated 20 July 1998, in CTA Case No. 5296, invoked by petitioner corporation, emphasizes that the decision of the CTA to allow petitioner corporation to present evidence "is applicable pro hac vice   or in this occasion only as it is the finding of [the CTA] that petitioner [corporation] has established a few of the aforementioned material points regarding the possible existence of the export documents together with the prior and succeeding returns for the quarters involved, x x x" [Emphasis supplied.] Therefore, the CTA, in the present cases, cannot be bound by its ruling in CTA Case No. 5296, when these cases do not involve the exact same circumstances that compelled it to grant the motion of petitioner corporation for re-opening of CTA Case No. 5296.

Finally, assuming for the sake of argument that the non-presentation of the required documents was due to the fault of the counsel of petitioner corporation, this Court finds that it does not constitute excusable negligence or mistake which would warrant the re-opening of the cases and/or holding of new trial.

Under Section 1, Rule 37 of the Revised Rules of Court, the "negligence" must be excusable and generally imputable to the party because if it is imputable to the counsel, it is binding on the client. To follow a contrary rule and allow a party to disown his counsel's conduct would render proceedings indefinite, tentative, and subject to re-opening by the mere subterfuge of replacing

the counsel. What the aggrieved litigant should do is seek administrative sanctions against the erring counsel and not ask for the reversal of the court's ruling.49

As elucidated by this Court in another case,50 the general rule is that the client is bound by the action of his counsel in the conduct of his case and he cannot therefore complain that the result of the litigation might have been otherwise had his counsel proceeded differently. It has been held time and again that blunders and mistakes made in the conduct of the proceedings in the trial court as a result of the ignorance, inexperience or incompetence of counsel do not qualify as a ground for new trial. If such were to be admitted as valid reasons for re-opening cases, there would never be an end to litigation so long as a new counsel could be employed to allege and show that the prior counsel had not been sufficiently diligent, experienced or learned.

Moreover, negligence, to be "excusable," must be one which ordinary diligence and prudence could not have guarded against.51 Revenue Regulations No. 3-88, which was issued on 15 February 1988, had been in effect more than two years prior to the filing by petitioner corporation of its earliest application for refund/credit of input VAT involved herein on 21 August 1990. CTA Circular No. 1-95 was issued only on 25 January 1995, after petitioner corporation had filed its Petitions before the CTA, but still during the pendency of the cases of petitioner corporation before the tax court. The counsel of petitioner corporation does not allege ignorance of the foregoing administrative regulation and tax court circular, only that he no longer deemed it necessary to present the documents required therein because of the presentation of alleged unrebutted evidence of the zero-rated sales of petitioner corporation. It was a judgment call made by the counsel as to which evidence to present in support of his client's cause, later proved to be unwise, but not necessarily negligent.

Neither is there any merit in the contention of petitioner corporation that the non-presentation of the required documentary evidence was due to the excusable mistake of its counsel, a ground under Section 1, Rule 37 of the revised Rules of Court for the grant of a new trial. "Mistake," as it is referred to in the said rule,

must be a mistake of fact, not of law, which relates to the case.52 In the present case, the supposed mistake made by the counsel of petitioner corporation is one of law, for it was grounded on his interpretation and evaluation that Revenue Regulations No. 3-88 and CTA Circular No. 1-95, as amended, did not apply to his client's cases and that there was no need to comply with the documentary requirements set forth therein. And although the counsel of petitioner corporation advocated an erroneous legal position, the effects thereof, which did not amount to a deprivation of his client's right to be heard, must bind petitioner corporation. The question is not whether petitioner corporation succeeded in establishing its interests, but whether it had the opportunity to present its side.53

Besides, litigation is a not a "trial and error" proceeding. A party who moves for a new trial on the ground of mistake must show that ordinary prudence could not have guarded against it. A new trial is not a refuge for the obstinate.54 Ordinary prudence in these cases would have dictated the presentation of all available evidence that would have supported the claims for refund/credit of input VAT of petitioner corporation. Without sound legal basis, counsel for petitioner corporation concluded that Revenue Regulations No. 3-88, and later on, CTA Circular No. 1-95, as amended, did not apply to its client's claims. The obstinacy of petitioner corporation and its counsel is demonstrated in their failure, nay, refusal, to comply with the appropriate administrative regulations and tax court circular in pursuing the claims for refund/credit, now subject of G.R. Nos. 141104 and 148763, even though these were separately instituted in a span of more than two years. It is also evident in the failure of petitioner corporation to address the issue and to present additional evidence despite being given the opportunity to do so by the Court of Appeals. As pointed out by the appellate court, in its Decision, dated 15 September 2000, in CA-G.R. SP No. 46718 –

x x x Significantly, in the resolution, dated 7 June 2000, this Court directed the parties to file memoranda discussing, among others, the submission of proof for "its [petitioner's] sales of gold, copper concentrates, and pyrite to buyers." Nevertheless, the

parties, including the petitioner, failed to address this issue, thereby necessitating the affirmance of the ruling of the Court of Tax Appeals on this point.55

Summary

Hence, although this Court agreed with the petitioner corporation that the two-year prescriptive period for the filing of claims for refund/credit of input VAT must be counted from the date of filing of the quarterly VAT return, and that sales to EPZA-registered enterprises operating within economic processing zones were effectively zero-rated and were not covered by Revenue Regulations No. 2-88, it still denies the claims of petitioner corporation for refund of its input VAT on its purchases of capital goods and effectively zero-rated sales during the second, third, and fourth quarters of 1990 and the first quarter of 1992, for not being established and substantiated by appropriate and sufficient evidence. Petitioner corporation is also not entitled to the re-opening of its cases and/or holding of new trial since the non-presentation of the required documentary evidence before the BIR and the CTA by its counsel does not constitute excusable negligence or mistake as contemplated in Section 1, Rule 37 of the revised Rules of Court.

WHEREFORE, premises considered, the instant Petitions for Review are hereby DENIED, and the Decisions, dated 6 July 1999 and 15 September 2000, of the Court of Appeals in CA-G.R. SP Nos. 47607 and 46718, respectively, are hereby AFFIRMED. Costs against petitioner.

Ynares-Santiago, Chairperson, Austria-Martinez, Nachura, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

 

G.R. No. 112024 January 28, 1999

PHILIPPINE BANK OF COMMUNICATIONS, petitioner, 

vs.COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX APPEALS and COURT OF APPEALS, respondent.

 

QUISUMBING, J.:

This petition for review assails the Resolution 1 of the Court of Appeals dated September 22, 1993 affirming the Decision 2 and a Resolution 3 of the Court Of Tax Appeals which denied the claims of the petitioner for tax refund and tax credits, and disposing as follows:

IN VIEW OF ALL, THE FOREGOING, the instant petition for review, is DENIED due course. The Decision of the Court of Tax Appeals dated May 20, 1993 and its resolution dated July 20, 1993, are hereby AFFIRMED in toto.

SO ORDERED. 4

The Court of Tax Appeals earlier ruled as follows:

WHEREFORE, Petitioner's claim for refund/tax credits of overpaid income tax for 1985 in the amount of P5,299,749.95 is hereby denied for having been filed beyond the reglementary period. The 1986 claim for refund amounting to P234,077.69 is likewise denied since petitioner has opted and in all likelihood automatically credited the same to the succeeding year. The petition for review is dismissed for lack of merit.

SO ORDERED. 5

The facts on record show the antecedent circumstances pertinent to this case.

Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation duly organized under Philippine laws, filed its

quarterly income tax returns for the first and second quarters of 1985, reported profits, and paid the total income tax of P5,016,954.00. The taxes due were settled by applying PBCom's tax credit memos and accordingly, the Bureau of Internal Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85 for P3,401,701.00 and P1,615,253.00, respectively.

Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns for the year-ended December 31, 1986, the petitioner likewise reported a net loss of P14,129,602.00, and thus declared no tax payable for the year.

But during these two years, PBCom earned rental income from leased properties. The lessees withheld and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986.

On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others, for a tax credit of P5,016,954.00 representing the overpayment of taxes in the first and second quarters of 1985.

Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.

Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted a Petition for Review on November 18, 1988 before the Court of Tax Appeals (CTA). The petition was docketed as CTA Case No. 4309 entitled: "Philippine Bank of Communications vs. Commissioner of Internal Revenue."

The losses petitioner incurred as per the summary of petitioner's claims for refund and tax credit for 1985 and 1986, filed before the Court of Tax Appeals, are as follows:

1985 1986

——— ———

Net Income (Loss) (P25,317,288.00) (P14,129,602.00)

Tax Due NIL NIL

Quarterly tax.

Payments Made 5,016,954.00 —

Tax Withheld at Source 282,795.50 234,077.69

———————— ———————

Excess Tax Payments P5,299,749.50* P234,077.69

=============== =============

* CTA's decision reflects PBCom's 1985 tax claim as P5,299,749.95. A forty five centavo difference was noted.

On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the request of petitioner for a tax refund or credit in the sum amount of P5,299,749.95, on the ground that it was filed beyond the two-year reglementary period provided for by law. The petitioner's claim for refund in 1986 amounting to P234,077.69 was likewise denied on the assumption that it was automatically credited by PBCom against its tax payment in the succeeding year.

On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTA's decision but the same was denied due course for lack of merit. 6

Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA with the Court of Appeals. However on September 22, 1993, the Court of Appeals affirmed in toto the CTA's resolution dated July 20, 1993. Hence this petition now before us.

The issues raised by the petitioner are:

I. Whether taxpayer PBCom — which relied in good faith on the formal assurances of BIR in RMC No. 7-85 and did not immediately file with the CTA a petition for review asking for the refund/tax credit of its 1985-86 excess quarterly income tax payments — can be prejudiced by the subsequent BIR rejection, applied retroactivity, of its assurances in RMC No. 7-85 that the prescriptive period for the refund/tax credit of excess quarterly income tax payments is not two years but ten (10). 7

II. Whether the Court of Appeals seriously erred in affirming the CTA decision which denied PBCom's claim for the refund of P234,077.69 income tax overpaid in 1986 on the mere speculation, without proof, that there were

taxes due in 1987 and that PBCom availed of tax-crediting that year. 8

Simply stated, the main question is: Whether or not the Court of Appeals erred in denying the plea for tax refund or tax credits on the ground of prescription, despite petitioner's reliance on RMC No. 7-85, changing the prescriptive period of two years to ten years?

Petitioner argues that its claims for refund and tax credits are not yet barred by prescription relying on the applicability of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985. The circular states that overpaid income taxes are not covered by the two-year prescriptive period under the tax Code and that taxpayers may claim refund or tax credits for the excess quarterly income tax with the BIR within ten (10) years under Article 1144 of the Civil Code. The pertinent portions of the circular reads:

REVENUE MEMORANDUM CIRCULAR NO. 7-85

SUBJECT: PROCESSING OF REF

UND OR TAX CREDIT OF EXCESS CORPORATE INCOME TAX RESULTI

NG FROM THE FILING OF THE FINAL ADJUSTMENT RETURN.

TO: All Internal Revenue Officers and Others Concerned.

Sec. 85 And 86 Of the National Internal Revenue Code provide:

xxx xxx xxx

The foregoing provisions are implemented by Section 7 of Revenue Regulations Nos. 10-77 which provide;

xxx xxx xxx

It has been observed, however, that because of the excess tax payments, corporations file claims for recovery of overpaid income tax with the Court of Tax Appeals within the two-year period from the date of payment, in accordance with sections 292 and 295 of the National Internal Revenue Code. It is obvious that the filing of the case in court is to preserve the judicial right of the corporation to claim the refund or tax credit.

It should he noted, however, that this is not a case of erroneously or illegally paid tax under the provisions of Sections 292 and 295 of the Tax Code.

In the above provision of the Regulations the corporation may request for the refund of the overpaid income tax or claim for automatic tax credit. To insure prompt action on corporate annual income tax returns showing refundable amounts arising from overpaid quarterly income taxes, this Office has promulgated Revenue Memorandum Order No. 32-76 dated June 11, 1976, containing the procedure in processing said returns. Under these procedures, the returns are merely pre-audited which consist mainly of checking mathematical accuracy of the figures of the return. After which, the refund or tax credit is

granted, and, this procedure was adopted to facilitate immediate action on cases like this.

In this regard, therefore, there is no need to file petitions for review in the Court of Tax Appeals in order to preserve the right to claim refund or tax credit the two year period. As already stated, actions hereon by the Bureau are immediate after only a cursory pre-audit of the income tax returns. Moreover, a taxpayer may recover from the Bureau of Internal Revenue excess income tax paid under the provisions of Section 86 of the Tax Code within 10 years from the date of payment considering that it is an obligation created by law (Article 1144 of the Civil Code). 9 (Emphasis supplied.)

Petitioner argues that the government is barred from asserting a position contrary to its declared circular if it would result to injustice to taxpayers. Citing ABS CBN Broadcasting Corporation vs. Court of Tax Appeals 10 petitioner claims that rulings or circulars promulgated by the Commissioner of Internal Revenue have no retroactive effect if it would be prejudicial to taxpayers, In ABS-CBN case, the Court held that the government is precluded from adopting a position inconsistent with one previously taken where injustice would result therefrom or where there has been a misrepresentation to the taxpayer.

Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides for this rules as follows:

Sec. 246 Non-retroactivity of rulings— Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if

the revocation, modification or reversal will be prejudicial to the taxpayers except in the following cases:

a). where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue;

b). where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based;

c). where the taxpayer acted in bad faith.

Respondent Commissioner of Internal Revenue, through Solicitor General, argues that the two-year prescriptive period for filing tax cases in court concerning income tax payments of Corporations is reckoned from the date of filing the Final Adjusted Income Tax Return, which is generally done on April 15 following the close of the calendar year. As precedents, respondent Commissioner cited cases which adhered to this principle, to wit ACCRA Investments Corp. vs. Court of Appeals, et al., 11 and Commissioner of Internal Revenue vs. TMX Sales, Inc., et al.. 12 Respondent Commissioner also states that since the Final Adjusted Income Tax Return of the petitioner for the taxable year 1985 was supposed to be filed on April 15, 1986, the latter had only until April 15, 1988 to seek relief from the court. Further, respondent Commissioner stresses that when the petitioner filed the case before the CTA on November 18, 1988, the same was filed beyond the time fixed by law, and such failure is fatal to petitioner's cause of action.

After a careful study of the records and applicable jurisprudence on the matter, we find that, contrary to the petitioner's contention, the relaxation of revenue regulations by RMC 7-85 is not warranted as it disregards the two-year prescriptive period set by law.

Basic is the principle that "taxes are the lifeblood of the nation." The primary purpose is to generate funds for the State to finance the needs of the citizenry and to advance the common weal. 13 Due process of law under the Constitution does not require judicial proceedings in tax cases. This must necessarily

be so because it is upon taxation that the government chiefly relies to obtain the means to carry on its operations and it is of utmost importance that the modes adopted to enforce the collection of taxes levied should be summary and interfered with as little as possible. 14

From the same perspective, claims for refund or tax credit should be exercised within the time fixed by law because the BIR being an administrative body enforced to collect taxes, its functions should not be unduly delayed or hampered by incidental matters.

Sec. 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997) provides for the prescriptive period for filing a court proceeding for the recovery of tax erroneously or illegally collected, viz.:

Sec. 230. Recovery of tax erroneously or illegally collected. — No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceedings shall begun after the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment;Provided however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such

payment appears clearly to have been erroneously paid. (Emphasis supplied)

The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of Internal Revenue, within two (2) years after payment of tax, before any suit in CTA is commenced. The two-year prescriptive period provided, should be computed from the time of filing the Adjustment Return and final payment of the tax for the year.

In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co., 15 this Court explained the application of Sec. 230 of 1977 NIRC, as follows:

Clearly, the prescriptive period of two years should commence to run only from the time that the refund is ascertained, which can only be determined after a final adjustment return is accomplished. In the present case, this date is April 16, 1984, and two years from this date would be April 16, 1986. . . . As we have earlier said in the TMX Sales case, Sections 68. 16 69, 17 and 70 18 on Quarterly Corporate Income Tax Payment and Section 321 should be considered in conjunction with it 19

When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two years to ten years on claims of excess quarterly income tax payments, such circular created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines contrary to the statute passed by Congress.

It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more specific and less general interpretations of tax laws) which are issued from time to time by the Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the courts.

Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to be erroneous. 20 Thus, courts will not countenance administrative issuances that override, instead of remaining consistent and in harmony with the law they seek to apply and implement. 21

In the case of People vs. Lim, 22 it was held that rules and regulations issued by administrative officials to implement a law cannot go beyond the terms and provisions of the latter.

Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only inconsistent with but is contrary to the provisions and spirit of Act. No 4003 as amended, because whereas the prohibition prescribed in said Fisheries Act was for any single period of time not exceeding five years duration, FAO No 37-1 fixed no period, that is to say, it establishes an absolute ban for all time. This discrepancy between Act No. 4003 and FAO No. 37-1 was probably due to an oversight on the part of Secretary of Agriculture and Natural Resources. Of course, in case of discrepancy, the basic Act prevails, for the reason that the regulation or rule issued to implement a law cannot go beyond the terms and provisions of the latter. . . . In this connection, the attention of the technical men in the offices of Department Heads who draft rules and regulation is called to the importance and necessity of closely following the terms and provisions of the law which they intended to implement, this to avoid any possible misunderstanding or confusion as in the present case. 23

Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors of its officials or agents. 24 As pointed out by the respondent courts, the nullification of

RMC No. 7-85 issued by the Acting Commissioner of Internal Revenue is an administrative interpretation which is not in harmony with Sec. 230 of 1977 NIRC. for being contrary to the express provision of a statute. Hence, his interpretation could not be given weight for to do so would, in effect, amend the statute.

It is likewise argued that the Commissioner of Internal Revenue, after promulgating RMC No. 7-85, is estopped by the principle of non-retroactively of BIR rulings. Again We do not agree. The Memorandum Circular, stating that a taxpayer may recover the excess income tax paid within 10 years from date of payment because this is an obligation created by law, was issued by the Acting Commissioner of Internal Revenue. On the other hand, the decision, stating that the taxpayer should still file a claim for a refund or tax credit and corresponding petition fro review within the two-year prescription period, and that the lengthening of the period of limitation on refund from two to ten years would be adverse to public policy and run counter to the positive mandate of Sec. 230, NIRC, - was the ruling and judicial interpretation of the Court of Tax Appeals. Estoppel has no application in the case at bar because it was not the Commissioner of Internal Revenue who denied petitioner's claim of refund or tax credit. Rather, it was the Court of Tax Appeals who denied (albeit correctly) the claim and in effect, ruled that the RMC No. 7-85 issued by the Commissioner of Internal Revenue is an administrative interpretation which is out of harmony with or contrary to the express provision of a statute (specifically Sec. 230, NIRC), hence, cannot be given weight

for to do so would in effect amend the statute. 25

Art. 8 of the Civil Code 26 recognizes judicial decisions, applying or interpreting statutes as part of the legal system of the country. But administrative decisions do not enjoy that level of recognition. A memorandum-circular of a bureau head could not operate to vest a taxpayer with shield against judicial action. For there are no vested rights to speak of respecting a wrong construction of the law by the administrative officials and such wrong interpretation could not place the Government in estoppel to correct or overrule the same. 27 Moreover, the non-retroactivity of rulings by the Commissioner of Internal Revenue is not applicable in this case because the nullity of RMC No. 7-85 was declared by respondent courts and not by the Commissioner of Internal Revenue. Lastly, it must be noted that, as repeatedly held by this Court, a claim for refund is in the nature of a claim for exemption and should be construed in strictissimi juris against the taxpayer. 28

On the second issue, the petitioner alleges that the Court of Appeals seriously erred in affirming CTA's decision denying its claim for refund of P234,077.69 (tax overpaid in 1986), based on mere speculation, without proof, that PBCom availed of the automatic tax credit in 1987.

Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997 NIRC) provides that any excess of the total quarterly payments over the actual income tax computed in the adjustment or final corporate income tax return, shall either(a) be refunded to the corporation, or (b) may be credited against the estimated quarterly income tax liabilities for the quarters of the succeeding taxable year.

The corporation must signify in its annual corporate adjustment return (by marking the option box provided in the BIR form) its intention, whether to request for a refund or claim for an automatic tax credit for the succeeding taxable year. To ease the administration of tax collection, these remedies are in the alternative, and the choice of one precludes the other.

As stated by respondent Court of Appeals:

Finally, as to the claimed refund of income tax over-paid in 1986 — the Court of Tax Appeals, after examining the adjusted final corporate annual income tax return for taxable year 1986, found out that petitioner opted to apply for automatic tax credit. This was the basis used (vis-avis the fact that the 1987 annual corporate tax return was not offered by the petitioner as evidence) by the CTA in concluding that petitioner had indeed availed of and applied the automatic tax credit to the succeeding year, hence it can no longer ask for refund, as to [sic] the two remedies of refund and tax credit are alternative. 30

That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977 NIRC, as specified in its 1986 Final Adjusted Income Tax Return, is a finding of fact which we must respect. Moreover, the 1987 annual corporate tax return of the petitioner was not offered as evidence to contovert said fact. Thus, we are bound by the findings of fact by respondent courts, there being no showing of gross error or abuse on their part to disturb our reliance thereon. 31

WHEREFORE, the, petition is hereby DENIED, The decision of the Court of Appeals appealed from is AFFIRMED, with COSTS against the petitioner.1âwphi1.nêt

SO ORDERED.

Bellosillo, Puno, Mendoza, and Buena, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

 

G.R. No. 107434 October 10, 1997

CITIBANK, N.A., petitioner, vs.COURT OF APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

 

PANGANIBAN, J.:

The law requires a lessee to withhold and remit to the Bureau of Internal Revenue (BIR) five percent (5%) of the rental due the lessor, by way of advance payment of the latter's income tax liability. Is the lessor entitled to a refund of such withheld amount after it is determined that the lessor was not, in fact, liable for any income tax at all because its annual operation resulted in a net loss as shown in its income tax return filed at the end of the taxable year?

This is the question raised in this petition for review on certiorari of the Court of Appeals 1 Decision 2 promulgated on May 27, 1992 and Resolution 3 promulgated on October 27, 1992 in CA-G.R. No. SP-26555, reversing the decision of the Court of Tax Appeals which allowed the tax refund.

The Facts

The facts, as found by Respondent Court, are undisputed. 4

From the pleadings and supporting papers on hand, it can be gathered that Citibank N.A. Philippine Branch (CITIBANK) is a foreign corporation doing business in the Philippines. In 1979 and 1980, its tenants withheld and paid to the Bureau of Internal Revenue the following taxes on

rents due to Citibank, pursuant to Section 1(c) of the Expanded Withholding Tax Regulations (BIR Revenue Regulations No. 13-78, as amended), to wit:

1979

First quarter P60,690.97

Second quarter 69,897.08

Third quarter 69,160.89

Fourth quarter 70,160.56—————

P270,160.56

1980

First quarter P78,370.22

Second quarter 69,049.37

Third quarter 79,139.60

Fourth quarter 72,270.10—————

P298,829.29

On April 15, 1980, Citibank filed its corporate income tax returns for the year ended December 31, 1979 (Exh. "E:), showing a net loss of P74,854,916.00 and its tax credits totalled P6,257,780.00, even without including the amounts withheld on rental income under the Expanded Withholding Tax System, the same not having been utilized or applied for the reason that the year's operation

resulted in a loss. (Exh. & "E-1 & E-2"). The taxes thus withheld by the tenants from rentals paid to Citibank in 1979 were not included as tax credits although a rental income amounting to P7,796,811.00 was included in its income declared for the year ended December 31, 1979 (Exhs. "E-3" & "E-4").

For the year ended December 31, 1980, Citibank's corporate income tax returns (Exh. "EC"), filed on April 15, 1981, showed a net loss of P77,071,790.00 for income tax purposes. Its available tax credit (refundable) at the end of 1980 amounting to P11,532,855.00 (Exh. "BC-1" & "BC-2") was not utilized or applied. The said available tax credits did not include the amounts withheld by Citibank's tenants from rental payments in 1980 but the rental payments for that year were declared as part of its gross income included in its annual income tax returns (Exh. "BC-3").

On October 31, 1981, Citibank submitted its claim for refund of the aforesaid amounts of P270,160.56 and P298,829, respectively, or a total of P568,989.85; and on October 12, 1981 filed a petition for review with the Court of Tax Appeals concerning subject claim for tax refund, docketed as CTA Case No. 3378. 5

On August 30, 1981, the Court of Tax Appeals adjudged Citibank's entitlement to the tax refund sought for, representing the 5% tax withheld and paid on Citibank's rental income for 1979 and 1980. . . .

In its decision 6 granting a refund to petitioner, 7 the Court of Tax Appeals rejected Respondent Commissioner's argument that the claim was not seasonably filed:

WHEREFORE, respondent is hereby ordered to grant the refund of the amount sought by the petitioner. No costs.

Not satisfied, the Commissioner appealed to the Court of Appeals. In due course, Respondent Court issued the assailed Decision and Resolution, ruling that the five percent tax withheld by tenants from the rental income of Citibank for the years 1979 and 1980 was in accordance with Section 1(c) of the Expanded Withholding Tax Regulations (BIR Revenue Regulation No. 13-78, as amended) and did not involve illegally or erroneously collected taxes. The dispositive portion of the Decision reads: 8

WHEREFORE, the appealed judgment of August 30, 1991, adjudging Citibank, N.A., Philippine Branch, entitled to a tax refund/credit in the amount of P569,989.85, representing the 5% withheld tax on Citibank's rental income for the taxable years 1979 and 1980 is hereby REVERSED. No pronouncement as to costs.

Respondent Court denied the motion for reconsideration of the petitioner-bank in the assailed Resolution, the dispositive portion of which reads: 9

WHEREFORE, for want of merit, the motion for reconsideration, dated June 19, 1992, of respondent Citibank, N.A. is hereby DENIED.

SO ORDERED.

Hence, this petition under Rule 45 of the Rules of Court.

The Issues

The appellate court ruled that it was not enough for petitioner to show its lack of income tax liability against which the five percent withholding tax could be credited. Petitioner should have also shown that the withholding tax was illegally or erroneously collected and remitted by the tenants. On the other hand,

petitioner counters that Respondent Court failed to grasp "two fundamental concepts in the present income tax system, namely: (1) the yearly computation of the corporate income tax and (2) the nature of the creditable withholding tax."

In the main, petitioner thus raises the following issues: (1) For creditable withholding tax to be refundable, when should the illegality or error in its assessment or collection be reckoned: at the time of withholding or at the end of the taxable year? (2) Where the income tax returns show that no income tax is payable to the government, is acreditable withholding tax, as contradistinguished from a final tax, refundable (or creditable) at the end of the taxable year?

The Court's Ruling

The petition is meritorious.

First Issue: Determination of the Illegality or Error in Assessment or

Collection

Tax refunds are allowed under Section 230 of the National Internal Revenue Code:

Sec. 230. Recovery of tax erroneously or illegally collected. — No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be begun after the expiration of two years from

the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment:Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid.

Petitioner maintains that it is entitled to a refund of the five percent creditable withholding tax in 1979 and 1980, since its operations resulted in a net loss and thus did not have any income tax liability for such years. Respondent Court refused to allow the claim for refund for the reason that the taxes were "not illegally or erroneously collected:" 10

It is decisively clear that the instant claim for tax refund under scrutiny does not involve illegally or erroneously collected taxes. It involves the 5% tax withheld by tenants from the rental income of Citibank for the years 1979 and 1980, in accordance with Section 1(c) of the Expanded Withholding Tax Regulations (BIR Revenue Regulation No. 13-78 as amended) . . .

It is thus evident that the tenants or lessee of Citibank were required by law to withhold and pay to BIR 5% of their rental and, therefore, such withholding taxes were not illegally or erroneously collected. It was the burden of Citibank to prove that the taxes it asked to be refunded were illegally or erroneously collected; an onus probandi Citibank utterly failed to discharge.

We disagree with the Court of Appeals. In several cases, we have already ruled that income taxes remitted partially on a periodic or quarterly basis should be credited or refunded to

the taxpayer on the basis of the taxpayer's final adjusted returns, nor on such periodic or quarterly basis. 11 For instance, in the recent case ofCommissioner of Internal Revenue vs. Philippine American Life Insurance Co., 12 the Court held:

. . . When applied to taxpayers filing income tax returns on a quarterly basis, the date of payment mentioned in Section 292 (now Section 230) must be deemed to be qualified by Sections 68 and 69 of the present Tax Code . . .

It may be observed that although quarterly taxes due are required to be paid within 60 days from the close of each quarter, the fact that the amount shall be deducted from the tax due for the succeeding quarter shows that until a final adjustment return shall have been filed, the taxes paid in the preceding quarters are merely partial taxes due from a corporation. Neither amount can serve as the final figure to quantify what is due the government nor what should be refunded to the corporation.

This interpretation may be gleaned from the last paragraph of Section 69 of the Tax Code which provides that the refundable amount, in case a refund is due a corporation, is that amount which is shown on its final adjustment return and not on its quarterly returns.

xxx xxx xxx

Clearly the prescriptive period of two years should commence to run only from the time that the refund is ascertained, which can only be determined after a final adjustment return is accomplished. Private respondent being a corporation, Section 292 (now Section 230)

cannot serve as the sole basis for determining the two-year prescriptive period for refunds. . . .

In the present case, there is no question that the taxes were withheld in accordance with Section 1(c), Rev. Reg. No. 13-78. In that sense, it can be said that they were withheld legally by the tenants. However, the annual income tax returns of petitioner-bank for tax years 1979 and 1980 undisputedly reflected the net losses it suffered. The question arises: whether the taxes withheld remained legal and correct at the end of each taxable year. We hold in the negative.

The withholding tax system was devised for two main reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax liability; and second, to ensure the collection of the income tax which could otherwise be lost or substantially reduced through failure to file the corresponding returns. 13 To these, a third reason may be added: to improve the government's cash flow. Under Section 53 a-f of the tax code which was in effect at the time this case ripened, withholding of tax at source was mandated in cases of: (a) tax free covenant bonds, (b) payments of interest, dividends, rents, royalties, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual, periodical, or casual gains, profits and income, and capital gains of non-resident aliens and foreign corporations; (c) dividends from a domestic corporation and royalties received by resident individuals and corporation; (d) certain dividends; (e) interest on bank deposit; and (f) other items of income payable to resident individuals or corporations. Section 53-f was amended by Presidential Decree No. 1351, delegating to the Secretary of Finance the power to require the withholding of a tax, as follows:

Sec. 1. Section 53 (f) of the National Internal Revenue Code of 1997 is hereby amended to read as follows:

(f) The Secretary of Finance may, upon recommendation of the Commissioner of Internal Revenue, require also the withholding of a tax on the same items of income payable to

persons (natural or juridical) residing in the Philippines by the same persons mentioned in paragraph (b) (1) of this Section at the rate of not less than 2-1/2% but not more than 35% thereof which shall be credited against the income tax liability of the taxpayer for the taxable year.

Pursuant to said P.D. No. 1351 and in accordance with Section 4 in relation to Section 326 14 of the National Internal Revenue Code, the Commissioner promulgated on September 7, 1978, Revenue Regulations No. 13-78 to implement the withholding of creditable income taxes from certain types of income. Rev. Reg. No. 13-78 requires that a certain percentage of income be deducted and withheld by a payor, who is constituted as the withholding agent, and paid to the revenue district officer or BIR collection agent. Section 1 of this revenue regulation provides:

Sec. 1. Income payments subject to withholding tax and rates prescribed therein. — Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines:

(a) xxx xxx xxx

(b) xxx xxx xxx

(c) Rentals. — When the gross rental or other payment required to be made as a condition to the continued use or possession of property, whether real or personal, to which the payor or obligor has not taken or is not taking title or in which he has no equity, exceeds five hundred pesos (P500.00) — five per centum (5%).

xxx xxx xxx

Under this system, income is viewed as a flow 15 and is measured over a period of time known as an "accounting period." An accounting period covers twelve months, subdivided into four equal segments known as "quarters." Income realized within the taxpayer's annual accounting period (fiscal or calendar year) becomes the basis for the computation of the gross income and the tax liability. 16

The same basic principles apply under the prevailing tax laws. Under the present tax code, the types of income subject to withholding tax in Section 53, now Section 50, is simplified into three categories: (a) withholding of final tax on certain incomes; (b) withholding of creditable tax at source; and (c) tax free covenant bonds.

Accordingly, the withheld amounts equivalent to five percent of the gross rental are remitted to the BIR and are considered creditable withholding taxes under Section 53-f, i.e., creditable against income tax liability for that year. The taxes withheld, as ruled in Gibbs vs. Commissioner of Internal Revenue, 17 are in the nature of payment by a taxpayer in order to extinguish his possible tax obligation. They are installments on the annual tax which may be due at the end of the taxable year. 18

In this case, petitioner's lessees withheld and remitted to the BIR the amounts now claimed as tax refunds. That they were withheld and remitted pursuant to Rev. Reg. No. 13-78 does not derogate from the fact that they were merely partial payments of probable taxes. Like the corporate quarterly income tax, creditable withholding taxes are subject to adjustment upon determination of the correct income tax liability after the filing of the corporate income tax return, as at the end of the taxable year. This final determination of the corporate income tax liability is provided in Section 69, NIRC:

Sec. 69. Final Adjustment Return. — Every corporation liable to tax under Section 24 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire

taxable net income of that year the corporation shall either:

(a) Pay the excess tax still due; or

(b) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the refundable amount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year.

The taxes thus withheld and remitted are provisional in nature. 19 We repeat: five per cent of the rental income withheld and remitted to the BIR pursuant to Rev. Reg. No. 13-78 is, unlike the withholding of final taxes on passive incomes, a creditable withholding tax; that is, creditable against income tax liability if any, for that taxable year.

In Commissioner of Internal Revenue vs. TMX Sales, Inc., 20 this Court ruled that the payments of quarterly income taxes (per Section 68, NIRC) should be considered mere installments of the annual tax due. These quarterly tax payments, which are computed based on the cumulative figures of gross receipts and deductions in order to arrive at a net taxable income, should be treated as advances or portions of the annual income tax due, to be adjusted at the end of the calendar or fiscal year. The same holds true in the case of the withholding of creditable tax at source. Withholding taxes are "deposits" which are subject to adjustments at the proper time when the complete tax liability is determined.

In this case, the payments of the withholding taxes for 1979 and 1980 were creditable to the income tax liability, if any, of petitioner-bank, determined after the filing of the corporate income tax returns on April 15, 1980 and April 15, 1981. As petitioner posted net losses in its 1979 and 1980 returns, it was not liable for any income taxes. Consequently and clearly, the taxes withheld during the course of the taxable

year, while collected legally under the aforesaid revenue regulation, became untenable and took on the nature of erroneously collected taxes at the end of the taxable year.

Second Issue: Onus of Disputing a Claim for Refund

In general, there is no disagreement that a claimant has the burden of proof to establish the factual basis of his or her claim for tax credit or refund. 21 Tax refunds, like tax exemptions, are construed strictly against the taxpayer. The mechanics of a tax refunds provided in Rev. Reg. No. 13-78:

Sec. 8. Claims for tax credit or refund. — Claims for tax credit or refund of income tax deducted and withheld on income payments shall be given due course only when it is shown on the return that the income payment received was declared as part of the gross income and the fact of withholding is established by a copy of the statement, duly issued by the payor to the payee (BIR Form No. 1743-A) showing the amount paid and the amount of tax withheld therefrom.

A refund claimant is required to prove the inclusion of the income payments which were the basis of the withholding taxes and the fact of withholding. However, detailed proof of the truthfulness of each and every item in the income tax return is nor required. That function is lodged in the commissioner of internal revenue by the NIRC which requires the commissioner to assess internal revenue taxes within three years after the last day prescribed by law for the filing of the return. 22 In San Carlos Milling Co., Inc. vs. Commissioner of Internal Revenue, 23 the Court held that the internal revenue branch of government must investigate and confirm the claims for tax refund or credit before taxpayers may avail themselves of this option. The grant of a refund is founded on the assumption that the tax return is valid; that is, the facts stated therein are true and correct. 24 In fact, even without petitioner's tax claim, the commissioner can proceed to examine the

books, records of the petitioner-bank, or any data which may be relevant or material in accordance with Section 16 of the present NIRC.

In the case in hand, Respondent Commissioner examined petitioner's income tax returns and presumably found no false declaration in them, because he did not allege any such false declaration before Respondent Court and the Court of Tax Appeals (CTA). In the CTA, Respondent Commissioner's refusal to refund was based on the argument that the claim filed on October 31, 1981 was time-barred. It bears stressing that this issue was not raised in the appeal before us. The issue of operational losses was not raised until the appeal before Respondent Court was filed on February 5, 1992. By such time, at least a decade had already passed since the pertinent books and accounting records of petitioner-bank were closed. Section 235 of the Tax Code requires the preservation of the books of account and records only "for a period beginning from the last entry in each book until the last day prescribed by Section 203." Section 203 provides that internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the return, and no proceeding in Court without an assessment for the collection of such taxes shall begin after the expiration of such period. To expect petitioner to have its book and records on hand during the appeal was obviously unreasonable and violative of Section 235 in relation to Section 203 of the Tax Code.

In addition, the Tax Code has placed several safety measures to prevent falsification of income tax returns which the Court recognized in Commissioner vs. TMX Sales, Inc.: 25

Furthermore, Section 321 (now Section 232) of the National Internal Revenue Code requires that the books of accounts of companies or persons with gross quarterly sales or earnings exceeding Twenty Five Thousand Pesos (P25,000.00) be audited and examined yearly by an independent Certified Public Accountant and their income tax returns be accompanied by certified

balance sheets, profit and loss statements, schedules listing income producing properties and the corresponding incomes therefrom and other related statements.

It is generally recognized that before an accountant can make a certification on the financial statements or render an auditor's opinion, an audit of the books of accounts has to be conducted in accordance with generally accepted auditing standards.

Since the audit, as required by Section 321 (now Section 232) of the Tax Code is to be conducted yearly, then it is the Final Adjustment Return, where the figures of the gross receipts and deductions have been audited and adjusted, that is truly reflective of the results of the operations of a business enterprise. Thus, it is only when the Adjustment Return covering the whole year is filed that the taxpayer would know whether a tax is still due or a refund can be claimed based on the adjusted and audited figures.

Therefore, the alleged irregularity in the declared operational losses is a matter which must be proven by competent evidence. In resisting the claims of petitioner, Respondent Commissioner set up the defense of the legality of the collection of the creditable withholding tax as well as prescription, instead of presenting an assessment of the proper tax liability of the petitioner. This fact leads us to the conclusion that the income tax returns were accepted as accurate and regular by the BIR.

After this case was filed, the Commissioner clarified on June 27, 1994, the onus probandi of a taxpayer claiming refund of overpaid withholding taxes, inter alia, in Revenue Regulation No. 12-94, Section 10:

Sec. 10. Claim for Tax Credit or Refund.—

(a) Claims for Tax Credit or Refund of income tax deducted and withheld on income payments shall be given due course only when it is shown on the return that the income payment received has been declared as part of the gross income and the fact of withholding is established by a copy of the Withholding Tax Statement duly issued by the payor to the payee showing the amount paid and the amount of tax withheld therefrom.

(b) Excess Credits. — A taxpayer's excess expanded withholding tax credits for the taxable quarter/taxable year shall automatically be allowed as a credit for purposes of filing his income tax return for the taxable quarter/taxable year immediately succeeding the taxable quarter/taxable year in which the aforesaid excess credit arose, provided, however, he submits with his income tax return a copy of his income tax return for the aforesaid previous taxable period showing the amount of his aforementioned excess withholding tax credits.

If the taxpayer, in lieu of the aforesaid automatic application of his excess credit, wants a cash refund or a tax credit certificate for use in payment of his other national internal tax liabilities, he shall make a written request therefor. Upon filing of his request, the taxpayer's income tax return showing the excess expanded withholding tax credits shall be examined. The excess expanded withholding tax, if any, shall determined and refunded/credited to the taxpayer-applicant. The refunded/credit shall be made within a period of sixty (60) days from date of the taxpayer's

request provided, however, that the taxpayer-applicant submitted for audit all his pertinent accounting records and that the aforesaid records established the veracity of his claim for a refund/credit of his excess expanded withholding tax credits.

Prior to Rev. Reg. 12-94, the requisites for a refund were: (1) the income tax return for the previous year must show that income payment (rental in this case) was reported as part of the gross income; and (2) the withholding tax statement of the withholding tax agent must show that payment of the creditable withholding tax was made. However, even without this regulation, the commissioner may inspect the books of the taxpayer and reassess a taxpayer for deficiency tax payments under Sections 7, NICR. We stress that what was required under Rev. Reg. 12-94 was only a submission of records but the verification of the tax return remained the function of the commissioner.

Worth emphasizing are these uncontested facts: (1) the amounts withheld were actually remitted to the BIR and (2) the final adjusted returns — which the BIR did not question — showed that, for 1979 and 1980, no income taxes from petitioner were due. Hence, under the principle of solutio indebiti provided in Art. 2154, Civil Code, 26 the BIR received something when "there [was] no right to demand it," and thus "the obligation to return arises." 27 Heavily militating against Respondent Commissioner is the ancient principle that no one, not even the state, shall enrich oneself at the expense of another. Indeed, simple justice requires the speedy refund of the wrongly held taxes.

WHEREFORE, the assailed Decision is hereby REVERSED and the decision of the Court of Tax Appeals is REINSTATED. No costs.

SO ORDERED.

Narvasa, C.J., Romero, Melo and Francisco, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

 

G.R. No. 83736 January 15, 1992

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

TMX SALES, INC. and THE COURT OF TAX APPEALS, respondents.

F.R. Quiogue for private respondent.

 

GUTIERREZ, JR., J.:

In a case involving corporate quarterly income tax, does the two-year prescriptive period to claim a refund of erroneously collected tax provided for in Section 292 (now Section 230) of the National Internal Revenue Code commence to run from the date the quarterly income tax was paid, as contended by the petitioner, or from the date of filing of the Final Adjustment Return (final payment), as claimed by the private respondent?

Section 292 (now Section 230) of the National Internal Revenue Code provides:

Sec. 292. Recovery of tax erroneously or illegally collected. — No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has

been duly filed with the Commissioner of Internal Revenue; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.

In any case no such suit or proceeding shall be begun after the expiration of two years from the date of payment of that tax or penalty regardless of any supervening cause that may arise after payment: . . . (Emphasis supplied)

The facts of this case are uncontroverted.

Private respondent TMX Sales, Inc., a domestic corporation, filed its quarterly income tax return for the first quarter of 1981, declaring an income of P571,174.31, and consequently paying an income tax thereon of P247,010.00 on May 15, 1981. During the subsequent quarters, however, TMX Sales, Inc. suffered losses so that when it filed on April 15, 1982 its Annual Income Tax Return for the year ended December 31, 1981, it declared a gross income of P904,122.00 and total deductions of P7,060,647.00, or a net loss of P6,156,525.00 (CTA Decision, pp. 1-2; Rollo, pp. 45-46).

Thereafter, on July 9, 1982, TMX Sales, Inc. thru its external auditor, SGV & Co. filed with the Appellate Division of the Bureau of Internal Revenue a claim for refund in the amount of P247,010.00 representing overpaid income tax. (Rollo, p. 30)

This claim was not acted upon by the Commissioner of Internal Revenue. On March 14, 1984, TMX Sales, Inc. filed a petition for review before the Court of Tax Appeals against the Commissioner of Internal Revenue, praying that the petitioner, as private respondent therein, be ordered to refund to TMX Sales, Inc. the amount of P247,010.00, representing overpaid income tax for the taxable year ended December 31, 1981.

In his answer, the Commissioner of Internal Revenue averred that "granting, without admitting, the amount in question is refundable, the petitioner (TMX Sales, Inc.) is already barred

from claiming the same considering that more than two (2) years had already elapsed between the payment (May 15, 1981) and the filing of the claim in Court (March 14, 1984). (Sections 292 and 295 of the Tax Code of 1977, as amended)."

On April 29, 1988, the Court of Tax Appeals rendered a decision granting the petition of TMX Sales, Inc. and ordering the Commissioner of Internal Revenue to refund the amount claimed.

The Tax Court, in granting the petition, viewed the quarterly income tax paid as a portion or installment of the total annual income tax due. Said the Tax Court in its assailed decision:

xxx xxx xxx

When a tax is paid in installments, the prescriptive period of two years provided in Section 306 (now Section 292) of the Revenue Code should be counted from the date of the final payment or last installment. . . . This rule proceeds from the theory that in contemplation of tax laws, there is no payment until the whole or entire tax liability is completely paid. Thus, a payment of a part or portion thereof, cannot operate to start the commencement of the statute of limitations. In this regard the word "tax" or words "the tax" in statutory provisions comparable to section 306 of our Revenue Code have been uniformly held to refer to the entire tax and not a portion thereof (Clark v. U.S., 69 F. 2d 748; A.S. Kriedner Co. v. U.S., 30 F Supp. 274; Hills v. U.S., 50 F 2d 302, 55 F 2d 1001), and the vocable "payment of tax" within statutes requiring refund claim, refer to the date when all the tax was paid, not when a portion was paid (Braun v. U.S., 8 F supp. 860, 863; Collector of Internal Revenue v. Prieto, 2 SCRA 1007; Commissioner of Internal Revenue v. Palanca, 18 SCRA 496).

Petitioner Commissioner of Internal Revenue is now before this Court seeking a reversal of the above decision. Thru the Solicitor General, he contends that the basis in computing the two-year period of prescription provided for in Section 292 (now Section 230) of the Tax Code, should be May 15, 1981, the date when the quarterly income tax was paid and not April 15, 1982, when the Final Adjustment Return for the year ended December 31, 1981 was filed.

He cites the case of Pacific Procon Limited v. Commissioner of Internal Revenue (G.R. No. 68013, November 12, 1984) involving a similar set of facts, wherein this Court in a minute resolution affirmed the Court of Appeals' decision denying the claim for refund of the petitioner therein for being barred by prescription.

A re-examination of the aforesaid minute resolution of the Court in the Pacific Procon case is warranted under the circumstances to lay down a categorical pronouncement on the question as to when the two-year prescriptive period in cases of quarterly corporate income tax commences to run. A full-blown decision in this regard is rendered more imperative in the light of the reversal by the Court of Tax Appeals in the instant case of its previous ruling in the Pacific Procon case.

Section 292 (now Section 230) of the National Internal Revenue Code should be interpreted in relation to the other provisions of the Tax Code in order to give effect to legislative intent and to avoid an application of the law which may lead to inconvenience and absurdity. In the case of People vs. Rivera (59 Phil 236 [1933]), this Court stated that statutes should receive a sensible construction, such as will give effect to the legislative intention and so as to avoid an unjust or an absurd conclusion. INTERPRETATIO TALIS IN AMBIGUIS SEMPER FRIENDA EST, UT EVITATUR INCONVENIENS ET ABSURDUM. Where there is ambiguity, such interpretation as will avoid inconvenience and absurdity is to be adopted. Furthermore, courts must give effect to the general legislative intent that can be discovered from or is unraveled by the four corners of the statute, and in order to discover said intent, the whole statute, and not only a particular provision thereof, should be considered. (Manila Lodge No. 761, et al. v.

Court of Appeals, et al., 73 SCRA 162 [1976]) Every section, provision or clause of the statute must be expounded by reference to each other in order to arrive at the effect contemplated by the legislature. The intention of the legislator must be ascertained from the whole text of the law and every part of the act is to be taken into view. (Chartered Bank v. Imperial, 48 Phil. 931 [1921]; Lopez v. El Hogar Filipino, 47 Phil. 249, cited in Aboitiz Shipping Corporation v. City of Cebu, 13 SCRA 449 [1965]).

Thus, in resolving the instant case, it is necessary that we consider not only Section 292 (now Section 230) of the National Internal Revenue Code but also the other provisions of the Tax Code, particularly Sections 84, 85 (now both incorporated as Section 68), Section 86 (now Section 70) and Section 87 (now Section 69) on Quarterly Corporate Income Tax Payment and Section 321 (now Section 232) on keeping of books of accounts. All these provisions of the Tax Code should be harmonized with each other.

Section 292 (now Section 230) provides a two-year prescriptive period to file a suit for a refund of a tax erroneously or illegally paid, counted from the tile the tax was paid. But a literal application of this provision in the case at bar which involves quarterly income tax payments may lead to absurdity and inconvenience.

Section 85 (now Section 68) provides for the method of computing corporate quarterly income tax which is on a cumulative basis, to wit:

Sec. 85. Method of computing corporate quarterly income tax. — Every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a cumulative basisfor the preceding quarter or quarters upon which the income tax, as provided in Title II of this Code shall be levied, collected and paid. The tax so computed shall be decreased by the amount of tax previously paid or assessed during the preceding quarters and shall be paid not later than sixty (60) days from the close of each of the first three (3) quarters of the

taxable year, whether calendar or fiscal year. (Emphasis supplied)

while Section 87 (now Section 69) requires the filing of an adjustment returns and final payment of income tax, thus:

Sec. 87. Filing of adjustment returns final payment of income tax. — On or before the fifteenth day of April or on or before the fifteenth day of the fourth month following the close of the fiscal year, every taxpayer covered by this Chapter shall file an Adjustment Return covering the total net taxable income of the preceding calendar or fiscal year and if the sum of the quarterly tax payments made during that year is not equal to the tax due on the entire net taxable income of that year the corporation shall either (a) pay the excess tax still due or (b) be refunded the excess amount paid as the case may be. . . . (Emphasis supplied)

In the case at bar, the amount of P247,010.00 claimed by private respondent TMX Sales, Inc. based on its Adjustment Return required in Section 87 (now Section 69), is equivalent to the tax paid during the first quarter. A literal application of Section 292 (now Section 230) would thus pose no problem as the two-year prescriptive period reckoned from the time the quarterly income tax was paid can be easily determined. However, if the quarter in which the overpayment is made, cannot be ascertained, then a literal application of Section 292 (Section 230) would lead to absurdity and inconvenience.

The following application of Section 85 (now Section 68) clearly illustrates this point:

FIRST QUARTER:

Gross Income 100,000.00

Less: Deductions 50,000.00

—————

Net Taxable Income 50,000.00

=========

Tax Due & Paid [Sec. 24 NIRC (25%)] 12,500.00

=========

SECOND QUARTER:

Gross Income 1st Quarter 100,000.00

2nd Quarter 50,000.00 150,000.00

—————

Less: Deductions 1st Quarter 50,000.00

2nd Quarter 75,000.00 125,000.00

—————

Net Taxable Income 25,000.00

=========

Tax Due Thereon 6,250.00

Less: Tax Paid 1st Quarter 12,500.00

—————

Creditable Income Tax (6,250.00)

—————

THIRD QUARTER:

Gross Income 1st Quarter 100,000.00

2nd Quarter 50,000.00

3rd Quarter 100,000.00 250,000.00

—————

Less: Deductions 1st Quarter 50,000.00

2nd Quarter 75,000.00

3rd Quarter 25,000.00 150,000.00

————— —————

100,000.00

=========

Tax Due Thereon 25,000.00

Less: Tax Paid 1st Quarter 12,500.00

2nd Quarter — 12,500.00

————— =========

FOURTH QUARTER: (Adjustment Return required in Sec. 87)

Gross Income 1st Quarter 100,000.00

2nd Quarter 50,000.00

3rd Quarter 100,000.00

4th Quarter 75,000.00 325,000.00

————— —————

Less: Deductions 1st Quarter 50,000.00

2nd Quarter 75,000.00

3rd Quarter 25,000.00

4th Quarter 100,000.00 250,000.00

————— —————

Net Taxable Income 75,000.00

=========

Tax Due Thereon 18,750.00

Less: Tax Paid 1st Quarter 12,500.00

2nd Quarter —

3rd Quarter 12,500.00 25,000.00

————— —————

Creditable Income Tax (to be REFUNDED) (6,250.00)

=========

Based on the above hypothetical data appearing in the Final Adjustment Return, the taxpayer is entitled under Section 87 (now Section 69) of the Tax Code to a refund of P6,250.00. If Section 292 (now Section 230) is literally applied, what then is the reckoning date in computing the two-year prescriptive period? Will it be the 1st quarter when the taxpayer paid P12,500.00 or the 3rd quarter when the taxpayer also paid P12,500.00? Obviously, the most reasonable and logical application of the law would be to compute the two-year prescriptive period at the time of filing the Final Adjustment Return or the Annual Income Tax Return, when it can be finally ascertained if the taxpayer has still to pay additional income tax or if he is entitled to a refund of overpaid income tax.

Furthermore, Section 321 (now Section 232) of the National Internal Revenue Code requires that the books of accounts of companies or persons with gross quarterly sales or earnings exceeding Twenty Five Thousand Pesos (P25,000.00) be audited and examined yearly by an independent Certified Public Accountant and their income tax returns be accompanied by certified balance sheets, profit and loss

statements, schedules listing income producing properties and the corresponding incomes therefrom and other related statements.

It is generally recognized that before an accountant can make a certification on the financial statements or render an auditor's opinion, an audit of the books of accounts has to be conducted in accordance with generally accepted auditing standards.

Since the audit, as required by Section 321 (now Section 232) of the Tax Code is to be conducted yearly, then it is the Final Adjustment Return, where the figures of the gross receipts and deductions have been audited and adjusted, that is truly reflective of the results of the operations of a business enterprise. Thus, it is only when the Adjustment Return covering the whole year is filed that the taxpayer would know whether a tax is still due or a refund can be claimed based on the adjusted and audited figures.

Therefore, the filing of quarterly income tax returns required in Section 85 (now Section 68) and implemented per BIR Form 1702-Q and payment of quarterly income tax should only be considered mere installments of the annual tax due. These quarterly tax payments which are computed based on the cumulative figures of gross receipts and deductions in order to arrive at a net taxable income, should be treated as advances or portions of the annual income tax due, to be adjusted at the end of the calendar or fiscal year. This is reinforced by Section 87 (now Section 69) which provides for the filing of adjustment returns and final payment of income tax. Consequently, the two-year prescriptive period provided in Section 292 (now Section 230) of the Tax Code should be computed from the time of filing the Adjustment Return or Annual Income Tax Return and final payment of income tax.

In the case of Collector of Internal Revenue v. Antonio Prieto (2 SCRA 1007 [1961]), this Court held that when a tax is paid in installments, the prescriptive period of two years provided in Section 306 (Section 292) of the National internal Revenue Code should be counted from the date of the final payment. This ruling is reiterated inCommission of Internal Revenue v. Carlos Palanca (18 SCRA 496 [1966]), wherein this Court stated that where the tax account was paid on installment, the

computation of the two-year prescriptive period under Section 306 (Section 292) of the Tax Code, should be from the date of the last installment.

In the instant case, TMX Sales, Inc. filed a suit for a refund on March 14, 1984. Since the two-year prescriptive period should be counted from the filing of the Adjustment Return on April 15, 1982, TMX Sales, Inc. is not yet barred by prescription.

WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby DENIED. The decision of the Court of Tax Appeals dated April 29, 1988 is AFFIRMED. No costs.

SO ORDERED.

Narvasa, C.J., Melencio-Herrera, Cruz, Paras, Padilla, Bidin, Griño-Aquino, Medialdea, Regalado, Davide, Jr. and Romero, JJ., concur.

Feliciano and Nocon, JJ., took no part.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

 

G.R. No. 105208 May 29, 1995

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.THE PHILIPPINE AMERICAN LIFE INSURANCE CO., THE COURT OF TAX APPEALS and THE COURT OF APPEALS, respondents.

 

ROMERO, J.:

This is a petition for review on certiorari filed by petitioner, Commissioner of Internal Revenue, of the Decision 1dated March 26, 1992 of the Court of Appeals in CA-GR No. 26598, entitled

"Commissioner of Internal Revenue v. The Philippine American Life Insurance Co. & the Court of Tax Appeals" affirming the decision of respondent Court of Tax Appeals which ordered the refund to the Philippine American Life Insurance Co. (Philamlife) of the amount of P3,643,015.00 representing excess corporate income taxes for the first and second quarters of 1983.

Private respondent filed a case before the Court of Tax Appeals (CTA) docketed as CTA Case No. 4018 entitled "The Philippine American Life Insurance Company versus Commissioner of Internal Revenue."

On September 16, 1991, the CTA rendered a decision in the above-entitled case, the dispositive portion of which states:

WHEREFORE, petitioner's claim for refund for P3,246,141.00 and P396,874.00 representing excess corporated income tax payments for the first and second quarters of 1983, respectively, or a total of P3,643,015.00 is hereby GRANTED. Accordingly, respondent Commissioner of Internal Revenue, is hereby ordered to refund to petitioner Philippine American Life Insurance Company the total amount of P3,643,015.00.

With respect to petitioner's claim for refund of P215,742.00 representing 1983 withholding taxes on rental income the same is hereby DENIED for failure to present proof of actual-withholding and payment with the Bureau of Internal Revenue. No costs.

The facts, uncontroverted by petitioner, are:

On May 30, 1983, private respondent Philamlife paid to the Bureau of Internal Revenue (BIR) its first quarterly corporate income tax for Calendar Year (CY) 1983 amounting to P3,246,141.00.

On August 29, 1983, it paid P396,874.00 for the Second Quarter of 1983.

For the Third Quarter of 1983, private respondent declared a net taxable income of P2,515,671.00 and a tax due of P708,464.00. After crediting the amount of P3,899,525.00 it declared a refundable amount of P3,158,061.00.

For its Fourth and final quarter ending December 31, private respondent suffered a loss and thereby had no income tax liability. In the return for that quarter, it declared a refund of P3,991,841.00 representing the first and second quarterly payments: P215,742.00 as withholding taxes on rental income for 1983 and P133,084.00 representing 1982 income tax refund applied as 1983 tax credit.

In 1984, private respondent again suffered a loss and declared no income tax liability. However, it applied as tax credit for 1984, the amount of P3,991,841.00 representing its 1982 and 1983 overpaid income taxes and the amount of P250,867.00 as withholding tax on rental income for 1984.

On September 26, 1984, private respondent filed a claim for its 1982 income tax refund of P133,084.00. On November 22, 1984, it filed a petition for review with the Court of Tax Appeals (C.T.A. Case No. 3868) with respect to its 1982 claim for refund of P133,084.00.

On December 16, 1985, it filed another claim for refund with petitioners appellate division in the aggregate amount of P4,109,624.00, computed as follows:

1982 income tax refundable

applied as tax credit P 133,084

1983 income tax refundable

applied as tax credit P 3,858,757

1984 tax credit on rental P 250,867

T o t a l P 4,242,708

Less: 1983 claim for

refund already

filed with the

BIR and the CTA

(Case No. 3868) P 133,084

——————

Net Amount Refundable — P 4,109,624

===========

On January 2, 1986, private respondent filed a petition for review with the CTA, docketed as CTA Case No. 4018 regarding its 1983 and 1984 claims for refund in the above-stated amount.

Later, it amended its petition by limiting its claim for refund to only P3,858,757.00 computed as follows:

Date Paid O.R. No. Amount Paid

5/30/83 B2269337 P3,246,141.00

8/29/83 B1938178 396,874.00

215,742.00

P3,858,757.00

The issue in this case is the reckoning date of the two-year prescriptive period provided in Section 230 of the National Internal Revenue Code (formerly Section 292) which states that:

Recovery of tax erroneously or illegally collected. — No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be begun after the expiration of two years from

the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment:Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid.

Forfeiture of refund. — A refund check or warrant issued in accordance with the pertinent provisions of this Code which shall remain unclaimed or uncashed within five (5) years from the date the said warrant or check was mailed or delivered shall be forfeited in favor of the government and the amount thereof shall revert to the General Fund.

Petitioner poses the following question: In a case such as this, where a corporate taxpayer remits/pays to the BIR tax withheld on income for the first quarter but whose business operations actually resulted in a loss for that year, as reflected in the Corporate Final Adjustment Return subsequently filed with the BIR, should not the running of the prescriptive period commence from the remittance/payment at the end of the first quarter of the tax withheldinstead of from the filing of the Final Adjustment Return?

In support of its contention, petitioner cites the case of Pacific Procon Ltd. v. Court of Tax Appeals, et a1. 2wherein the CTA denied therein petitioner's claim for refund after it construed Section 292 (now Section 230) of the NIRC to be mandatory and "not subject to any qualification," hence it applies regardless of the conditions under which payment may have been made. The Tax Court ruled:

Under Section 292 (formerly Section 306) of the National Internal Revenue Code, a claim for refund of a tax alleged to have been erroneously or illegally collected shall be filed

with the Commissioner of Internal Revenue within two years from the date of payment of the tax, and that no suit or proceeding for refund shall be begun after the expiration of the said two-year period (Citation omitted). As a matter of fact, the said section further provides that: . . . In any case, no such suit or proceeding shall be begun after the expiration of two years from the date of payment of the tax or the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment.

Petitioner states that the phrase "regardless of supervening cause that may arise after payment" is an amendatory phrase under the said Section 292 which did not appear in Section 306 of the old Tax Code before it was amended by Presidential Decree No. 69, which became effective January 1, 1973. Petitioner argues that the incorporation of the said phrase did away with any other interpretation and, therefore, the reckoning period of prescription under Section 292 (now section 230) is from the date of payment of tax regardless of financial loss (the "supervening cause"). Thus, the claim for refund of the amounts of P3,246,141.00 and P396,874.00 paid on May 30, 1983 and August 29, 1983, respectively, has prescribed.

We find petitioner's contentions to be unmeritorious.

It is true that in the Pacific Procon case, we held that the right to bring an action for refund had prescribed, the tax having been found to have been paid at the end of the first quarter when the withholding tax corresponding thereto was remitted to the Bureau of Internal Revenue, not at the time of filing of the Final Adjustment Return in April of the following year.

However, this case was overturned by the Court in Commissioner of Internal Revenue v. TMX Sales Incorporated and the Court of Tax Appeals, 3 wherein we said:

. . . in resolving the instant case, it is necessary that we consider not only Section 292 (now

Section 230) of the National Internal Revenue Code but also the other provisions of the Tax Code, particularly Sections 84, 85 (now both incorporated as Section 68), Section 86 (now Section 70) and Section 87 (now Section 69) on Quarterly Corporate Income Tax Payment and Section 321 (now Section 232) on keeping of books of accounts. All these provisions of the Tax Code should be harmonized with each other.

Section 292 (now Section 230) stipulates that the two-year prescriptive period to claim refunds should be counted from date of payment of the tax sought to be refunded. When applied to tax payers filing income tax returns on a quarterly basis, the date of payment mentioned in Section 292 (now Section 230) must be deemed to be qualified by Sections 68 and 69 of the present Tax Code which respectively provide:

Sec. 68 Declaration of Quarterly Income Tax. — Every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters upon which the income tax, as provided in Title II of this Code shall be levied, collected and paid. The Tax so computed shall be decreased by the amount of tax previously paid or assessed during the preceding quarters and shall be paid not later than sixty (60) days from the close of each of the first three (3) quarters of the taxable year.

Sec. 69. Final Adjustment Return. — Every corporation liable to tax under Section 24 shall file a final adjustment return covering the total net income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the

total tax due on the entire taxable net income of that year the corporation shall either:

(a) Pay the excess still due; or

(b) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the refundable amount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year.

It may be observed that although quarterly taxes due are required to be paid within sixty days from the close of each quarter, the fact that the amount shall be deducted from the tax due for the succeeding quarter shows that until a final adjustment return shall have been filed, the taxes paid in the preceding quarters are merely partial taxes due from a corporation. Neither amount can serve as the final figure to quantity what is due the government nor what should be refunded to the corporation.

This interpretation may be gleaned from the last paragraph of Section 69 of the Tax Code which provides that the refundable amount, in case a refund is due a corporation, is that amount which is shown on its final adjustment return and not on its quarterly returns.

Therefore, when private respondent paid P3,246,141.00 on May 30, 1983, it would not have been able to ascertain on that date, that the said amount was refundable. The same applies with cogency to the payment of P396,874.00 on August 29, 1983.

Clearly, the prescriptive period of two years should commence to run only from the time that the refund is ascertained, which can only be determined after a final adjustment return is accomplished. In the present case, this date is April 16, 1984, and two years from this date would be April 16, 1986. The record shows that

the claim for refund was filed on December 10, 1985 and the petition for review was brought before the CTA on January 2, 1986. Both dates are within the two-year reglementary period. Private respondent being a corporation, Section 292 (now Section 230) cannot serve as the sole basis for determining the two-year prescriptive period for refunds. As we have earlier said in the TMX Sales case, Sections 68, 69, and 70 on Quarterly Corporate Income Tax Payment and Section 321 should be considered in conjunction with it.

Moreover, even if the two-year period had already lapsed, the same is not jurisdictional 4 and may be suspended for reasons of equity and other special circumstances. 5

Petitioner also raises the issue of whether or not private respondent has satisfactorily shown by competent evidence that it is entitled to the amount sought to be refunded. This being a question of fact, this Court is bound by the findings of the Court of Tax Appeals which has clearly established the propriety of private respondent's claim for refund for excess 1983 quarterly income tax payments. On the other hand, petitioner Commissioner of Internal Revenue has failed to present any documentary or testimonial evidence in support of his case. Instead, he opted to postpone the hearings several times and later chose to submit the case for decision on the basis of the records and pleadings of instant case.

To repeat, we find that private respondent has presented sufficient evidence in support of its claim for refund, whereas petitioner has failed to controvert the same adequately.

WHEREFORE, the instant petition is DISMISSED and the decision of the Court of Appeals is hereby AFFIRMED in toto. No costs.

SO ORDERED.

Melo and Francisco, JJ., concur.

Feliciano, J., took no part.

 

Republic of the PhilippinesSUPREME COURTManila

SECOND DIVISION

 

G.R. No. 106611 July 21, 1994

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.COURT OF APPEALS, CITYTRUST BANKING CORPORATION and COURT OF TAX APPEALS, respondents.

The Solicitor General for petitioner.

Palaez, Adriano & Gregorio for private respondent.

 

REGALADO, J.:

The judicial proceedings over the present controversy commenced with CTA Case No. 4099, wherein the Court of Tax Appeals ordered herein petitioner Commissioner of Internal Revenue to grant a refund to herein private respondent Citytrust Banking Corporation (Citytrust) in the amount of P13,314,506.14, representing its overpaid income taxes for 1984 and 1985, but denied its claim for the alleged refundable amount reflected in its 1983 income tax return on the ground of prescription. 1 That judgment of the tax court was affirmed by respondent Court of Appeals in its judgment in CA-G.R. SP No. 26839. 2 The case was then elevated to us in the present petition for review on certiorari wherein the latter judgment is impugned and sought to be nullified and/or set aside.

It appears that in a letter dated August 26, 1986, herein private respondent corporation filed a claim for refund with the Bureau of Internal Revenue (BIR) in the amount of P19,971,745.00 representing the alleged aggregate of the excess of its carried-over total quarterly payments over the actual income tax due, plus carried-over withholding tax payments on

government securities and rental income, as computed in its final income tax return for the calendar year ending December 31, 1985. 3

Two days later, or on August 28, 1986, in order to interrupt the running of the prescriptive period, Citytrust filed a petition with the Court of Tax Appeals, docketed therein as CTA Case No. 4099, claiming the refund of its income tax overpayments for the years 1983, 1984 and 1985 in the total amount of P19,971,745.00. 4

In the answer filed by the Office of the Solicitor General, for and in behalf of therein respondent commissioner, it was asserted that the mere averment that Citytrust incurred a net loss in 1985 does not ipso facto merit a refund; that the amounts of P6,611,223.00, P1,959,514.00 and P28,238.00 claimed by Citytrust as 1983 income tax overpayment, taxes withheld on proceeds of government securities investments, as well as on rental income, respectively, are not properly documented; that assuming arguendo that petitioner is entitled to refund, the right to claim the same has prescribed with respect to income tax payments prior to August 28, 1984, pursuant to Sections 292 and 295 of the National Internal Revenue Code of 1977, as amended, since the petition was filed only on August 28, 1986. 5

On February 20, 1991, the case was submitted for decision based solely on the pleadings and evidence submitted by herein private respondent Citytrust. Herein petitioner could not present any evidence by reason of the repeated failure of the Tax Credit/Refund Division of the BIR to transmit the records of the case, as well as the investigation report thereon, to the Solicitor General. 6

However, on June 24, 1991, herein petitioner filed with the tax court a manifestation and motion praying for the suspension of the proceedings in the said case on the ground that the claim of Citytrust for tax refund in the amount of P19,971,745.00 was already being processed by the Tax Credit/Refund Division of the BIR, and that said bureau was only awaiting the submission by Citytrust of the required confirmation receipts which would show whether or not the aforestated amount was actually paid and remitted to the BIR. 7

Citytrust filed an opposition thereto, contending that since the Court of Tax Appeals already acquired jurisdiction over the case, it could no longer be divested of the same; and, further, that the proceedings therein could not be suspended by the mere fact that the claim for refund was being administratively processed, especially where the case had already been submitted for decision. It also argued that the BIR had already conducted an audit, citing therefor Exhibits Y, Y-1, Y-2 and Y-3 adduced in the case, which clearly showed that there was an overpayment of income taxes and for which a tax credit or refund was due to Citytrust. The Foregoing exhibits are allegedly conclusive proof of and an admission by herein petitioner that there had been an overpayment of income taxes. 8

The tax court denied the motion to suspend proceedings on the ground that the case had already been submitted for decision since February 20, 1991. 9

Thereafter, said court rendered its decision in the case, the decretal portion of which declares:

WHEREFORE, in view of the foregoing, petitioner is entitled to a refund but only for the overpaid taxes incurred in 1984 and 1985. The refundable amount as shown in its 1983 income tax return is hereby denied on the ground of prescription. Respondent is hereby ordered to grant a refund to petitioner Citytrust Banking Corp. in the amount of P13,314,506.14 representing the overpaid income taxes for 1984 and 1985, recomputed as follows:

1984 Income tax due P 4,715,533.00Less: 1984 Quarterly payments P 16,214,599.00*1984 Tax Credits —W/T on int. on gov't. sec. 1,921,245.37*W/T on rental inc. 26,604.30* 18,162,448.67——————— ———————Tax Overpayment

(13,446,915.67)Less: FCDU payable 150,252.00———————Amount refundable for 1984 P (13,296,663.67)

1985 Income tax due (loss) P — 0 —Less: W/T on rentals 36,716.47*———————Tax Overpayment (36,716.47)*Less: FCDU payable 18,874.00———————Amount Refundable for 1985 P (17,842.47)

* Note:

These credits are smaller than the claimed amount because only the above figures are well supported by the various exhibits presented during the hearing.

No pronouncement as to costs.

SO ORDERED. 10

The order for refund was based on the following findings of the Court of Tax Appeals: (1) the fact of withholding has been established by the statements and certificates of withholding taxes accomplished by herein private respondent's withholding agents, the authenticity of which were neither disputed nor controverted by herein petitioner; (2) no evidence was presented which could effectively dispute the correctness of the income tax return filed by herein respondent corporation and other material facts stated therein; (3) no deficiency assessment was issued by herein petitioner; and (4) there was an audit report submitted by the BIR Assessment Branch, recommending the refund of overpaid

taxes for the years concerned (Exhibits Y to Y-3), which enjoys the presumption of regularity in the performance of official duty. 11

A motion for the reconsideration of said decision was initially filed by the Solicitor General on the sole ground that the statements and certificates of taxes allegedly withheld are not conclusive evidence of actual payment and remittance of the taxes withheld to the BIR. 12 A supplemental motion for reconsideration was thereafter filed, wherein it was contended for the first time that herein private respondent had outstanding unpaid deficiency income taxes. Petitioner alleged that through an inter-office memorandum of the Tax Credit/Refund Division, dated August 8, 1991, he came to know only lately that Citytrust had outstanding tax liabilities for 1984 in the amount of P56,588,740.91 representing deficiency income and business taxes covered by Demand/Assessment Notice No. FAS-1-84-003291-003296. 13

Oppositions to both the basic and supplemental motions for reconsideration were filed by private respondent Citytrust. 14 Thereafter, the Court of Tax Appeals issued a resolution denying both motions for the reason that Section 52 (b) of the Tax Code, as implemented by Revenue Regulation 6-85, only requires that the claim for tax credit or refund must show that the income received was declared as part of the gross income, and that the fact of withholding was duly established. Moreover, with regard to the argument raised in the supplemental motion for reconsideration anent the deficiency tax assessment against herein petitioner, the tax court ruled that since that matter was not raised in the pleadings, the same cannot be considered, invoking therefor the salutary purpose of the omnibus motion rule which is to obviate multiplicity of motions and to discourage dilatory pleadings. 15

As indicated at the outset, a petition for review was filed by herein petitioner with respondent Court of Appeals which in due course promulgated its decision affirming the judgment of the Court of Tax Appeals. Petitioner eventually elevated the case to this Court, maintaining that said respondent court erred in affirming the grant of the claim for refund of Citytrust, considering that, firstly, said private respondent failed to prove and substantiate its claim for such refund; and, secondly, the

bureau's findings of deficiency income and business tax liabilities against private respondent for the year 1984 bars such payment. 16

After a careful review of the records, we find that under the peculiar circumstances of this case, the ends of substantial justice and public interest would be better subserved by the remand of this case to the Court of Tax Appeals for further proceedings.

It is the sense of this Court that the BIR, represented herein by petitioner Commissioner of Internal Revenue, was denied its day in court by reason of the mistakes and/or negligence of its officials and employees. It can readily be gleaned from the records that when it was herein petitioner's turn to present evidence, several postponements were sought by its counsel, the Solicitor General, due to the unavailability of the necessary records which were not transmitted by the Refund Audit Division of the BIR to said counsel, as well as the investigation report made by the Banks/Financing and Insurance Division of the said bureau/ despite repeated requests. 17 It was under such a predicament and in deference to the tax court that ultimately, said records being still unavailable, herein petitioner's counsel was constrained to submit the case for decision on February 20, 1991 without presenting any evidence.

For that matter, the BIR officials and/or employees concerned also failed to heed the order of the Court of Tax Appeals to remand the records to it pursuant to Section 2, Rule 7 of the Rules of the Court of Tax Appeals which provides that the Commissioner of Internal Revenue and the Commissioner of Customs shall certify and forward to the Court of Tax Appeals, within ten days after filing his answer, all the records of the case in his possession, with the pages duly numbered, and if the records are in separate folders, then the folders shall also be numbered.

The aforestated impassé came about due to the fact that, despite the filing of the aforementioned initiatory petition in CTA Case No. 4099 with the Court of Tax Appeals, the Tax Refund Division of the BIR still continued to act administratively on the claim for refund previously filed therein,

instead of forwarding the records of the case to the Court of Tax Appeals as ordered. 18

It is a long and firmly settled rule of law that the Government is not bound by the errors committed by its agents. 19In the performance of its governmental functions, the State cannot be estopped by the neglect of its agent and officers. Although the Government may generally be estopped through the affirmative acts of public officers acting within their authority, their neglect or omission of public duties as exemplified in this case will not and should not produce that effect.

Nowhere is the aforestated rule more true than in the field of taxation. 20 It is axiomatic that the Government cannot and must not be estopped particularly in matters involving taxes. Taxes are the lifeblood of the nation through which the government agencies continue to operate and with which the State effects its functions for the welfare of its constituents. 21 The errors of certain administrative officers should never be allowed to jeopardize the Government's financial position, 22 especially in the case at bar where the amount involves millions of pesos the collection whereof, if justified, stands to be prejudiced just because of bureaucratic lethargy.

Further, it is also worth nothing that the Court of Tax Appeals erred in denying petitioner's supplemental motion for reconsideration alleging bringing to said court's attention the existence of the deficiency income and business tax assessment against Citytrust. The fact of such deficiency assessment is intimately related to and inextricably intertwined with the right of respondent bank to claim for a tax refund for the same year. To award such refund despite the existence of that deficiency assessment is an absurdity and a polarity in conceptual effects. Herein private respondent cannot be entitled to refund and at the same time be liable for a tax deficiency assessment for the same year.

The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated therein are true and correct. The deficiency assessment, although not yet final, created a doubt as to and constitutes a challenge against the truth and accuracy of the facts stated in said return which, by itself and without unquestionable evidence, cannot be the basis for the grant of the refund.

Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law when the claim of Citytrust was filed, provides that "(w)hen an assessment is made in case of any list, statement, or return, which in the opinion of the Commissioner of Internal Revenue was false or fraudulent or contained any understatement or undervaluation, no tax collected under such assessment shall be recovered by any suits unless it is proved that the said list, statement, or return was not false nor fraudulent and did not contain any understatement or undervaluation; but this provision shall not apply to statements or returns made or to be made in good faith regarding annual depreciation of oil or gas wells and mines."

Moreover, to grant the refund without determination of the proper assessment and the tax due would inevitably result in multiplicity of proceedings or suits. If the deficiency assessment should subsequently be upheld, the Government will be forced to institute anew a proceeding for the recovery of erroneously refunded taxes which recourse must be filed within the prescriptive period of ten years after discovery of the falsity, fraud or omission in the false or fraudulent return involved. 23 This would necessarily require and entail additional efforts and expenses on the part of the Government, impose a burden on and a drain of government funds, and impede or delay the collection of much-needed revenue for governmental operations.

Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically necessary and legally appropriate that the issue of the deficiency tax assessment against Citytrust be resolved jointly with its claim for tax refund, to determine once and for all in a single proceeding the true and correct amount of tax due or refundable.

In fact, as the Court of Tax Appeals itself has heretofore conceded, 24 it would be only just and fair that the taxpayer and the Government alike be given equal opportunities to avail of remedies under the law to defeat each other's claim and to determine all matters of dispute between them in one single case. It is important to note that in determining whether or not petitioner is entitled to the refund of the amount paid, it would necessary to determine how much the

Government is entitled to collect as taxes. This would necessarily include the determination of the correct liability of the taxpayer and, certainly, a determination of this case would constitute res judicata on both parties as to all the matters subject thereof or necessarily involved therein.

The Court cannot end this adjudication without observing that what caused the Government to lose its case in the tax court may hopefully be ascribed merely to the ennui or ineptitude of officialdom, and not to syndicated intent or corruption. The evidential cul-de-sac in which the Solicitor General found himself once again gives substance to the public perception and suspicion that it is another proverbial tip in the iceberg of venality in a government bureau which is pejoratively rated over the years. What is so distressing, aside from the financial losses to the Government, is the erosion of trust in a vital institution wherein the reputations of so many honest and dedicated workers are besmirched by the acts or omissions of a few. Hence, the liberal view we have here taken pro hac vice, which may give some degree of assurance that this Court will unhesitatingly react to any bane in the government service, with a replication of such response being likewise expected by the people from the executive authorities.

WHEREFORE, the judgment of respondent Court of Appeals in CA-G.R. SP No. 26839 is hereby SET ASIDE and the case at bar is REMANDED to the Court of Tax Appeals for further proceedings and appropriate action, more particularly, the reception of evidence for petitioner and the corresponding disposition of CTA Case No. 4099 not otherwise inconsistent with our adjudgment herein.

SO ORDERED.

Narvasa, C.J., Padilla, Puno and Mendoza, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. 150812 August 22, 2006

COMMISSIONER OF INTERNAL REVENUE, Petitioner,vs.CITYTRUST BANKING CORPORATION, Respondent.

D E C I S I O N

CORONA, J.

The Commissioner of Internal Revenue (CIR) assails the decision1 of the Court of Appeals (CA) and its resolution2upholding the decision of the Court of Tax Appeals (CTA) in CTA Case No. 4099 which ordered the refund ofP13,314,506.14 to respondent Citytrust Banking Corporation (Citytrust)3 as its alleged overpaid income taxes for the years 1984 and 1985.

On May 28, 1991, the CTA ordered the CIR to grant Citytrust a refund in the amount of P13,314,506.14 representing Citytrust’s overpaid income taxes for 1984 and 1985. The CIR filed a motion for reconsideration (MR) on the ground that the Certificate of Tax Withheld was inconclusive evidence of payment and remittance of tax to the Bureau of Internal Revenue. In its supplemental MR, the CIR alleged an additional ground: that Citytrust had outstanding deficiency income and business tax liabilities of P4,509,293.714 for 1984, thus, the claim for refund was not in order. The tax court denied both motions.

The case was elevated to the CA5 in CA-G.R. SP No. 26839 but the appellate court affirmed the CTA’s ruling. On petition for review on certiorari to this Court, however, we ruled that there was an apparent contradiction between the claim for refund and the deficiency assessments against Citytrust, and that the government could not be held in estoppel due to the negligence of its officials or employees, specially in cases involving taxes. For that reason, the case was remanded to the CTA for further reception of evidence.6

The tax court thereafter conducted the necessary proceedings. One of the exhibits

presented and offered in the hearings was a letter dated February 28, 1995, signed by the CIR, stating the withdrawal and cancellation of the following assessments:7

Kind of Tax Year Involved Amount1. [Deficiency] Fixed Tax

2. [Deficiency] Withholding Tax on deposit substitutes (1-1-84 to

3. [Deficiency] Withholding Tax on deposit substitutes (10-15-84 to 12-31-84)

4. [Deficiency] Documentary Stamp Tax on deposit substitutes

1984

1984

1984

1984

P 44,132.88

22,363,791.31

11,292,140.50

17,825,342.30

In the same letter, the CIR demanded the following sums from Citytrust for 1984: (1) as deficiency income tax –P3,301,578.19; (2) as deficiency gross receipts tax – P1,193,090.52 and (3) as fixed tax as real estate dealer –P14,625. Citytrust paid these deficiency tax liabilities.8

From the exhibits presented to it, the CTA determined that: (1) the deficiency and gross receipts taxes had been fully paid and (2) the deficiency income tax was only partially settled.9

Except for a pending issue in another CTA proceeding,10 Citytrust considered all its deficiency tax liabilities for 1984 fully settled, hence, it prayed that it be granted a refund. The CIR interposed his objection, however, alleging that Citytrust still had unpaid deficiency income, business and withholding taxes for the year 1985.11 Due to these deficiency assessments, the CIR insisted that Citytrust was not entitled to any tax refund.

On October 16, 1997, the CTA set aside the CIR’s objections and granted the refund.12

On May 21, 2001, the CA denied the CIR’s petition for review13 for lack of merit and affirmed the CTA decision.14

Before us in this petition for review on certiorari, the CIR contends that respondent is not entitled

to the refund ofP13,314,506.14 as alleged overpaid income taxes for 1984 and 1985. The CIR claims that the CA erred in not holding that payment by Citytrust of its deficiency income tax was an admission of its tax liability and, therefore, a bar to its entitlement to a refund of income tax for the same taxable year.

In resolving this case, the CTA did not allow a set-off or legal compensation of the taxes involved.15 The CTA reasoned:

Again, the BIR interposed objection to the grant of such refund. It alleged that there are still deficiency income, business and withholding taxes proposed against petitioner for 1985. These assessments are contained in a Delinquency Verification Slip, dated June 5, 1990, which was marked as Exh. "5" for respondent. Due to these deficiency assessments, respondent insisted that petitioner is not entitled to any tax refund.

[The CTA] sets aside respondent’s objection and grants to petitioner the refund of the amount of P13,314,506.14 on several grounds.

First, [respondent’s position] violates the order of the Supreme Court in directing [the CTA] to conduct further proceedings for the reception of petitioner’s evidence, and the disposition of the present case. Although the Supreme Court did not specifically mention what kind of petitioner’s evidence should be entertained, [the CTA] is of the opinion that the evidence should pertain only to the 1984 assessments which were the only assessments raised as a defense on appeal to the Court of Appeals and the Supreme Court. The assessments embodied in Exhibit "5" of respondent were never raised on appeal to the higher [c]ourts. Hence, evidence related to said assessments should not be allowed as this will lead to endless litigation.

Second, [the CTA] has no jurisdiction to try an assessment case which was never appealed to it. With due respect to the Supreme Court’s decision, it is [the CTA’s] firm stand that in hearing a refund case, the CTA cannot hear in the same case an assessment dispute even if the parties involved are the same parties.16 xxx xxx xxx. (Citations omitted and emphasis supplied)

We uphold the findings and conclusion of the CTA and the CA.

Records show that this Court made no previous direct ruling on Citytrust’s alleged failure to substantiate its claim for refund. Instead, the order of this Court addressed the apparent failure of the Bureau of Internal Revenue, by reason of the mistake or negligence of its officials and employees, to present the appropriate evidence to oppose respondent’s claim.17 In the earlier case, we directed the joint resolution of the issues of tax deficiency assessment and refund due to its particular circumstances.18

The CTA complied with the Court’s order to conduct further proceedings for the reception of the CIR’s evidence in CTA Case No. 4099. In the course thereof, Citytrust paid the assessed deficiencies to remove all administrative impediments to its claim for refund. But the CIR considered this payment as an admission of a tax liability which was inconsistent with Citytrust’s claim for refund.

There is indeed a contradiction between a claim for refund and the assessment of deficiency tax. The CA pointed out that the case was remanded to the CTA for the reception of additional evidence precisely to resolve the apparent contradiction.

Because of the CTA’s recognized expertise in taxation, its findings are not ordinarily subject to review specially where there is no showing of grave error or abuse on its part.19

This Court will not set aside lightly the conclusion reached by the Court of Tax Appeals which, by the very nature of its function, is dedicated exclusively to the consideration of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority.20

WHEREFORE, the petition is hereby DENIED. The May 21, 2001 decision of the Court of Appeals in CA-G.R. SP No. 46793 is AFFIRMED.

SO ORDERED.Republic of the PhilippinesSUPREME COURTManila

EN BANC

 

G.R. No. L-66838 December 2, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF TAX APPEALS,respondents.

T.A. Tejada & C.N. Lim for private respondent.

 

R E S O L U T I O N

 

FELICIANO, J.:p

For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30 June 1975, private respondent Procter and Gamble Philippine Manufacturing Corporation ("P&G-Phil.") declared dividends payable to its parent company and sole stockholder, Procter and Gamble Co., Inc. (USA) ("P&G-USA"), amounting to P24,164,946.30, from which dividends the amount of P8,457,731.21 representing the thirty-five percent (35%) withholding tax at source was deducted.

On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of Internal Revenue a claim for refund or tax credit in the amount of P4,832,989.26 claiming, among other things, that pursuant to Section 24 (b) (1) of the National Internal Revenue Code ("NITC"), 1 as amended by Presidential Decree No. 369, the applicable rate of withholding tax on the dividends remitted was only fifteen percent (15%) (and not thirty-five percent [35%]) of the dividends.

There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July 1977, filed a petition for review with public respondent Court of Tax Appeals ("CTA") docketed as CTA Case No. 2883. On 31 January 1984, the CTA rendered a decision ordering petitioner

Commissioner to refund or grant the tax credit in the amount of P4,832,989.00.

On appeal by the Commissioner, the Court through its Second Division reversed the decision of the CTA and held that:

(a) P&G-USA, and not private respondent P&G-Phil., was the proper party to claim the refund or tax credit here involved;

(b) there is nothing in Section 902 or other provisions of the US Tax Code that allows a credit against the US tax due from P&G-USA of taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%) which represents the difference between the regular tax of thirty-five percent (35%) on corporations and the tax of fifteen percent (15%) on dividends; and

(c) private respondent P&G-Phil. failed to meet certain conditions necessary in order that "the dividends received by its

non-resident parent company in the US (P&G-USA) may be subject to the preferential tax rate of 15% instead of 35%."

These holdings were questioned in P&G-Phil.'s Motion for Re-consideration and we will deal with them seriatim in this Resolution resolving that Motion.

I

1. There are certain preliminary aspects of the question of the capacity of P&G-Phil. to bring the present claim for refund or tax credit, which need to be examined. This question was raised for the first time on appeal, i.e., in the proceedings before this Court on the Petition for Review filed by the Commissioner of Internal Revenue. The question was not raised by the Commissioner on the administrative level, and neither was it raised by him before the CTA.

We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat an otherwise valid claim for refund by raising this question of alleged incapacity for the first time on appeal before this Court. This is clearly a matter of procedure. Petitioner does not pretend that P&G-Phil., should it succeed in the claim for refund, is likely to run away, as it were, with the refund instead of transmitting such refund or tax credit to its parent and sole stockholder. It is commonplace that in the absence of explicit statutory provisions to the contrary, the government must follow the same rules of procedure which bind private parties. It is, for instance, clear that the government is held to compliance with the provisions of Circular No. 1-88 of this Court in exactly the same way that private litigants are held to such compliance, save only in respect of the matter of filing fees from which the Republic of the Philippines is exempt by the Rules of Court.

More importantly, there arises here a question of fairness should the BIR, unlike any other litigant, be allowed to raise for the first time on appeal questions which had not been litigated either in the lower court or on the administrative level.

For, if petitioner had at the earliest possible opportunity, i.e., at the administrative level, demanded that P&G-Phil. produce an express authorization from its parent corporation to bring the claim for refund, then P&G-Phil. would have been able forthwith to secure and produce such authorization before filing the action in the instant case. The action here was commenced just before expiration of the two (2)-year prescriptive period.

2. The question of the capacity of P&G-Phil. to bring the claim for refund has substantive dimensions as well which, as will be seen below, also ultimately relate to fairness.

Under Section 306 of the NIRC, a claim for refund or tax credit filed with the Commissioner of Internal Revenue is essential for maintenance of a suit for recovery of taxes allegedly erroneously or illegally assessed or collected:

Sec. 306. Recovery of tax erroneously or illegally collected. — No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner of Internal Revenue; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: . . . (Emphasis supplied)

Section 309 (3) of the NIRC, in turn, provides:

Sec. 309. Authority of Commissioner to Take Compromises and to Refund Taxes.—The Commissioner may:

xxx xxx xxx

(3) credit or refund taxes erroneously or illegally received, . . . No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty. (As amended by P.D. No. 69) (Emphasis supplied)

Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&G-Phil. a "taxpayer" under Section 309 (3) of the NIRC? The term "taxpayer" is defined in our NIRC as referring to "any person subject to taximposed by the Title [on Tax on Income]." 2 It thus becomes important to note that under Section 53 (c) of the NIRC, the withholding agent who is "required to deduct and withhold any tax" is made " personally liable for such tax" and indeed is indemnified against any claims and demands which the stockholder might wish to make in questioning the amount of payments effected by the withholding agent in accordance with the provisions of the NIRC. The withholding agent, P&G-Phil., is directly and independently liable 3 for the correct amount of the tax that should be withheld from the dividend remittances. The withholding agent is, moreover, subject to and liable for deficiency assessments, surcharges and penalties should the amount of the tax withheld be finally found to be less than the amount that should have been withheld under law.

A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer." 4 The terms liable for tax" and "subject to tax" both connote legal obligation or duty to pay a tax. It is very difficult, indeed conceptually impossible, to consider a person

who is statutorily made "liable for tax" as not "subject to tax." By any reasonable standard, such a person should be regarded as a party in interest, or as a person having sufficient legal interest, to bring a suit for refund of taxes he believes were illegally collected from him.

In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 5 this Court pointed out that a withholding agent is in fact the agent both of the government and of the taxpayer, and that the withholding agent is not an ordinary government agent:

The law sets no condition for the personal liability of the withholding agent to attach. The reason is to compel the withholding agent to withhold the tax under all circumstances. In effect, the responsibility for the collection of the tax as well as the payment thereof is concentrated upon the person over whom the Government has jurisdiction. Thus, the withholding agent is constituted the agent of both the Government and the taxpayer. With respect to the collection and/or withholding of the tax, he is the Government's agent. In regard to the filing of the necessary income tax return and the payment of the tax to the Government, he is the agent of the taxpayer. The withholding agent, therefore, is no ordinary government agent especially because under Section 53 (c) he is held personally liable for the tax he is duty bound to withhold; whereas the Commissioner and his deputies are not made liable by law. 6 (Emphasis supplied)

If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of the dividends with respect to the filing of the necessary income tax return and with respect to actual payment of the tax to the government, such authority may reasonably be held to include the authority to file a claim for

refund and to bring an action for recovery of such claim. This implied authority is especially warranted where, is in the instant case, the withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under the effective control of such parent-stockholder. In the circumstances of this case, it seems particularly unreal to deny the implied authority of P&G-Phil. to claim a refund and to commence an action for such refund.

We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show some written or telexed confirmation by P&G-USA of the subsidiary's authority to claim the refund or tax credit and to remit the proceeds of the refund., or to apply the tax credit to some Philippine tax obligation of, P&G-USA, before actual payment of the refund or issuance of a tax credit certificate. What appears to be vitiated by basic unfairness is petitioner's position that, although P&G-Phil. is directly and personally liable to the Government for the taxes and any deficiency assessments to be collected, the Government is not legally liable for a refund simply because it did not demand a written confirmation of P&G-Phil.'s implied authority from the very beginning. A sovereign government should act honorably and fairly at all times, even vis-a-vis taxpayers.

We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a "taxpayer" within the meaning of Section 309, NIRC, and as impliedly authorized to file the claim for refund and the suit to recover such claim.

II

1. We turn to the principal substantive question before us: the applicability to the dividend remittances by P&G-Phil. to P&G-USA of the fifteen percent (15%) tax rate provided for in the following portion of Section 24 (b) (1) of the NIRC:

(b) Tax on foreign corporations.—

(1) Non-resident corporation. — A foreign

corporation not engaged in trade and business in the Philippines, . . ., shall pay a tax equal to 35% of the gross income receipt during its taxable year from all sources within the Philippines, as . . . dividends . . .Provided, still further, that on dividends received from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends, which shall be collected and paid as provided in Section 53 (d) of this Code, subject to the condition that the country in which the non-resident foreign corporation, is domiciled shall allow a credit against the tax due from the non-resident foreign corporation, taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax

(35%) on corporations and the tax (15%) on dividends as provided in this Section . . .

The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation, goes down to fifteen percent (15%) if the country of domicile of the foreign stockholder corporation "shall allow" such foreign corporation a tax credit for "taxes deemed paid in the Philippines," applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. In other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount equivalent to twenty (20) percentage points which represents the difference between the regular thirty-five percent (35%) dividend tax rate and the preferred fifteen percent (15%) dividend tax rate.

It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed paid" tax credit for the dividend tax (20 percentage points) waived by the Philippines in making applicable the preferred divided tax rate of fifteen percent (15%). In other words, our NIRC does not require that the US tax law deem the parent-corporation to have paid the twenty (20) percentage points of dividend tax waived by the Philippines. The NIRC only requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the twenty (20) percentage points waived by the Philippines.

2. The question arises: Did the US law comply with the above requirement? The relevant provisions of the US Intemal Revenue Code ("Tax Code") are the following:

Sec. 901 — Taxes of foreign countries and possessions of United States.

(a) Allowance of credit. — If the taxpayer chooses to have the benefits of this subpart,the tax imposed by this chapter shall, subject to the applicable limitation of section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under sections 902and 960. Such choice for any taxable year may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for such taxable year. The credit shall not be allowed against the tax imposed by section 531 (relating to the tax on accumulated earnings), against the additional tax imposed for the taxable year under section

1333 (relating to war loss recoveries) or under section 1351 (relating to recoveries of foreign expropriation losses), or against the personal holding company tax imposed by section 541.

(b) Amount allowed. — Subject to the applicable limitation of section 904, the following amounts shall be allowed as the credit under subsection (a):

(a) Citizens and domestic corporations. — In the case of a citizen of the United States and of a domestic corporation, the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States; and

xxx xxx xxx

Sec. 902. — Credit for corporate stockholders in foreign corporation.

(A) Treatment of Taxes Paid by Foreign Corporation. — For purposes of this subject, a domestic corporation which owns at least 10 percent of

the voting stock of a foreign corporation from which it receives dividends in any taxable year shall —

xxx xxx xxx

2) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in subsection (c) (1) (b)] of a year for which such foreign corporation is a less developed country corporation, be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect to such accumulated profits, which the amount of such dividends bears to the amount of such accumulated profits.

xxx xxx xxx

(c) Applicable Rules

(1) Accumulated profits defined. — For purposes of this section, the term "accumulated profits" means with respect to any foreign corporation,

(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income computed without reduction by the amount of the income, war profits, and excess profits taxes imposed on or with respect to such profits or income by any foreign country. . . .; and

(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in excess of the income, war profits, and excess profitstaxes imposed on or with respect to such profits or income.

The Secretary or his delegate shall have full power to determine from the accumulated profits of what year or years such dividends were paid, treating dividends paid in the first 20 days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shows otherwise), and in other respects treating dividends as having been paid from the most recently accumulated gains, profits, or earning. . . . (Emphasis supplied)

Close examination of the above quoted provisions of the US Tax Code 7 shows the following:

a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for the amount of the dividend tax actually paid (i.e., withheld) from the dividend remittances to P&G-USA;

b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid' tax credit 8 for a proportionate part of the corporate income tax actually paid to the Philippines by P&G-Phil.

The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income taxalthough that tax was actually paid by its Philippine subsidiary, P&G-Phil., not by P&G-USA. This "deemed paid" concept merely reflects economic reality, since the Philippine corporate income tax was in fact paid and deducted from revenues earned in the Philippines, thus reducing the amount remittable as dividends to P&G-USA. In other words, US tax law treats the Philippine corporate income tax as if it came out of the pocket, as it were, of P&G-USA as a part of the economic cost of carrying on business operations in the Philippines through the medium of P&G-Phil. and here earning profits. What is, under US law, deemed paid by P&G- USA are not "phantom taxes" but instead Philippine corporate income taxes actually paid here by P&G-Phil., which are very real indeed.

It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine corporate income tax actually paid by P&G Phil. but "deemed paid" by P&G-USA, are tax credits available or applicable against the US corporate income tax of P&G-USA. These tax credits are allowed because of the US congressional desire

to avoid or reduce double taxation of the same income stream. 9

In order to determine whether US tax law complies with the requirements for applicability of the reduced or preferential fifteen percent (15%) dividend tax rate under Section 24 (b) (1), NIRC, it is necessary:

a. to determine the amount of the 20 percentage points dividend tax waived by the Philippine government under Section 24 (b) (1), NIRC, and which hence goes to P&G-USA;

b. to determine the amount of the "deemed paid" tax credit which US tax law must allow to P&G-USA; and

c. to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at least equal to the amount of the dividend tax waived by the Philippine Government.

Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically determined in the following manner:

P100.00 — Pretax net corporate income earned by P&G-Phil.x 35% — Regular Philippine corporate income tax rate———P35.00 — Paid to the BIR by P&G-Phil. as Philippinecorporate income tax.

P100.00-35.00———P65.00 — Available for remittance as dividends to P&G-USA

P65.00 — Dividends remittable to P&G-USAx 35% — Regular Philippine dividend tax rate under Section 24——— (b) (1), NIRCP22.75 — Regular dividend tax

P65.00 — Dividends remittable to P&G-USA

x 15% — Reduced dividend tax rate under Section 24 (b) (1), NIRC———P9.75 — Reduced dividend tax

P22.75 — Regular dividend tax under Section 24 (b) (1), NIRC-9.75 — Reduced dividend tax under Section 24 (b) (1), NIRC———P13.00 — Amount of dividend tax waived by Philippine===== government under Section 24 (b) (1), NIRC.

Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil. Amount (a) is also the minimum amount of the "deemed paid" tax credit that US tax law shall allow if P&G-USA is to qualify for the reduced or preferential dividend tax rate under Section 24 (b) (1), NIRC.

Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under Section 902, Tax Code, may be computed arithmetically as follows:

P65.00 — Dividends remittable to P&G-USA- 9.75 — Dividend tax withheld at the reduced (15%) rate———P55.25 — Dividends actually remitted to P&G-USA

P35.00 — Philippine corporate income tax paid by P&G-Phil.to the BIR

Dividends actuallyremitted by P&G-Phil.to P&G-USA P55.25——————— = ——— x P35.00 = P29.75 10Amount of accumulated P65.00 ======profits earned byP&G-Phil. in excessof income tax

Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by

P&G-Phil. to its US parent P&G-USA, a tax credit of P29.75 is allowed by Section 902 US Tax Code for Philippine corporate income tax "deemed paid" by the parent but actually paid by the wholly-owned subsidiary.

Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine government), Section 902, US Tax Code, specifically and clearly complies with the requirements of Section 24 (b) (1), NIRC.

3. It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax Code is identical with the reading of the BIR of Sections 901 and 902 of the US Tax Code is identical with the reading of the BIR of Sections 901 and 902 as shown by administrative rulings issued by the BIR.

The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting Commissioner of Intemal Revenue Efren I. Plana, later Associate Justice of this Court, the relevant portion of which stated:

However, after a restudy of the decision in the American Chicle Company case and the provisions of Section 901 and 902 of the U.S. Internal Revenue Code, we find merit in your contention that our computation of the credit which the U.S. tax law allows in such cases is erroneous as the amount of tax "deemed paid" to the Philippine government for purposes of credit against the U.S. tax by the recipient of dividends includes a portion of the amount of income tax paid by the corporation declaring the dividend in addition to the tax withheld from the dividend remitted. In other words, the U.S.government will allow a credit to the U.S. corporation or recipient of the dividend, in addition to the amount of tax actually withheld, a portion of the income tax paid by the corporation declaring the dividend. Thus, if a Philippine corporation wholly owned by a

U.S. corporation has a net income of P100,000, it will pay P25,000 Philippine income tax thereon in accordance with Section 24(a) of the Tax Code. The net income, after income tax, which is P75,000, will then be declared as dividend to the U.S. corporation at 15% tax, or P11,250, will be withheld therefrom. Under the aforementioned sections of the U.S. Internal Revenue Code, U.S. corporation receiving the dividend can utilize as credit against its U.S. tax payable on said dividends the amount of P30,000 composed of:

(1) The tax "deemed pai" or indirectly paid on the dividend arrived at as follows:

P75,000 x P25,000 = P18,750———100,000 **

(2) The amount of 15% ofP75,000 withheld = 11,250———P30,000

The amount of P18,750 deemed paid and to be credited against the U.S. tax on the dividends received by the U.S. corporation from a Philippine subsidiary is clearly more than 20% requirement ofPresidential Decree No. 369 as 20% of P75,000.00 the dividends to be remitted under the above example, amounts to P15,000.00 only.

In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is hereby amended in the sense that the dividends to be remitted by your client to its parent company shall be subject to the withholding tax at the rate of 15% only.

This ruling shall have force and effect only for as long as the present pertinent provisions of the U.S. Federal Tax Code, which are the bases of the ruling, are not revoked, amended and modified, the effect of which will reduce the percentage of tax deemed paid and creditable against the U.S. tax on dividends remitted by a foreign corporation to a U.S. corporation. (Emphasis supplied)

The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic Foods Corporation and BIR Ruling dated 20 October 1987 addressed to Castillo, Laman, Tan and Associates. In other words, the 1976 Ruling of Hon. Efren I. Plana was reiterated by the BIR even as the case at bar was pending before the CTA and this Court.

4. We should not overlook the fact that the concept of "deemed paid" tax credit, which is embodied in Section 902, US Tax Code, is exactly the same "deemed paid" tax credit found in our NIRC and which Philippine tax law allows to Philippine corporations which have operations abroad (say, in the United States) and which, therefore, pay income taxes to the US government.

Section 30 (c) (3) and (8), NIRC, provides:

(d) Sec. 30. Deductions from Gross Income.—In computing net income, there shall be allowed as deductions — . . .

(c) Taxes. — . . .

xxx xxx xxx

(3) Credits against tax for taxes of foreign countries. — If the taxpayer signifies in his return his desire to have the benefits of this

paragraphs, the tax imposed by this Title shall be credited with . . .

(a) Citizen and Domestic Corporation. — In the case of a citizen of the Philippines and of domestic corporation, the amount of net income, war profits or excess profits, taxes paid or accrued during the taxable year to any foreign country. (Emphasis supplied)

Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine corporation for taxes actually paid by it to the US government—e.g., for taxes collected by the US government on dividend remittances to the Philippine corporation. This Section of the NIRC is the equivalent of Section 901 of the US Tax Code.

Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides as follows:

(8) Taxes of foreign subsidiary. — For the purposes of this subsection a domestic corporation which owns a majority of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall be deemed to have paid the same proportion of any income, war-profits, or excess-profits taxes paid by such foreign corporation to any foreign country, upon or with respect to the accumulated profits of such foreign corporation from which such dividends were paid, which the amount of such dividends bears to the amount of such accumulated profits: Provided, That the amount of tax deemed to have been paid under this subsection shall in no case exceed the same proportion of the tax against which credit is taken which the amount of such dividends bears to the amount of the entire net income of the domestic corporation in which such dividends are included.The term "accumulated profits" when used in this subsection

reference to a foreign corporation, means the amount of its gains, profits, or income in excess of the income, war-profits, and excess-profits taxes imposed upon or with respect to such profits or income; and the Commissioner of Internal Revenue shall have full power to determine from the accumulated profits of what year or years such dividends were paid; treating dividends paid in the first sixty days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shown otherwise), and in other respects treating dividends as having been paid from the most recently accumulated gains, profits, or earnings. In the case of a foreign corporation, the income, war-profits, and excess-profits taxes of which are determined on the basis of an accounting period of less than one year, the word "year" as used in this subsection shall be construed to mean such accounting period. (Emphasis supplied)

Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a Philippine parent corporation for taxes "deemed paid" by it, that is, e.g., for taxes paid to the US by the US subsidiary of a Philippine-parent corporation. The Philippine parent or corporate stockholder is "deemed" under our NIRCto have paid a proportionate part of the US corporate income tax paid by its US subsidiary, although such US tax was actually paid by the subsidiary and not by the Philippine parent.

Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US law to P&G-USA, is the same "deemed paid" tax credit that Philippine law allows to a Philippine corporation with a wholly- or majority-owned subsidiary in (for instance) the US. The

"deemed paid" tax credit allowed in Section 902, US Tax Code, is no more a credit for "phantom taxes" than is the "deemed paid" tax credit granted in Section 30 (c) (8), NIRC.

III

1. The Second Division of the Court, in holding that the applicable dividend tax rate in the instant case was the regular thirty-five percent (35%) rate rather than the reduced rate of fifteen percent (15%), held that P&G-Phil. had failed to prove that its parent, P&G-USA, had in fact been given by the US tax authorities a "deemed paid" tax credit in the amount required by Section 24 (b) (1), NIRC.

We believe, in the first place, that we must distinguish between the legal question before this Court from questions of administrative implementation arising after the legal question has been answered. The basic legal issue is of course, this: which is the applicable dividend tax rate in the instant case: the regular thirty-five percent (35%) rate or the reduced fifteen percent (15%) rate? The question of whether or not P&G-USA is in fact given by the US tax authorities a "deemed paid" tax credit in the required amount, relates to the administrative implementation of the applicable reduced tax rate.

In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit shall have actually been granted before the applicable dividend tax rate goes down from thirty-five percent (35%) to fifteen percent (15%). As noted several times earlier, Section 24 (b) (1), NIRC, merely requires, in the case at bar, that the USA "shall allow a credit against the tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ." There is neither statutory provision nor revenue regulation issued by the Secretary of Finance requiring the actual grant of the "deemed paid" tax credit by the US Internal Revenue Service to P&G-USA before the preferential fifteen percent (15%) dividend rate becomes applicable. Section 24 (b) (1), NIRC, does not create a tax exemption nor does it provide a tax credit; it is a provision which specifies when a particular (reduced) tax rate is legally applicable.

In the third place, the position originally taken by the Second Division results in a severe practical problem of administrative circularity. The Second Division in effect held that the reduced dividend tax rate is not applicable until the US tax credit for "deemed paid" taxes is actually given in the required minimum amount by the US Internal Revenue Service to P&G-USA. But, the US "deemed paid" tax credit cannot be given by the US tax authorities unless dividends have actually been remitted to the US, which means that the Philippine dividend tax, at the rate here applicable, was actually imposed and collected. 11 It is this practical or operating circularity that is in fact avoided by our BIR when it issues rulings that the tax laws of particular foreign jurisdictions (e.g., Republic of Vanuatu 12 Hongkong, 13 Denmark, 14 etc.) comply with the requirements set out in Section 24 (b) (1), NIRC, for applicability of the fifteen percent (15%) tax rate. Once such a ruling is rendered, the Philippine subsidiary begins to withhold at the reduced dividend tax rate.

A requirement relating to administrative implementation is not properly imposed as a condition for the applicability,as a matter of law, of a particular tax rate. Upon the other hand, upon the determination or recognition of the applicability of the reduced tax rate, there is nothing to prevent the BIR from issuing implementing regulations that would require P&G Phil., or any Philippine corporation similarly situated, to certify to the BIR the amount of the "deemed paid" tax credit actually subsequently granted by the US tax authorities to P&G-USA or a US parent corporation for the taxable year involved. Since the US tax laws can and do change, such implementing regulations could also provide that failure of P&G-Phil. to submit such certification within a certain period of time, would result in the imposition of a deficiency assessment for the twenty (20) percentage points differential. The task of this Court is to settle which tax rate is applicable, considering the state of US law at a given time. We should leave details relating to administrative implementation where they properly belong — with the BIR.

2. An interpretation of a tax statute that produces a revenue flow for the government is not, for that reason alone, necessarily the correct reading of the statute. There are many tax statutes or provisions which are designed,

not to trigger off an instant surge of revenues, but rather to achieve longer-term and broader-gauge fiscal and economic objectives. The task of our Court is to give effect to the legislative design and objectives as they are written into the statute even if, as in the case at bar, some revenues have to be foregone in that process.

The economic objectives sought to be achieved by the Philippine Government by reducing the thirty-five percent (35%) dividend rate to fifteen percent (15%) are set out in the preambular clauses of P.D. No. 369 which amended Section 24 (b) (1), NIRC, into its present form:

WHEREAS, it is imperative to adopt measures responsive to the requirements of a developing economy foremost of which is the financing of economic development programs;

WHEREAS, nonresident foreign corporations with investments in the Philippines are taxed on their earnings from dividends at the rate of 35%;

WHEREAS, in order to encourage more capital investment for large projects an appropriate tax need be imposed on dividends received by non-resident foreign corporations in the same manner as the tax imposed on interest on foreign loans;

xxx xxx xxx

(Emphasis supplied)

More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign equity investment in the Philippines by reducing the tax cost of earning profits here and thereby increasing the net dividends remittable to the investor. The foreign investor, however, would not benefit from the reduction of the Philippine dividend tax rate unless its home country gives it some relief from double taxation (i.e., second-tier taxation) (the home country would simply have more "post-R.P. tax" income to subject to

its own taxing power) by allowing the investor additional tax credits which would be applicable against the tax payable to such home country. Accordingly, Section 24 (b) (1), NIRC, requires the home or domiciliary country to give the investor corporation a "deemed paid" tax credit at least equal in amount to the twenty (20) percentage points of dividend tax foregone by the Philippines, in the assumption that a positive incentive effect would thereby be felt by the investor.

The net effect upon the foreign investor may be shown arithmetically in the following manner:

P65.00 — Dividends remittable to P&G-USA (pleasesee page 392 above- 9.75 — Reduced R.P. dividend tax withheld by P&G-Phil.———P55.25 — Dividends actually remitted to P&G-USA

P55.25x 46% — Maximum US corporate income tax rate———P25.415—US corporate tax payable by P&G-USAwithout tax credits

P25.415- 9.75 — US tax credit for RP dividend tax withheld by P&G-Phil.at 15% (Section 901, US Tax Code)———P15.66 — US corporate income tax payable after Section 901——— tax credit.

P55.25- 15.66———P39.59 — Amount received by P&G-USA net of R.P. and U.S.===== taxes without "deemed paid" tax credit.

P25.415- 29.75 — "Deemed paid" tax credit under Section 902 US

——— Tax Code (please see page 18 above)

- 0 - — US corporate income tax payable on dividends====== remitted by P&G-Phil. to P&G-USA after Section 902 tax credit.

P55.25 — Amount received by P&G-USA net of RP and US====== taxes after Section 902 tax credit.

It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code, could offset the US corporate income tax payable on the dividends remitted by P&G-Phil. The result, in fine, could be that P&G-USA would after US tax credits, still wind up with P55.25, the full amount of the dividends remitted to P&G-USA net of Philippine taxes. In the calculation of the Philippine Government, this should encourage additional investment or re-investment in the Philippines by P&G-USA.

3. It remains only to note that under the Philippines-United States Convention "With Respect to Taxes on Income,"15 the Philippines, by a treaty commitment, reduced the regular rate of dividend tax to a maximum of twenty percent (20%) of the gross amount of dividends paid to US parent corporations:

Art 11. — Dividends

xxx xxx xxx

(2) The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed —

(a) 25 percent of the gross amount of the dividend; or

(b) When the recipient is a corporation, 20 percent of the gross amount of the dividend ifduring the part of the paying corporation's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation.

xxx xxx xxx

(Emphasis supplied)

The Tax Convention, at the same time, established a treaty obligation on the part of the United States that it "shall allow" to a US parent corporation receiving dividends from its Philippine subsidiary "a [tax] credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine [subsidiary] —.16 This is, of course, precisely the "deemed paid" tax credit provided for in Section 902, US Tax Code, discussed above. Clearly, there is here on the part of the Philippines a deliberate undertaking to reduce the regular dividend tax rate of twenty percent (20%) is a maximum rate, there is still a differential or additional reduction of five (5) percentage points which compliance of US law (Section 902) with the requirements of Section 24 (b) (1), NIRC, makes available in

respect of dividends from a Philippine subsidiary.

We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax credit which it seeks.

WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's Motion for Reconsideration dated 11 May 1988, to SET ASIDE the Decision of the and Division of the Court promulgated on 15 April 1988, and in lieu thereof, to REINSTATE and AFFIRM the Decision of the Court of Tax Appeals in CTA Case No. 2883 dated 31 January 1984 and to DENY the Petition for Review for lack of merit. No pronouncement as to costs.

Narvasa, Gutierrez, Jr., Griño-Aquino, Medialdea and Romero, JJ., concur.

Fernan, C.J., is on leave.

 

 

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. L-68375 April 15, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.WANDER PHILIPPINES, INC. AND THE COURT OF TAX APPEALS, respondents.

The Solicitor General for petitioner.

Felicisimo R. Quiogue and Cirilo P. Noel for respondents.

 

BIDIN, J.:

This is a petition for review on certiorari of the January 19, 1984 Decision of the Court of Tax Appeals * in C.T.A. Case No.2884, entitled

Wander Philippines, Inc. vs. Commissioner of Internal Revenue, holding that Wander Philippines, Inc. is entitled to the preferential rate of 15% withholding tax on the dividends remitted to its foreign parent company, the Glaro S.A. Ltd. of Switzerland, a non-resident foreign corporation.

Herein private respondent, Wander Philippines, Inc. (Wander, for short), is a domestic corporation organized under Philippine laws. It is wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro for short), a Swiss corporation not engaged in trade or business in the Philippines.

On July 18, 1975, Wander filed its withholding tax return for the second quarter ending June 30, 1975 and remitted to its parent company, Glaro dividends in the amount of P222,000.00, on which 35% withholding tax thereof in the amount of P77,700.00 was withheld and paid to the Bureau of Internal Revenue.

Again, on July 14, 1976, Wander filed a withholding tax return for the second quarter ending June 30, 1976 on the dividends it remitted to Glaro amounting to P355,200.00, on wich 35% tax in the amount of P124,320.00 was withheld and paid to the Bureau of Internal Revenue.

On July 5, 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for refund and/or tax credit in the amount of P115,400.00, contending that it is liable only to 15% withholding tax in accordance with Section 24 (b) (1) of the Tax Code, as amended by Presidential Decree Nos. 369 and 778, and not on the basis of 35% which was withheld and paid to and collected by the government.

Petitioner herein, having failed to act on the above-said claim for refund, on July 15, 1977, Wander filed a petition with respondent Court of Tax Appeals.

On October 6, 1977, petitioner file his Answer.

On January 19, 1984, respondent Court of Tax Appeals rendered a Decision, the decretal portion of which reads:

WHEREFORE, respondent is hereby ordered to grant a refund

and/or tax credit to petitioner in the amount of P115,440.00 representing overpaid withholding tax on dividends remitted by it to the Glaro S.A. Ltd. of Switzerland during the second quarter of the years 1975 and 1976.

On March 7, 1984, petitioner filed a Motion for Reconsideration but the same was denied in a Resolution dated August 13, 1984. Hence, the instant petition.

Petitioner raised two (2) assignment of errors, to wit:

I

ASSUMING THAT THE TAX REFUND IN THE CASE AT BAR IS ALLOWABLE AT ALL, THE COURT OF TAX APPEALS ERRED INHOLDING THAT THE HEREIN RESPONDENT WANDER PHILIPPINES, INC. IS ENTITLED TO THE SAID REFUND.

II

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT SWITZERLAND, THE HOME COUNTRY OF GLARO S.A. LTD. (THE PARENT COMPANY OF THE HEREIN RESPONDENT WANDER PHILIPPINES, INC.), GRANTS TO SAID GLARO S.A. LTD. AGAINST ITS SWISS INCOME TAX LIABILITY A TAX CREDIT EQUIVALENT TO THE 20 PERCENTAGE-POINT PORTION (OF THE 35 PERCENT PHILIPPINE DIVIDEND TAX) SPARED OR WAIVED OR OTHERWISE DEEMED AS IF PAID IN THE PHILIPPINES UNDER SECTION 24 (b) (1) OF THE PHILIPPINE TAX CODE.

The sole issue in this case is whether or not private respondent Wander is entitled to the preferential rate of 15% withholding tax on dividends declared and remitted to its parent corporation, Glaro.

From this issue, two questions were posed by petitioner: (1) Whether or not Wander is the proper party to claim the refund; and (2) Whether or not Switzerland allows as tax credit

the "deemed paid" 20% Philippine Tax on such dividends.

Petitioner maintains and argues that it is Glaro the tax payer, and not Wander, the remitter or payor of the dividend income and a mere withholding agent for and in behalf of the Philippine Government, which should be legally entitled to receive the refund if any.

It will be noted, however, that Petitioner's above-entitled argument is being raised for the first time in this Court. It was never raised at the administrative level, or at the Court of Tax Appeals. To allow a litigant to assume a different posture when he comes before the court and challenge the position he had accepted at the administrative level, would be to sanction a procedure whereby the Court—which is supposed to review administrative determinations—would not review, but determine and decide for the first time, a question not raised at the administrative forum. Thus, it is well settled that under the same underlying principle of prior exhaustion of administrative remedies, on the judicial level, issues not raised in the lower court cannot be raised for the first time on appeal (Aguinaldo Industries Corporation vs. Commissioner of Internal Revenue, 112 SCRA 136; Pampanga Sugar Dev. Co., Inc. vs. CIR, 114 SCRA 725; Garcia vs. Court of Appeals, 102 SCRA 597; Matialonzo vs. Servidad, 107 SCRA 726,

In any event, the submission of petitioner that Wander is but a withholding agent of the government and therefore cannot claim reimbursement of the alleged overpaid taxes, is untenable. It will be recalled, that said corporation is first and foremost a wholly owned subsidiary of Glaro. The fact that it became a withholding agent of the government which was not by choice but by compulsion under Section 53 (b) of the Tax Code, cannot by any stretch of the imagination be considered as an abdication of its responsibility to its mother company. Thus, this Court construing Section 53 (b) of the Internal Revenue Code held that "the obligation imposed thereunder upon the withholding agent is compulsory." It is a device to insure the collection by the Philippine Government of taxes on incomes, derived from sources in the Philippines, by aliens who are outside the taxing jurisdiction of this Court (Commissioner of Internal Revenue vs. Malayan Insurance Co.,

Inc., 21 SCRA 944). In fact, Wander may be assessed for deficiency withholding tax at source, plus penalties consisting of surcharge and interest (Section 54, NLRC). Therefore, as the Philippine counterpart, Wander is the proper entity who should for the refund or credit of overpaid withholding tax on dividends paid or remitted by Glaro.

Closely intertwined with the first assignment of error is the issue of whether or not Switzerland, the foreign country where Glaro is domiciled, grants to Glaro a tax credit against the tax due it, equivalent to 20%, or the difference between the regular 35% rate of the preferential 15% rate. The dispute in this issue lies on the fact that Switzerland does not impose any income tax on dividends received by Swiss corporation from corporations domiciled in foreign countries.

Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, the law involved in this case, reads:

Sec. 1. The first paragraph of subsection (b) of Section 24 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows:

(b) Tax on foreign corporations. — 1) Non-resident corporation. A foreign corporation not engaged in trade or business in the Philippines, including a foreign life insurance company not engaged in the life insurance business in the Philippines, shall pay a tax equal to 35% of the gross income received during

its taxable year from all sources within the Philippines, as interest (except interest on foreign loans which shall be subject to 15% tax), dividends, premiums, annuities, compensations, remuneration for technical services or otherwise, emoluments or other fixed or determinable, annual, periodical or casual gains, profits, and income, and capital gains: ... Provided, still further That on dividends received from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends received, which shall be collected and paid as provided in Section 53 (d) of this Code, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign

corporation taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) dividends as provided in this section: ...

From the above-quoted provision, the dividends received from a domestic corporation liable to tax, the tax shall be 15% of the dividends received, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) dividends.

In the instant case, Switzerland did not impose any tax on the dividends received by Glaro. Accordingly, Wander claims that full credit is granted and not merely credit equivalent to 20%. Petitioner, on the other hand, avers the tax sparing credit is applicable only if the country of the parent corporation allows a foreign tax credit not only for the 15 percentage-point portion actually paid but also for the equivalent twenty percentage point portion spared, waived or otherwise deemed as if paid in the Philippines; that private respondent does not cite anywhere a Swiss law to the effect that in case where a foreign tax, such as the Philippine 35% dividend tax, is spared waived or otherwise considered as if paid in whole or in part by the foreign country, a Swiss foreign-tax credit would be allowed for the whole or for the part, as the case may be, of the foreign tax so spared or waived or considered as if paid by the foreign country.

While it may be true that claims for refund are construed strictly against the claimant, nevertheless, the fact that Switzerland did not

impose any tax or the dividends received by Glaro from the Philippines should be considered as a full satisfaction of the given condition. For, as aptly stated by respondent Court, to deny private respondent the privilege to withhold only 15% tax provided for under Presidential Decree No. 369, amending Section 24 (b) (1) of the Tax Code, would run counter to the very spirit and intent of said law and definitely will adversely affect foreign corporations" interest here and discourage them from investing capital in our country.

Besides, it is significant to note that the conclusion reached by respondent Court is but a confirmation of the May 19, 1977 ruling of petitioner that "since the Swiss Government does not impose any tax on the dividends to be received by the said parent corporation in the Philippines, the condition imposed under the above-mentioned section is satisfied. Accordingly, the withholding tax rate of 15% is hereby affirmed."

Moreover, as a matter of principle, this Court will not set aside the conclusion reached by an agency such as the Court of Tax Appeals which is, by the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject unless there has been an abuse or improvident exercise of authority (Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, which is not present in the instant case.

WHEREFORE, the petition filed is DISMISSED for lack of merit.

SO ORDERED.

Fernan (Chairman), Gutierrez, Jr., Feliciano and Cortes, JJ., concur.

 

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 168498             April 24, 2007

RIZAL COMMERCIAL BANKING CORPORATION, Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

R E S O L U T I O N

YNARES-SANTIAGO, J.:

For resolution is petitioner’s Motion for Reconsideration of our Decision1 dated June 16, 2006 affirming the Decision of the Court of Tax Appeals En Banc dated June 7, 2005 in C.T.A. EB No. 50, which affirmed the Resolutions of the Court of Tax Appeals Second Division dated May 3, 2004 and November 5, 2004 in C.T.A. Case No. 6475, denying petitioner’s Petition for Relief from Judgment and Motion for Reconsideration, respectively.

Petitioner reiterates its claim that its former counsel’s failure to file petition for review with the Court of Tax Appeals within the period set by Section 228 of the National Internal Revenue Code of 1997 (NIRC) was excusable and raised the following issues for resolution:

A.

THE DENIAL OF PETITIONER’S PETITION FOR RELIEF FROM JUDGMENT WILL RESULT IN THE DENIAL OF SUBSTANTIVE JUSTICE TO PETITIONER, CONTRARY TO ESTABLISHED DECISIONS OF THIS HONORABLE COURT BECAUSE THE ASSESSMENT SOUGHT TO BE CANCELLED HAS ALREADY PRESCRIBED – A FACT NOT DENIED BY THE RESPONDENT IN ITS ANSWER.

B.

CONTRARY TO THIS HONORABLE COURT’S DECISION, AND FOLLOWING THE LASCONA DECISION, AS WELL AS THE 2005 REVISED RULES OF THE COURT OF TAX APPEALS, PETITIONER TIMELY FILED ITS PETITION FOR REVIEW BEFORE THE COURT OF TAX APPEALS; THUS, THE COURT OF TAX APPEALS HAD JURISDICTION OVER THE CASE.

C.

CONSIDERING THAT THE SUBJECT ASSESSMENT INVOLVES AN INDUSTRY ISSUE, THAT IS, A DEFICIENCY ASSESSMENT FOR DOCUMENTARY STAMP TAX ON SPECIAL SAVINGS ACCOUNTS AND GROSS ONSHORE TAX, PETITIONER IN THE INTEREST OF SUBSTANTIVE JUSTICE AND UNIFORMITY OF TAXATION, SHOULD BE ALLOWED TO FULLY LITIGATE THE ISSUE BEFORE THE COURT OF TAX APPEALS.2

Petitioner’s motion for reconsideration is denied for lack of merit.

Other than the issue of prescription, which is raised herein for the first time, the issues presented are a mere rehash of petitioner’s previous arguments, all of which have been considered and found without merit in our Decision dated June 16, 2006.

Petitioner maintains that its counsel’s neglect in not filing the petition for review within the reglementary period was excusable. It alleges that the counsel’s secretary misplaced the Resolution hence the counsel was not aware of its issuance and that it had become final and executory.

We are not persuaded.

In our Decision, we held that:

Relief cannot be granted on the flimsy excuse that the failure to appeal was due to the neglect of petitioner’s counsel. Otherwise, all that a losing party would do to salvage his case would be to invoke neglect or mistake of his counsel as a ground for reversing or setting aside the adverse judgment, thereby putting no end to litigation.

Negligence to be "excusable" must be one which ordinary diligence and prudence could not have guarded against and by reason of which the rights of an aggrieved party have probably been impaired. Petitioner’s former counsel’s omission could hardly be characterized as excusable, much less unavoidable.

The Court has repeatedly admonished lawyers to adopt a system whereby they can always

receive promptly judicial notices and pleadings intended for them. Apparently, petitioner’s counsel was not only remiss in complying with this admonition but he also failed to check periodically, as an act of prudence and diligence, the status of the pending case before the CTA Second Division. The fact that counsel allegedly had not renewed the employment of his secretary, thereby making the latter no longer attentive or focused on her work, did not relieve him of his responsibilities to his client. It is a problem personal to him which should not in any manner interfere with his professional commitments.3

Petitioner also argues that, in the interest of substantial justice, the instant case should be re-opened considering that it was allegedly not accorded its day in court when the Court of Tax Appeals dismissed its petition for review for late filing. It claims that rules of procedure are intended to help secure, not override, substantial justice.

Petitioner’s arguments fail to persuade us.

As correctly observed by the Court of Tax Appeals in its Decision dated June 7, 2005:

If indeed there was negligence, this is obviously on the part of petitioner’s own counsel whose prudence in handling the case fell short of that required under the circumstances. He was well aware of the motion filed by the respondent for the Court to resolve first the issue of this Court’s jurisdiction on July 15, 2003, that a hearing was conducted thereon on August 15, 2003 where both counsels were present and at said hearing the motion was submitted for resolution. Petitioner’s counsel apparently did not show enthusiasm in the case he was handling as he should have been vigilant of the outcome of said motion and be prepared for the necessary action to take whatever the outcome may have been. Such kind of negligence cannot support petitioner’s claim for relief from judgment.

Besides, tax assessments by tax examiners are presumed correct and made in good faith, and all presumptions are in favor of the correctness of a tax assessment unless proven otherwise.4 Also, petitioner’s failure to file a petition for review with the Court of Tax Appeals within the statutory period rendered the disputed assessment final, executory and demandable,

thereby precluding it from interposing the defenses of legality or validity of the assessment and prescription of the Government’s right to assess.5

The Court of Tax Appeals is a court of special jurisdiction and can only take cognizance of such matters as are clearly within its jurisdiction. Section 7 of Republic Act (R.A.) No. 9282, amending R.A. No. 1125, otherwise known as the Law Creating the Court of Tax Appeals, provides:

Sec. 7. Jurisdiction. — The CTA shall exercise:

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

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

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

Also, Section 3, Rule 4 and Section 3(a), Rule 8 of the Revised Rules of the Court of Tax Appeals6 state:

RULE 4Jurisdiction of the Court

x x x x

SECTION 3. Cases Within the Jurisdiction of the Court in Divisions. — The Court in Divisions shall exercise:

(a) Exclusive original or appellate jurisdiction to review by appeal the following:

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

(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code or other applicable law provides a specific period for action: Provided, that in case of disputed assessments, the inaction of the Commissioner of Internal Revenue within the one hundred eighty day-period under Section 228 of the National Internal Revenue Code shall be deemed a denial for purposes of allowing the taxpayer to appeal his case to the Court and does not necessarily constitute a formal decision of the Commissioner of Internal Revenue on the tax case; Provided, further, that should the taxpayer opt to await the final decision of the Commissioner of Internal

Revenue on the disputed assessments beyond the one hundred eighty day-period abovementioned, the taxpayer may appeal such final decision to the Court under Section 3(a), Rule 8 of these Rules; and Provided, still further, that in the case of claims for refund of taxes erroneously or illegally collected, the taxpayer must file a petition for review with the Court prior to the expiration of the two-year period under Section 229 of the National Internal Revenue Code;

x x x x

RULE 8Procedure in Civil Cases

x x x x

SECTION 3. Who May Appeal; Period to File Petition. — (a) A party adversely affected by a decision, ruling or the inaction of the Commissioner of Internal Revenue on disputed assessments or claims for refund of internal revenue taxes, or by a decision or ruling of the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry, the Secretary of Agriculture, or a Regional Trial Court in the exercise of its original jurisdiction may appeal to the Court by petition for review filed within thirty days after receipt of a copy of such decision or ruling, or expiration of the period fixed by law for the Commissioner of Internal Revenue to act on the disputed assessments. In case of inaction of the Commissioner of Internal Revenue on claims for refund of internal revenue taxes erroneously or illegally collected, the taxpayer must file a petition for review within the two-year period prescribed by law from payment or collection of the taxes. (n)

From the foregoing, it is clear that the jurisdiction of the Court of Tax Appeals has been expanded to include not only decisions or rulings but inaction as well of the Commissioner of Internal Revenue. The decisions, rulings or inaction of the Commissioner are necessary in order to vest the Court of Tax Appeals with jurisdiction to entertain the appeal, provided it is filed within 30

days after the receipt of such decision or ruling, or within 30 days after the expiration of the 180-day period fixed by law for the Commissioner to act on the disputed assessments. This 30-day period within which to file an appeal is jurisdictional and failure to comply therewith would bar the appeal and deprive the Court of Tax Appeals of its jurisdiction to entertain and determine the correctness of the assessments. Such period is not merely directory but mandatory and it is beyond the power of the courts to extend the same.7

In case the Commissioner failed to act on the disputed assessment within the 180-day period from date of submission of documents, a taxpayer can either: 1) file a petition for review with the Court of Tax Appeals within 30 days after the expiration of the 180-day period; or 2) await the final decision of the Commissioner on the disputed assessments and appeal such final decision to the Court of Tax Appeals within 30 days after receipt of a copy of such decision. However, these options are mutually exclusive, and resort to one bars the application of the other.

In the instant case, the Commissioner failed to act on the disputed assessment within 180 days from date of submission of documents. Thus, petitioner opted to file a petition for review before the Court of Tax Appeals. Unfortunately, the petition for review was filed out of time, i.e., it was filed more than 30 days after the lapse of the 180-day period. Consequently, it was dismissed by the Court of Tax Appeals for late filing. Petitioner did not file a motion for reconsideration or make an appeal; hence, the disputed assessment became final, demandable and executory.

Based on the foregoing, petitioner can not now claim that the disputed assessment is not yet final as it remained unacted upon by the Commissioner; that it can still await the final decision of the Commissioner and thereafter appeal the same to the Court of Tax Appeals. This legal maneuver cannot be countenanced. After availing the first option, i.e., filing a petition for review which was however filed out of time, petitioner can not successfully resort to the second option, i.e., awaiting the final decision of the Commissioner and appealing the same to the Court of Tax Appeals, on the pretext that there is yet no final decision on the disputed

assessment because of the Commissioner’s inaction.

Lastly, we note that petitioner is raising the issue of prescription for the first time in the instant motion for reconsideration. Although the same was raised in the petition for review, it was dismissed for late filing. No motion for reconsideration was filed hence the disputed assessment became final, demandable and executory. Thereafter, petitioner filed with the Court of Tax Appeals a petition for relief from judgment. However, it failed to raise the issue of prescription therein. After its petition for relief from judgment was denied by the Court of Tax Appeals for lack of merit, petitioner filed a petition for review before this Court without raising the issue of prescription. It is only in the instant motion for reconsideration that petitioner raised the issue of prescription which is not allowed. The rule is well-settled that points of law, theories, issues and arguments not adequately brought to the attention of the lower court need not be considered by the reviewing court as they cannot be raised for the first time on appeal,8 much more in a motion for reconsideration as in this case, because this would be offensive to the basic rules of fair play, justice and due process.9 This last ditch effort to shift to a new theory and raise a new matter in the hope of a favorable result is a pernicious practice that has consistently been rejected.

WHEREFORE, in view of the foregoing, petitioner’s motion for reconsideration is DENIED.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. Nos. 172045-46               June 16, 2009

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs.FIRST EXPRESS PAWNSHOP COMPANY, INC., Respondent.

D E C I S I O N

CARPIO, J.:

The Case

The Commissioner of Internal Revenue (petitioner) filed this Petition for Review1 to reverse the Court of Tax Appeals’ Decision2 dated 24 March 2006 in the consolidated cases of C.T.A. EB Nos. 60 and 62. In the assailed decision, the Court of Tax Appeals (CTA) En Banc partially reconsidered the CTA First Division’s Decision3 dated 24 September 2004.

The Facts

On 28 December 2001, petitioner, through Acting Regional Director Ruperto P. Somera of Revenue Region 6 Manila, issued the following assessment notices against First Express Pawnshop Company, Inc. (respondent):

a. Assessment No. 31-1-984 for deficiency income tax of P20,712.58 with compromise penalty of P3,000;

b. Assessment No. 31-14-000053-985 for deficiency value-added tax (VAT) of P601,220.18 with compromise penalty of P16,000;

c. Assessment No. 31-14-000053-986 for deficiency documentary stamp tax (DST) of P12,328.45 on deposit on subscription with compromise penalty of P2,000; and

d. Assessment No. 31-1-000053-987 for deficiency DST of P62,128.87 on pawn tickets with compromise penalty of P8,500.

Respondent received the assessment notices on 3 January 2002. On 1 February 2002, respondent filed its written protest on the above assessments. Since petitioner did not act on the protest during the 180-day period,8respondent filed a petition before the CTA on 28 August 2002.9

Respondent contended that petitioner did not consider the supporting documents on the interest expenses and donations which resulted in the deficiency income tax.10 Respondent

maintained that pawnshops are not lending investors whose services are subject to VAT, hence it was not liable for deficiency VAT.11 Respondent also alleged that no deficiency DST was due because Section 18012 of the National Internal Revenue Code (Tax Code) does not cover any document or transaction which relates to respondent. Respondent also argued that the issuance of a pawn ticket did not constitute a pledge under Section 19513 of the Tax Code.14

In its Answer filed before the CTA, petitioner alleged that the assessment was valid and correct and the taxpayer had the burden of proof to impugn its validity or correctness. Petitioner maintained that respondent is subject to 10% VAT based on its gross receipts pursuant to Republic Act No. 7716, or the Expanded Value-Added Tax Law (EVAT). Petitioner also cited BIR Ruling No. 221-91 which provides that pawnshop tickets are subject to DST. 15

On 1 July 2003, respondent paid P27,744.88 as deficiency income tax inclusive of interest.16

After trial on the merits, the CTA First Division ruled, thus:

IN VIEW OF ALL THE FOREGOING, the instant petition is hereby PARTIALLY GRANTED. Assessment No. 31-1-000053-98 for deficiency documentary stamp tax in the amount of Sixty-Two Thousand One Hundred Twenty-Eight Pesos and 87/100 (P62,128.87) and Assessment No. 31-14-000053-98 for deficiency documentary stamp tax on deposits on subscription in the amount of Twelve Thousand Three Hundred Twenty-Eight Pesos and 45/100 (P12,328.45) are CANCELLED and SET ASIDE. However, Assessment No. 31-14-000053-98 is herebyAFFIRMED except the imposition of compromise penalty in the absence of showing that petitioner consented thereto (UST vs. Collector, 104 SCRA 1062; Exquisite Pawnshop Jewelry, Inc. vs. Jaime B. Santiago, et al., supra).

Accordingly petitioner is ORDERED to PAY the deficiency value added tax in the amount of Six Hundred One Thousand Two Hundred Twenty Pesos and 18/100 (P601,220.18) inclusive of deficiency interest for the year 1998. In addition, petitioner is ORDERED to PAY 25% surcharge and 20% delinquency interest per annum from

February 12, 2002 until fully paid pursuant to Sections 248 and 249 of the 1997 Tax Code.

SO ORDERED.17 (Boldfacing in the original)

Both parties filed their Motions for Reconsideration which were denied by the CTA First Division for lack of merit. Thereafter, both parties filed their respective Petitions for Review under Section 11 of Republic Act No. 9282 (RA 9282) with the CTA En Banc.18

On 24 March 2006, the CTA En Banc promulgated a Decision affirming respondent’s liability to pay the VAT and ordering it to pay DST on its pawnshop tickets. However, the CTA En Banc found that respondent’s deposit on subscription was not subject to DST.19

Aggrieved by the CTA En Banc’s Decision which ruled that respondent’s deposit on subscription was not subject to DST, petitioner elevated the case before this Court.

The Ruling of the Court of Tax Appeals

On the taxability of deposit on subscription, the CTA, citing First Southern Philippines Enterprises, Inc. v. Commissioner of Internal Revenue,20 pointed out that deposit on subscription is not subject to DST in the absence of proof that an equivalent amount of shares was subscribed or issued in consideration for the deposit. Expressed otherwise, deposit on stock subscription is not subject to DST if: (1) there is no agreement to subscribe; (2) there are no shares issued or any additional subscription in the restructuring plan; and (3) there is no proof that the issued shares can be considered as issued certificates of stock.21

The CTA ruled that Section 17522 of the Tax Code contemplates a subscription agreement. The CTA explained that there can be subscription only with reference to shares of stock which have been unissued, in the following cases: (a) the original issuance from authorized capital stock at the time of incorporation; (b) the opening, during the life of the corporation, of the portion of the original authorized capital stock previously unissued; or (c) the increase of authorized capital stock achieved through a formal amendment of the articles of

incorporation and registration of the articles of incorporation with the Securities and Exchange Commission.23

The CTA held that in this case, there was no subscription or any contract for the acquisition of unissued stock forP800,000 in the taxable year assessed. The General Information Sheet (GIS) of respondent showed only a capital structure of P500,000 as Subscribed Capital Stock and P250,000 as Paid-up Capital Stock and did not include the assessed amount. Mere reliance on the presumption that the assessment was correct and done in good faith was unavailing vis-à-vis the evidence presented by respondent. Thus, the CTA ruled that the assessment for deficiency DST on deposit on subscription has not become final.24

The Issue

Petitioner submits this sole issue for our consideration: whether the CTA erred on a question of law in disregarding the rule on finality of assessments prescribed under Section 228 of the Tax Code. Corollarily, petitioner raises the issue on whether respondent is liable to pay P12,328.45 as DST on deposit on subscription of capital stock.

The Ruling of the Court

Petitioner contends that the CTA erred in disregarding the rule on the finality of assessments prescribed under Section 228 of the Tax Code.25 Petitioner asserts that even if respondent filed a protest, it did not offer evidence to prove its claim that the deposit on subscription was an "advance" made by respondent’s stockholders.26Petitioner alleges that respondent’s failure to submit supporting documents within 60 days from the filing of its protest as required under Section 228 of the Tax Code caused the assessment of P12,328.45 for deposit on subscription to become final and unassailable.27

Petitioner alleges that revenue officers are afforded the presumption of regularity in the performance of their official functions, since they have the distinct opportunity, aside from competence, to peruse records of the assessments. Petitioner invokes the principle that by reason of the expertise of administrative agencies over matters falling under their

jurisdiction, they are in a better position to pass judgment thereon; thus, their findings of fact are generally accorded great respect, if not finality, by the courts. Hence, without the supporting documents to establish the non-inclusion from DST of the deposit on subscription, petitioner’s assessment pursuant to Section 228 of the Tax Code had become final and unassailable.28

Respondent, citing Standard Chartered Bank-Philippine Branches v. Commissioner of Internal Revenue,29 asserts that the submission of all the relevant supporting documents within the 60-day period from filing of the protest is directory.

Respondent claims that petitioner requested for additional documents in petitioner’s letter dated 12 March 2002, to wit: (1) loan agreement from lender banks; (2) official receipts of interest payments issued to respondent; (3) documentary evidence to substantiate donations claimed; and (4) proof of payment of DST on subscription.30 It must be noted that the only document requested in connection with respondent’s DST assessment on deposit on subscription is proof of DST payment. However, respondent could not produce any proof of DST payment because it was not required to pay the same under the law considering that the deposit on subscription was an advance made by its stockholders for future subscription, and no stock certificates were issued.31 Respondent insists that petitioner could have issued a subpoena requiring respondent to submit other documents to determine if the latter is liable for DST on deposit on subscription pursuant to Section 5(c) of the Tax Code.32

Respondent argues that deposit on future subscription is not subject to DST under Section 175 of the Tax Code. Respondent explains:

It must be noted that deposits on subscription represent advances made by the stockholders and are in the nature of liabilities for which stocks may be issued in the future. Absent any express agreement between the stockholders and petitioner to convert said advances/deposits to capital stock, either through a subscription agreement or any other document, these deposits remain as liabilities owed by respondent to its stockholders. For these deposits to be subject to DST, it is necessary that a conversion/subscription agreement be made by First Express and its stockholders.

Absent such conversion, no DST can be imposed on said deposits under Section 175 of the Tax Code.33 (Underscoring in the original)

Respondent contends that by presenting its GIS and financial statements, it had already sufficiently proved that the amount sought to be taxed is deposit on future subscription, which is not subject to DST.34 Respondent claims that it cannot be required to submit proof of DST payment on subscription because such payment is non-existent. Thus, the burden of proving that there was an agreement to subscribe and that certificates of stock were issued for the deposit on subscription rests on petitioner and his examiners. Respondent states that absent any proof, the deficiency assessment has no basis and should be cancelled.35

On the Taxability of Deposit on Stock Subscription

DST is a tax on documents, instruments, loan agreements, and papers evidencing the acceptance, assignment, sale or transfer of an obligation, right or property incident thereto. DST is actually an excise tax because it is imposed on the transaction rather than on the document.36 DST is also levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific legal relationships through the execution of specific instruments.37 The Tax Code provisions on DST relating to shares or certificates of stock state:

Section 175. Stamp Tax on Original Issue of Shares of Stock. - On every original issue, whether on organization, reorganization or for any lawful purpose, of shares of stock by any association, company or corporation, there shall be collected a documentary stamp tax of Two pesos (P2.00) on each Two hundred pesos (P200), or fractional part thereof, of the par value, of such shares of stock: Provided, That in the case of the original issue of shares of stock without par value the amount of the documentary stamp tax herein prescribed shall be based upon the actual consideration for the issuance of such shares of stock: Provided, further, That in the case of stock dividends, on the actual value represented by each share.38

Section 176. Stamp Tax on Sales, Agreements to Sell, Memoranda of Sales, Deliveries or

Transfer of Due-bills, Certificates of Obligation, or Shares or Certificates of Stock. - On all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of due-bills, certificates of obligation, or shares or certificates of stock in any association, company or corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such due-bills, certificates of obligation or stock, or to secure the future payment of money, or for the future transfer of any due-bill, certificate of obligation or stock, there shall be collected a documentary stamp tax of One peso and fifty centavos (P1.50) on each Two hundred pesos (P200), or fractional part thereof, of the par value of such due-bill, certificate of obligation or stock: Provided, That only one tax shall be collected on each sale or transfer of stock or securities from one person to another, regardless of whether or not a certificate of stock or obligation is issued, indorsed, or delivered in pursuance of such sale or transfer: Andprovided, further, That in the case of stock without par value the amount of the documentary stamp tax herein prescribed shall be equivalent to twenty-five percent (25%) of the documentary stamp tax paid upon the original issue of said stock.39

In Section 175 of the Tax Code, DST is imposed on the original issue of shares of stock. The DST, as an excise tax, is levied upon the privilege, the opportunity and the facility of issuing shares of stock. In Commissioner of Internal Revenue v. Construction Resources of Asia, Inc.,40 this Court explained that the DST attaches upon acceptance of the stockholder’s subscription in the corporation’s capital stock regardless of actual or constructive delivery of the certificates of stock. Citing Philippine Consolidated Coconut Ind., Inc. v. Collector of Internal Revenue,41 the Court held:

The documentary stamp tax under this provision of the law may be levied only once, that is upon the original issue of the certificate. The crucial point therefore, in the case before Us is the proper interpretation of the word ‘issue.’ In other words, when is the certificate of stock deemed ‘issued’ for the purpose of imposing the documentary stamp tax? Is it at the time the certificates of stock are printed, at the time they are filled up (in whose name the stocks

represented in the certificate appear as certified by the proper officials of the corporation), at the time they are released by the corporation, or at the time they are in the possession (actual or constructive) of the stockholders owning them?

x x x

Ordinarily, when a corporation issues a certificate of stock (representing the ownership of stocks in the corporation to fully paid subscription) the certificate of stock can be utilized for the exercise of the attributes of ownership over the stocks mentioned on its face. The stocks can be alienated; the dividends or fruits derived therefrom can be enjoyed, and they can be conveyed, pledged or encumbered. The certificate as issued by the corporation, irrespective of whether or not it is in the actual or constructive possession of the stockholder, is considered issued because it is with value and hence the documentary stamp tax must be paid as imposed by Section 212 of the National Internal Revenue Code, as amended.

In Section 176 of the Tax Code, DST is imposed on the sales, agreements to sell, memoranda of sales, deliveries or transfer of shares or certificates of stock in any association, company, or corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such certificates of stock, or to secure the future payment of money, or for the future transfer of certificates of stock. In Compagnie Financiere Sucres et Denrees v. Commissioner of Internal Revenue, this Court held that under Section 176 of the Tax Code, sales to secure the future transfer of due-bills, certificates of obligation or certificates of stock are subject to documentary stamp tax.42

Revenue Memorandum Order No. 08-98 (RMO 08-98) provides the guidelines on the corporate stock documentary stamp tax program. RMO 08-98 states that:

1. All existing corporations shall file the Corporation Stock DST Declaration, and the DST Return, if applicable when DST is still due on the subscribed share issued by the corporation, on or

before the tenth day of the month following publication of this Order.

x x x

3. All existing corporations with authorization for increased capital stock shall file their Corporate Stock DST Declaration, together with the DST Return, if applicable when DST is due on subscriptions made after the authorization, on or before the tenth day of the month following the date of authorization. (Boldfacing supplied)

RMO 08-98, reiterating Revenue Memorandum Circular No. 47-97 (RMC 47-97), also states that what is being taxed is the privilege of issuing shares of stock, and, therefore, the taxes accrue at the time the shares are issued. RMC 47-97 also defines issuance as the point in which the stockholder acquires and may exercise attributes of ownership over the stocks.

As pointed out by the CTA, Sections 175 and 176 of the Tax Code contemplate a subscription agreement in order for a taxpayer to be liable to pay the DST. A subscription contract is defined as any contract for the acquisition of unissued stocks in an existing corporation or a corporation still to be formed.43 A stock subscription is a contract by which the subscriber agrees to take a certain number of shares of the capital stock of a corporation, paying for the same or expressly or impliedly promising to pay for the same.44

In this case, respondent’s Stockholders’ Equity section of its Balance Sheet as of 31 December 199845 shows:

Stockholders’ Equity 1998

Authorized Capital Stock P 2,000,000.00

Paid-up Capital Stock 250,000.00

Deposit on Subscription 800,000.00

Retained Earnings 62,820.34

Net Income (858,498.38)

Total P 254,321.96

The GIS submitted to the Securities and Exchange Commission on 31 March 1999 shows the following Capital Structure:46

B. Financial Profile

1. Capital Structure :

AUTHORIZED - P2,000,000.00

SUBSCRIBED - 500,000.00

PAID-UP - 250,000.00

These entries were explained by Miguel Rosario, Jr. (Rosario), respondent’s external auditor, during the hearing before the CTA on 11 June 2003. Rosario testified in this wise:

Atty. Napiza

Q. Mr. Rosario, I refer you to the balance sheet of First Express for the year 1998 particularly the entry of deposit on subscription in the amount of P800 thousand, will you please tell us what is (sic) this entry represents?

Mr. Rosario Jr.

A. This amount of P800 thousand represents the case given by the stockholders to the company but does not necessarily made (sic) payment to subscribed portion.

Atty. Napiza

Q. What is (sic) that payment stands for?

Mr. Rosario Jr.

A. This payment stands as (sic) for the deposit for future subscription.

Atty. Napiza

Q. Would you know if First Express issued corresponding shares pertinent to the amount being deposited?

Mr. Rosario Jr.

A. No.

Atty. Napiza

Q. What do you mean by no? Did they or they did not?

Mr. Rosario Jr.

A. They did not issue any shares because that is not the payment of subscription. That is just a mere deposit.

Atty. Napiza

Q. Would you know, Mr. Rosario, how much is the Subscribed Capital of First Express Pawnshop?

Mr. Rosario Jr.

A. The Subscribed Capital of First Express Pawnshop Company, Inc. for the year 1998 is P500 thousand.

Atty. Napiza

Q. How about the Paid Up Capital?

Mr. Rosario Jr.

A. The Paid Up Capital is P250 thousand.

Atty. Napiza

Q. Are (sic) all those figures appear in the balance sheet?

Mr. Rosario Jr.

A. The Paid Up Capital appeared here but the Subscribed Portion was not stated. (Boldfacing supplied)

Based on Rosario’s testimony and respondent’s financial statements as of 1998, there was no agreement to subscribe to the unissued shares. Here, the deposit on stock subscription refers to an amount of money received by the corporation as a deposit with the possibility of applying the

same as payment for the future issuance of capital stock.47 In Commissioner of Internal Revenue v. Construction Resources of Asia, Inc.,48 we held:

We are firmly convinced that the Government stands to lose nothing in imposing the documentary stamp tax only on those stock certificates duly issued, or wherein the stockholders can freely exercise the attributes of ownership and with value at the time they are originally issued. As regards those certificates of stocks temporarily subject to suspensive conditions they shall be liable for said tax only when released from said conditions, for then and only then shall they truly acquire any practical value for their owners.lavvphil(Boldfacing supplied)

Clearly, the deposit on stock subscription as reflected in respondent’s Balance Sheet as of 1998 is not a subscription agreement subject to the payment of DST. There is no P800,000 worth of subscribed capital stock that is reflected in respondent’s GIS. The deposit on stock subscription is merely an amount of money received by a corporation with a view of applying the same as payment for additional issuance of shares in the future, an event which may or may not happen. The person making a deposit on stock subscription does not have the standing of a stockholder and he is not entitled to dividends, voting rights or other prerogatives and attributes of a stockholder. Hence, respondent is not liable for the payment of DST on its deposit on subscription for the reason that there is yet no subscription that creates rights and obligations between the subscriber and the corporation.

On the Finality of Assessment as Prescribed under Section 228 of the Tax Code

Section 228 of the Tax Code provides:

SEC. 228. Protesting of Assessment. - When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided, however, That a preassessment notice shall not be required in the following cases:

(a) When the finding for any deficiency tax is the result of mathematical error in

the computation of the tax as appearing on the face of the return; or

(b) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or

(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or

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

(e) When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons.

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

Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings.

Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final.

If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or

inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable. (Boldfacing supplied)

Section 228 of the Tax Code49 provides the remedy to dispute a tax assessment within a certain period of time. It states that an assessment may be protested by filing a request for reconsideration or reinvestigation within 30 days from receipt of the assessment by the taxpayer. Within 60 days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final.

In this case, respondent received the tax assessment on 3 January 2002 and it had until 2 February 2002 to submit its protest. On 1 February 2002, respondent submitted its protest and attached the GIS and Balance Sheet as of 31 December 1998. Respondent explained that it received P800,000 as a deposit with the possibility of applying the same as payment for the future issuance of capital stock.

Within 60 days from the filing of protest or until 2 April 2002, respondent should submit relevant supporting documents. Respondent, having submitted the supporting documents together with its protest, did not present additional documents anymore.

In a letter dated 12 March 2002, petitioner requested respondent to present proof of payment of DST on subscription. In a letter-reply, respondent stated that it could not produce any proof of DST payment because it was not required to pay DST under the law considering that the deposit on subscription was an advance made by its stockholders for future subscription, and no stock certificates were issued.

Since respondent has not allegedly submitted any relevant supporting documents, petitioner now claims that the assessment has become final, executory and demandable, hence, unappealable.

We reject petitioner’s view that the assessment has become final and unappealable. It cannot be said that respondent failed to submit relevant

supporting documents that would render the assessment final because when respondent submitted its protest, respondent attached the GIS and Balance Sheet. Further, petitioner cannot insist on the submission of proof of DST payment because such document does not exist as respondent claims that it is not liable to pay, and has not paid, the DST on the deposit on subscription.

The term "relevant supporting documents" should be understood as those documents necessary to support the legal basis in disputing a tax assessment as determined by the taxpayer. The BIR can only inform the taxpayer to submit additional documents. The BIR cannot demand what type of supporting documents should be submitted. Otherwise, a taxpayer will be at the mercy of the BIR, which may require the production of documents that a taxpayer cannot submit.1awphi1

After respondent submitted its letter-reply stating that it could not comply with the presentation of the proof of DST payment, no reply was received from petitioner.

Section 228 states that if the protest is not acted upon within 180 days from submission of documents, the taxpayer adversely affected by the inaction may appeal to the CTA within 30 days from the lapse of the 180-day period. Respondent, having submitted its supporting documents on the same day the protest was filed, had until 31 July 2002 to wait for petitioner’s reply to its protest. On 28 August 2002 or within 30 days after the lapse of the 180-day period counted from the filing of the protest as the supporting documents were simultaneously filed, respondent filed a petition before the CTA.

Respondent has complied with the requisites in disputing an assessment pursuant to Section 228 of the Tax Code. Hence, the tax assessment cannot be considered as final, executory and demandable. Further, respondent’s deposit on subscription is not subject to the payment of DST. Consequently, respondent is not liable to pay the deficiency DST of P12,328.45.

Wherefore, we DENY the petition. We AFFIRM the Court of Tax Appeals’ Decision

dated 24 March 2006 in the consolidated cases of C.T.A. EB Nos. 60 and 62.

SO ORDERED.

ANTONIO T. CARPIOAssociate Justice

WE CONCUR: