i. Adamson et al. v.

CA and Chato,

AMC, Lucas G. Adamson, Therese June D. Adamson

and Sara S. de los Reyes filed with the DOJ a motion to
suspend proceedings on the ground of prejudicial question,
pendency of a civil case with the Supreme Court, and
pendency of their letter-request for re-investigation with the
Commissioner.
After the preliminary investigation, State
Prosecutor Alfredo P. Agcaoili found probable cause. The
Motion for Reconsideration against the findings of probable
cause was denied by the prosecutor.
On April 29, 1994, Lucas G. Adamson, Therese June D.
Adamson and Sara S. de los Reyes were charged before the
Regional Trial Court (RTC) of Makati, Branch 150 in Criminal
Case Nos. 94-1842 to 94-1846.
They filed a Motion to
Dismiss or Suspend the Proceedings.
They invoked the
grounds that there was yet no final assessment of their tax
liability, and there were still pending relevant Supreme Court
and CTA cases. Initially, the trial court denied the motion. A
Motion for Reconsideration was however filed, this time
assailing the trial courts lack of jurisdiction over the nature of
the subject cases. On August 8, 1994, the trial court granted
the Motion. It ruled that the complaints for tax evasion filed
by the Commissioner should be regarded as a decision of the
Commissioner regarding the tax liabilities of Lucas G.
Adamson, Therese June D. Adamson and Sara S. de los Reyes,
and appealable to the CTA. It further held that the said cases
cannot proceed independently of the assessment case pending
before the CTA, which has jurisdiction to determine the civil
and criminal tax liability of the respondents therein.
On October 10, 1994, the Commissioner filed a Petition
for Review with the Court of Appeals assailing the trial courts

dismissal of the criminal cases. She averred that it was not a

condition prerequisite that a formal assessment should first be
given to the private respondents before she may file the
aforesaid criminal complaints against them. She argued that
the criminal complaints for tax evasion may proceed
independently from the assessment cases pending before the
CTA.
On March 21, 1995, the Court of Appeals reversed the
trial courts decision and reinstated the criminal complaints.
The appellate court held that, in a criminal prosecution for
tax evasion, assessment of tax deficiency is not required
because the offense of tax evasion is complete or
consummated when the offender has knowingly and
willfully filed a fraudulent return with intent to evade the
tax.[9] It ruled that private respondents filed false and
fraudulent returns with intent to evade taxes, and acting
thereupon, petitioner filed an Affidavit of Complaint with
the Department of Justice, without an accompanying
assessment of the tax deficiency of private respondents, in
order to commence criminal action against the latter for
tax evasion.[10]
Private respondents filed a Motion for Reconsideration,
but the trial court denied the motion on July 6, 1995. Thus,
they filed the petition in G.R. No. 120935, raising the
following issues:
1.

WHETHER OR NOT THE RESPONDENT

HONORABLE COURT OF APPEALS
ERRED IN APPLYING THE DOCTRINE IN
UNGAB V. CUSI (Nos. L-41919-24, May 30,
1980, 97 SCRA 877) TO THE CASE AT
BAR.

2.

WHETHER OR NOT AN ASSESSMENT IS

REQUIRED UNDER THE SECOND
C AT E G O RY O F T H E O F F E N S E I N
SECTION 253 OF THE NIRC.

3.

WHETHER OR NOT THERE WAS A

VALID ASSESSMENT MADE BY THE
COMMISSIONER IN THE CASE AT BAR.

4.

WHETHER OR NOT THE FILING OF A

CRIMINAL COMPLAINT SERVES AS AN
IMPLIED ASSESSMENT ON THE TAX
LIABILITY OF THE TAXPAYER.

5.

WHETHER OR NOT THE FILING OF THE

CRIMINAL INFORMATION FOR TAX
EVASION IN THE TRIAL COURT IS
PREMATURE BECAUSE THERE IS YET
NO BASIS FOR THE CRIMINAL CHARGE
OF WILLFULL INTENT TO EVADE THE
PAYMENT OF A TAX.

6.

WHETHER OR NOT THE DOCTRINES

LAID DOWN IN THE CASES OF YABES V.
FLOJO (No. L-46954, July 20, 1982, 115
SCRA 286) AND CIR V. UNION SHIPPING
CORP. (G.R. No. 66160, May 21, 1990, 185
SCRA 547) ARE APPLICABLE TO THE
CASE AT BAR.

7.

WHETHER OR NOT THE COURT OF TAX

APPEALS HAS JURISDICTION OVER THE
DISPUTE ON WHAT CONSTITUTES THE
P R O P E R TA X E S D U E F R O M T H E
TAXPAYER.

In parallel circumstances, the following events preceded

G.R. No. 124557:

On December 1, 1993, AMC, Lucas G. Adamson,

Therese June D. Adamson and Sara S. de los Reyes filed a
letter request for re-investigation with the Commissioner of the
Examiners Findings earlier issued by the Bureau of Internal
Revenue (BIR), which pointed out the tax deficiencies.
On March 15, 1994 before the Commissioner could act
on their letter-request, AMC, Lucas G. Adamson, Therese June
D. Adamson and Sara S. de los Reyes filed a Petition for
Review with the CTA. They assailed the Commissioners
finding of tax evasion against them. The Commissioner moved
to dismiss the petition, on the ground that it was premature, as
she had not yet issued a formal assessment of the tax liability
of therein petitioners. On September 19, 1994, the CTA denied
the Motion to Dismiss. It considered the criminal complaint
filed by the Commissioner with the DOJ as an implied formal
assessment, and the filing of the criminal informations with the
RTC as a denial of petitioners protest regarding the tax
deficiency.
The Commissioner repaired to the Court of Appeals on
the ground that the CTA acted with grave abuse of discretion.
She contended that, with regard to the protest provided under
Section 229 of the NIRC, there must first be a formal
assessment issued by the Commissioner, and it must be in
accord with Section 6 of Revenue Regulation No. 12-85. She
maintained that she had not yet issued a formal assessment of
tax liability, and the tax deficiency amounts mentioned in her
criminal complaint with the DOJ were given only to show the
difference between the tax returns filed and the audit findings
of the revenue examiner.

The Court of Appeals sustained the CTAs denial of the

Commissioners Motion to Dismiss. Thus, the Commissioner
filed the petition for review under G.R. No. 124557, raising
the following issues:
1.

WHETHER OR NOT THE INSTANT

PETITION SHOULD BE DISMISSED FOR
FAILURE TO COMPLY WITH THE
MANDATORY REQUIREMENT OF A
CERTIFICATION UNDER OATH AGAINST
FORUM SHOPPING;

2.

WHETHER OR NOT THE CRIMINAL

CASE FOR TAX EVASION IN THE CASE
AT BAR CAN PROCEED WITHOUT AN
ASSESSMENT;

3.

WHETHER OR NOT THE COMPLAINT

FILED WITH THE DEPARTMENT OF
JUSTICE CAN BE CONSTRUED AS AN
IMPLIED ASSESSMENT; and

4.

WHETHER OR NOT THE COURT OF TAX

APPEALS HAS JURISDICTION TO ACT
ON PRIVATE RESPONDENTS PETITION
FOR REVIEW FILED WITH THE SAID
COURT.

The issues in G.R. No. 124557 and G.R. No. 120935

can be compressed into three:
1.

WHETHER THE COMMISSIONER HAS

ALREADY RENDERED AN
ASSESSMENT (FORMAL OR
OTHERWISE) OF THE TAX LIABILITY
OF AMC, LUCAS G. ADAMSON,
THERESE JUNE D. ADAMSON AND
SARA S. DE LOS REYES;

2.

WHETHER THERE IS BASIS FOR THE

CRIMINAL CASES FOR TAX EVASION
TO PROCEED AGAINST AMC, LUCAS
G. ADAMSON, THERESE JUNE D.
ADAMSON AND SARA S. DE LOS
REYES; and

3.

WHETHER THE COURT OF TAX

APPEALS HAS JURISDICTION TO
TAKE COGNIZANCE OF BOTH THE
CIVIL AND THE CRIMINAL ASPECTS
OF THE TAX LIABILITY OF AMC,
LUCAS G. ADAMSON, THERESE JUNE
D. ADAMSON AND SARA S. DE LOS
REYES.

The case of CIR v. Pascor Realty, et al.[11] is

relevant. In this case, then BIR Commissioner Jose U. Ong
authorized revenue officers to examine the books of accounts
and other accounting records of Pascor Realty and
Development Corporation (PRDC) for 1986, 1987 and 1988.
This resulted in a recommendation for the issuance of an
assessment in the amounts of P7,498,434.65 and
P3,015,236.35 for the years 1986 and 1987, respectively.
On March 1, 1995, the Commissioner filed a criminal
complaint before the DOJ against PRDC, its President Rogelio
A. Dio, and its Treasurer Virginia S. Dio, alleging evasion of
taxes in the total amount of P10,513,671.00. Private
respondents filed an Urgent Request for Reconsideration/
Reinvestigation disputing the tax assessment and tax liability.
The Commissioner denied the urgent request for
reconsideration/reinvestigation because she had not yet issued
a formal assessment.

Private respondents then elevated the Decision of the

Commissioner to the CTA on a petition for review. The
Commissioner filed a Motion to Dismiss the petition on the
ground that the CTA has no jurisdiction over the subject matter
of the petition, as there was yet no formal assessment issued
against the petitioners. The CTA denied the said motion to
dismiss and ordered the Commissioner to file an answer within
thirty (30) days. The Commissioner did not file an answer nor
did she move to reconsider the resolution. Instead, the
Commissioner filed a petition for review of the CTA decision
with the Court of Appeals. The Court of Appeals upheld the
CTA order. However, this Court reversed the Court of Appeals
decision and the CTA order, and ordered the dismissal of the
petition. We held:
An assessment contains not only a computation
of tax liabilities, but also a demand for payment
within a prescribed period. It also signals the time
when penalties and interests begin to accrue against
the taxpayer. To enable the taxpayer to determine his
remedies thereon, due process requires that it must be
served on and received by the taxpayer. Accordingly,
an affidavit, which was executed by revenue officers
stating the tax liabilities of a taxpayer and attached to
a criminal complaint for tax evasion, cannot be
deemed an assessment that can be questioned before
the Court of Tax Appeals.
Neither the NIRC nor the revenue regulations
governing the protest of assessments[12] provide a
specific definition or form of an assessment.
However, the NIRC defines the specific functions and
effects of an assessment. To consider the affidavit
attached to the Complaint as a proper assessment is to
subvert the nature of an assessment and to set a bad
precedent that will prejudice innocent taxpayers.

True, as pointed out by the private respondents,

an assessment informs the taxpayer that he or she has
tax liabilities. But not all documents coming from the
BIR containing a computation of the tax liability can
be deemed assessments.
To start with, an assessment must be sent to and
received by a taxpayer, and must demand payment of
the taxes described therein within a specific period.
Thus, the NIRC imposes a 25 percent penalty, in
addition to the tax due, in case the taxpayer fails to
pay the deficiency tax within the time prescribed for
its payment in the notice of assessment. Likewise, an
interest of 20 percent per annum, or such higher rate
as may be prescribed by rules and regulations, is to be
collected from the date prescribed for its payment
until the full payment.[13]
The issuance of an assessment is vital in
determining the period of limitation regarding its
proper issuance and the period within which to protest
it. Section 203[14] of the NIRC provides that internal
revenue taxes must be assessed within three years
from the last day within which to file the return.
Section 222,[15] on the other hand, specifies a period
of ten years in case a fraudulent return with intent to
evade was submitted or in case of failure to file a
return. Also, Section 228[16] of the same law states
that said assessment may be protested only within
thirty days from receipt thereof. Necessarily, the
taxpayer must be certain that a specific document
constitutes an assessment.
Otherwise, confusion
would arise regarding the period within which to
make an assessment or to protest the same, or whether
interest and penalty may accrue thereon.
It should also be stressed that the said document
is a notice duly sent to the taxpayer. Indeed, an
assessment is deemed made only when the collector
of internal revenue releases, mails or sends such
notice to the taxpayer.[17]

In the present case, the revenue officers Affidavit

merely contained a computation of respondents tax
liability. It did not state a demand or a period for
payment. Worse, it was addressed to the justice
secretary, not to the taxpayers.
Respondents maintain that an assessment, in
relation to taxation, is simply understood to mean:
A notice to the effect that the
amount therein stated is due as tax and
a demand for payment thereof.[18]
Fixes the liability of the
taxpayer and ascertains the facts and
furnishes the data for the proper
presentation of tax rolls.[19]
Even these definitions fail to advance private
respondents case. That the BIR examiners Joint
Affidavit attached to the Criminal Complaint
contained some details of the tax liabilities of private
respondents does not ipso facto make it an
assessment. The purpose of the Joint Affidavit was
merely to support and substantiate the Criminal
Complaint for tax evasion. Clearly, it was not meant
to be a notice of the tax due and a demand to the
private respondents for payment thereof.
The fact that the Complaint itself was specifically
directed and sent to the Department of Justice and not
to private respondents shows that the intent of the
commissioner was to file a criminal complaint for tax
evasion, not to issue an assessment. Although the
revenue officers recommended the issuance of an
assessment, the commissioner opted instead to file a
criminal case for tax evasion.
What private
respondents received was a notice from the DOJ that a
criminal case for tax evasion had been filed against
them, not a notice that the Bureau of Internal Revenue
had made an assessment.

Private respondents maintain that the filing of a

criminal complaint must be preceded by an
assessment. This is incorrect, because Section 222 of
the NIRC specifically states that in cases where a false
or fraudulent return is submitted or in cases of failure
to file a return such as this case, proceedings in court
may be commenced without an assessment.
Furthermore, Section 205 of the same Code clearly
mandates that the civil and criminal aspects of the
case may be pursued simultaneously. In Ungab v.
Cusi,[20] petitioner therein sought the dismissal of the
criminal Complaints for being premature, since his
protest to the CTA had not yet been resolved. The
Court held that such protests could not stop or
suspend the criminal action which was independent of
the resolution of the protest in the CTA. This was
because the commissioner of internal revenue had, in
such tax evasion cases, discretion on whether to issue
an assessment or to file a criminal case against the
taxpayer or to do both.
Private respondents insist that Section 222 should
be read in relation to Section 255 of the NIRC,[21]
which penalizes failure to file a return. They add that
a tax assessment should precede a criminal
indictment. We disagree. To reiterate, said Section
222 states that an assessment is not necessary before a
criminal charge can be filed. This is the general rule.
Private respondents failed to show that they are
entitled to an exception. Moreover, the criminal
charge need only be supported by a prima facie
showing of failure to file a required return. This fact
need not be proven by an assessment.
The issuance of an assessment must be
distinguished from the filing of a complaint. Before
an assessment is issued, there is, by practice, a preassessment notice sent to the taxpayer. The taxpayer
is then given a chance to submit position papers and
documents to prove that the assessment is
unwarranted. If the commissioner is unsatisfied, an

assessment signed by him or her is then sent to the

taxpayer informing the latter specifically and clearly
that an assessment has been made against him or her.
In contrast, the criminal charge need not go through
all these. The criminal charge is filed directly with
the DOJ. Thereafter, the taxpayer is notified that a
criminal case had been filed against him, not that the
commissioner has issued an assessment. It must be
stressed that a criminal complaint is instituted not to
demand payment, but to penalize the taxpayer for
violation of the Tax Code.

In the cases at bar, the Commissioner denied that she

issued a formal assessment of the tax liability of AMC, Lucas
G. Adamson, Therese June D. Adamson and Sara S. de los
Reyes. She admits though that she wrote the recommendation
letter[22] addressed to the Secretary of the DOJ recommending
the filing of criminal complaints against AMC and the
aforecited persons for fraudulent returns and tax evasion.
The first issue is whether the Commissioners
recommendation letter can be considered as a formal
assessment of private respondents tax liability.
In the context in which it is used in the NIRC, an
assessment is a written notice and demand made by the BIR on
the taxpayer for the settlement of a due tax liability that is
there definitely set and fixed. A written communication
containing a computation by a revenue officer of the tax
liability of a taxpayer and giving him an opportunity to contest
or disprove the BIR examiners findings is not an assessment
since it is yet indefinite.[23]
We rule that the recommendation letter of the
Commissioner cannot be considered a formal assessment.

Even a cursory perusal of the said letter would reveal three key
points:
1. It was not addressed to the taxpayers.
2.
There was no demand made on the
taxpayers to pay the tax liability, nor a
period for payment set therein.
3. The letter was never mailed or sent to the taxpayers
by the Commissioner.
In fine, the said recommendation letter served merely as
the prima facie basis for filing criminal informations that the
taxpayers had violated Section 45 (a) and (d), and 110, in
relation to Section 100, as penalized under Section 255, and
for violation of Section 253, in relation to Section 252 9(b) and
(d) of the Tax Code.[24]
The next issue is whether the filing of the criminal
complaints against the private respondents by the DOJ is
premature for lack of a formal assessment.
Section 269 of the NIRC (now Section 222 of the Tax
Reform Act of 1997) provides:
Sec. 269. Exceptions as to period of limitation
of assessment and collection of taxes.-(a) In the case
of a false or fraudulent return with intent to evade tax
or of failure to file a return, the tax may be assessed,
or a proceeding in court after the collection of such
tax may be begun without assessment, at any time
within ten years after the discovery of the falsity,
fraud or omission: Provided, That in a fraud
assessment which has become final and executory, the
fact of fraud shall be judicially taken cognizance of in
the civil or criminal action for collection thereof

The law is clear. When fraudulent tax returns are

involved as in the cases at bar, a proceeding in court after the
collection of such tax may be begun without assessment.
Here, the private respondents had already filed the capital
gains tax return and the VAT returns, and paid the taxes they
have declared due therefrom.
Upon investigation of the
examiners of the BIR, there was a preliminary finding of gross
discrepancy in the computation of the capital gains taxes due
from the sale of two lots of AAI shares, first to APAC and then
to APAC Philippines, Limited. The examiners also found that
the VAT had not been paid for VAT-liable sale of services for
the third and fourth quarters of 1990. Arguably, the gross
disparity in the taxes due and the amounts actually declared by
the private respondents constitutes badges of fraud.
Thus, the applicability of Ungab v. Cusi[25] is evident
to the cases at bar. In this seminal case, this Court ruled that
there was no need for precise computation and formal
assessment in order for criminal complaints to be filed against
him. It quoted Mertens Law of Federal Income Taxation, Vol.
10, Sec. 55A.05, p. 21, thus:
An assessment of a deficiency is not necessary
to a criminal prosecution for willful attempt to defeat
and evade the income tax. A crime is complete when
the violator has knowingly and willfully filed a
fraudulent return, with intent to evade and defeat the
tax. The perpetration of the crime is grounded upon
knowledge on the part of the taxpayer that he has
made an inaccurate return, and the governments
failure to discover the error and promptly to assess has
no connections with the commission of the crime.

This hoary principle still underlies Section 269 and

related provisions of the present Tax Code.

We now go to the issue of whether the CTA has no

jurisdiction to take cognizance of both the criminal and civil
cases here at bar.
Under Republic Act No. 1125 (An Act Creating the
Court of Tax Appeals) as amended, the rulings of the Commissioner
are appealable to the CTA, thus:
SEC. 7. Jurisdiction. The Court of Tax Appeals
shall exercise 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 imposed in relation
thereto, or other matters arising under
the National Internal Revenue Code or
other laws or part of law administered
by the Bureau of Internal Revenue;

Republic Act No. 8424, titled An Act Amending the

National Internal Revenue Code, As Amended, And For Other
Purposes, later expanded the jurisdiction of the Commissioner
and, correspondingly, that of the CTA, thus:
SEC. 4. Power of the Commissioner to Interpret
Tax Laws and to Decide Tax Cases. The power to
interpret the provisions of this Code and other tax
laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by
the Secretary of Finance.
The power to decide disputed assessments,
refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other
matters arising under this Code or other laws or
portions thereof administered by the Bureau of
Internal Revenue is vested in the Commissioner,

subject to the exclusive appellate jurisdiction of the

Court of Tax Appeals.

The latest statute dealing with the jurisdiction of the CTA

is Republic Act No. 9282.[26] It provides:
SEC. 7. Section 7 of the same Act is hereby amended to read as
follows:
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;
(3) Decisions, orders or resolutions of
the Regional Trial Courts in local tax
cases originally decided or resolved by
them in the exercise of their original or
appellate jurisdiction;
xxx

(b) Jurisdiction over cases involving criminal

offenses as herein provided:
(1) Exclusive original jurisdiction
over all criminal offenses arising from
violations of the National Internal
Revenue Code or Tariff and Customs
Code and other laws administered by the
Bureau of Internal Revenue or the Bureau
of Customs: Provided, however, That
offenses or felonies mentioned in this
paragraph where the principal amount of
taxes and fees, exclusive of charges and
penalties, claimed is less than One million
pesos (P1,000,000.00) or where there is
no specified amount claimed shall be tried
by the regular courts and the jurisdiction
of the CTA shall be appellate. Any
provision of law or the Rules of Court to
the contrary notwithstanding, the criminal
action and the corresponding civil action
for the recovery of civil liability for taxes
and penalties shall at all times be
simultaneously instituted with, and jointly
determined in the same proceeding by the
CTA, the filing of the criminal action
being deemed to necessarily carry with it
the filing of the civil action, and no right
to reserve the filling of such civil action
separately from the criminal action will be
recognized.
(2) Exclusive appellate jurisdiction in
criminal offenses:
(a) Over appeals from the
judgments, resolutions or orders
of the Regional Trial Courts in
tax cases originally decided by
them, in their respected territorial
jurisdiction.

(b) Over petitions for review

of the judgments, resolutions or
orders of the Regional Trial
Courts in the exercise of their
appellate jurisdiction over tax
cases originally decided by the
Metropolitan Trial Courts,
Municipal Trial Courts and
Municipal Circuit Trial Courts in
their respective jurisdiction.
(c) Jurisdiction over tax
collection cases as herein
provided:
(1) Exclusive original
jurisdiction in tax collection
cases involving final and
executory assessments for
taxes, fees, charges and
penalties: Provided, however,
That collection cases where
the principal amount of taxes
and fees, exclusive of charges
and penalties, claimed is less
than One million pesos
(P1,000,000.00) shall be tried
by the proper Municipal Trial
Court, Metropolitan Trial
Court and Regional Trial
Court.
(2) Exclusive appellate
jurisdiction in tax collection
cases:
(a) Over appeals
from the judgments,
resolutions or orders of
the Regional Trial Courts
in tax collection cases
originally decided by

them, in their respective

territorial jurisdiction.
(b) Over petitions for
review of the judgments,
resolutions or orders of
the Regional Trial Courts
in the exercise of their
appellate jurisdiction over
tax collection cases
originally decided by the
Metropolitan Trial
Courts, Municipal Trial
Courts and Municipal
Circuit Trial Courts, in
their respective
jurisdiction.

These laws have expanded the jurisdiction of the CTA.

However, they did not change the jurisdiction of the CTA to
entertain an appeal only from a final decision or assessment of
the Commissioner, or in cases where the Commissioner has not
acted within the period prescribed by the NIRC. In the cases at
bar, the Commissioner has not issued an assessment of the tax
liability of private respondents.
Finally, we hold that contrary to private respondents
stance, the doctrines laid down in CIR v. Union Shipping Co.
and Yabes v. Flojo are not applicable to the cases at bar. In
these earlier cases, the Commissioner already rendered an
assessment of the tax liabilities of the delinquent taxpayers, for
which reason the Court ruled that the filing of the civil suit for
collection of the taxes due was a final denial of the taxpayers
request for reconsideration of the tax assessment.

IN VIEW WHEREOF, premises considered, judgment

is rendered:
1.

In G.R. No. 120935, AFFIRMING the

CA decision dated March 21, 1995,
which set aside the Regional Trial
Courts Order dated August 8, 1994,
and REINSTATING Criminal Case
Nos. 94-1842 to 94-1846 for further
proceedings before the trial court; and

2.

In G.R. No. 124557, REVERSING

and SETTING ASIDE the Decision of
the Court of Appeals dated March 29,
1996, and ORDERING the dismissal of
C.T.A. Case No. 5075.

No costs.
SO ORDERED.

CIR vs NLRC

On January 12, 1984 the Commissioner of the Internal Revenue sent two
letters 3 of demand to the respondent Maritime Company of the Philippines for
deficiency common carrier's tax, fixed tax, 6% Commercial Broker's tax,
documentary stamp tax, income tax and withholding taxes in the total amount of
P17,284,882.45.

The assessment became final and executory as private respondent did not
contest it. But as private respondent did not pay its tax liability either, the
Commissioner of Internal Revenue issued warrants of distraint of personal
property and levy of real property of private respondent. Copies of the
warrants, both dated January 23, 1985, were served on January 28, 1985 on
Yoly T. Petrache, private respondent's accountant. 4

On April 16, 1985 a "Receipt for Goods, Articles, and Things Seized 5 under
Authority of the National Internal Revenue Code" was executed, covering, among
other things, six barges identified as MCP-1,2,3,4,5 and 6. This receipt is required
by 303 (now 206) of the NIRC as proof of the constructive distraint of property. It
is an undertaking by the taxpayer or person in possession of the property covered
that he will preserve the property and deliver it upon order of the court or the
Internal Revenue Commissioner.

The receipt was prepared by the BIR for the signature of a representative of
respondent Maritime Company of the Philippines, but it was not in fact
signed. Petitioner later explained that the individuals who had possession of
the barges had refused to sign the receipt.
This circumstance has given rise to the question in this case as it appears
that four of the barges placed under constructive distraint were levied upon
execution by respondent deputy sheriff of Manila on July 20, 1985 to satisfy a
judgment for unpaid wages and other benefits of employees of respondent
Maritime Company of the Philippines. More specifically, the question in this
case is the validity of the warrant of distraint served by the Revenue Seizure
Officer against the writ of execution subsequently levied upon the same
property by the deputy sheriff of Manila to satisfy the claims of employees in
NLRC Case No. NCR-12-4233-84 (Domingo C. Niangar, et al. v. Maritime
Company of the Philippines) for P490,749.21.
The four barges were sold by respondent deputy sheriff at a public auction on
August 12, 1985. The highest bidder, Daniel C. Sabino, subsequently sold
them to private respondents Fernando S. Tuliao and Tulmar Trading
Corporation.
On September 4, 1985, petitioner asked the Labor Arbiter to annul the sale
and to enjoin the sheriff from disposing of the proceeds of the sale or, in the
alternative, to remit them to the Bureau of Internal Revenue so that the
amount could be applied to the payment of private respondent Maritime
Company's tax liabilities.
In an order dated September 30, 1985, Labor Arbiter Ceferina Diosana
denied the motion on the ground that petitioner Commissioner of Internal
Revenue failed to show that the barges which were levied upon in execution
and sold at public auction had been validly placed under constructive
distraint. 6 The Labor Arbiter likewise rejected petitioner's contention that the
government's claim for taxes was preferred under Art. 2247, in relation to Art.
2241(1) of the Civil Code, on the ground that under this provisions only taxes and
fees which are due on specific movables enjoy preference, whereas the taxes
claimed by petitioner were not due on the four barges in question.

The order was appealed to the NLRC, which in resolution dated April 4, 1986,
affirmed the denial of the Internal Revenue Commissioner's motion. Hence
this petition for certiorari.
For reasons to be presently stated, the petition is granted.
The National Internal Revenue Code provides for the collection of delinquent
taxes by any of the following remedies: (a) distraint of personal property or
levy of real property of the delinquent taxpayer and (b) civil or criminal action.
With respect to the four barges in question, petitioner resorted to constructive
distraint pursuant to 303 (now 206) of the NLRC. This provisions states:
Constructive distraint of the property of a taxpayer. To safeguard the
interest of the Government, the Commissioner of Internal Revenue may place
under constructive distraint the property of a delinquent taxpayer or any
taxpayer who, in his opinion, is retiring from any business subject to tax, or
intends to leave the Philippines, or remove his property therefrom, or hide or
conceal his property, or perform any act tending to obstruct the proceedings,
for collecting the tax due or which may be due from him.
The constructive distraint of personal property shall be effected by requiring
the taxpayer or any person having possession or control of such property to
sign a receipt covering the property distrained and obligate himself to
preserve the same intact and unaltered and not to dispose of the same in any
manner whatever without the express authority of the Commissioner of
Internal Revenue.
In case the taxpayer or the person having the possession and control of the
property sought to be placed under constructive distraint refuses or fails to
sign the receipt herein referred to, the revenue officer effecting the
constructive distraint shall proceed to prepare a list of such property and in
the presence of two witnesses leave a copy thereof in the premises where the
property distrained is located, after which the said property shall be deemed
to have been placed under constructive distraint..
Although the warrant of distraint in this case had been issued earlier (January
23,1985) than the levy on execution in the labor case on July 20, 1985, the
Labor Arbiter nevertheless held that there was no valid distraint of personal
property on the ground that the receipt of property distrained had not been
signed by the taxpayer as required above. In her order, which the NLRC
affirmed in toto, the Labor Arbiter said:
It is claimed by the Commissioner of the Internal Revenue that on January
23, 1984, he issued a warrant of distraint of personal property on respondent
to satisfy the collection of the deficiency taxes in the aggregate sum of

P17,284,882.45 and a copy of said warrant was served upon Maritime

Company on January 28, 1985 and pursuant to the warrant, the
Commissioner, through Revenue Seizure Agent Roland L. Bombay, issued on
April 16, 1985, to Maritime Company a receipt for goods, articles and things
seized pursuant to authority granted to him under the National Internal
Revenue Code. Such personal properties seized includes, among others,
"Six (6) units of barges MCI-6 . . . " However, his own receipts for goods
attached to his motions does not show that it was received by Maritime;
neither does it show any signature of any of Maritime's Officers.
Apart from the foregoing, in his affidavit of 11 September 1985, Sheriff
Cachero stated that before he sold the subject four barges at public auction,
he conducted an investigation on the ownership of the said four barges. In
brief, he found out that the said four barges were purchased by respondent
through Makati Leasing and that the whole purchase price has been paid by
respondent. In fact, the corresponding deed of sale has already been signed.
He did not find any lien or encumbrance on any of the said four barges. Thus
it cannot be true that the Commissioner effected a valid warrant of distraint of
personal property on the four barges in question. 7
However, this case arose out of the same facts involved in Republic v.
Enriquez, 8 in which we sustained the validity of the distraint of the six barges,
which included the four involved in this case, against the levy on execution made by
another deputy sheriff of Manila in another case filed against Maritime Company.
Two barges (MCP-1 and MCP-4) were the subject of a levy in the case. There we
found that the "Receipt for Goods, Articles and Things Seized under Authority of the
National Internal Revenue Code" covering the six barges had been duly executed,
with the Headquarters, First Coast Guard District, Farola Compound Binondo,
Manila acknowledging receipt of several barges, vehicles and two (2) bodegas of
spare parts belonging to Maritime Company of the Philippines.

Apparently, what had been attached to the petitioner's motion filed by the
government with the Labor Arbiter in this case was a copy, not the original
one showing the rubber stamp of the Coast Guard and duly signed by its
representative. A xerox copy of this signed receipt was submitted in the prior
case. 9 This could be due to the fact that, except for Solicitor Erlinda B. Masakayan,
the government lawyers who prepared the petition in the prior case were different
from those who filed the present petition. They admitted that the receipt of property
distrained had not been signed by the taxpayer or person in possession of the
taxpayer's property allegedly because they had refused to do so. What apparently
they did not know is that the receipt had been acknowledged by the Coast Guard
which obviously had the barges in its possession.

In addition to the receipt duly acknowledged by the Coast Guard, the record
of the prior case also shows that on October 4, 1985, the Commissioner of
the Internal Revenue issued a "Notice of Seizure of Personal Property"

stating that the goods and chattels listed on its reverse side, among which
were the four barges (MCP-2, MCP-3, MCP-5, and MCP-6), had been
distrained by the Commissioner of Internal Revenue. 10
The "Notice of Seizure of Personal Property," a copy of which was received
by Atty. Redentor R. Melo in behalf of Maritime Company of the Philippines,
together with the receipt of the Coast Guard, belies the claim of respondent
deputy sheriff that when he levied upon the four barges there was no
indication that the barges had previously been placed under distraint by the
Commissioner of Internal Revenue.
Accordingly, what we said in the prior case 11 in upholding the validity of distraint
of two of the six barges (MCP Nos. 1 and 4), fully applies in this case:

It is settled that the claim of the government predicated on a tax lien is

superior to the claim of a private litigant predicated on a judgment. The tax
lien attaches not only from the service of the warrant of distraint of personal
property but from the time the tax became due and payable. Besides, the
distraint on the subject properties of the Maritime Company of the Philippines
as well as the notice of their seizure were made by petitioner, through the
Commissioner of the Internal Revenue, long before the writ of the execution
was issued by the Regional Trial Court of Manila, Branch 31. There is no
question then that at the time the writ of execution was issued, the two (2)
barges, MPC-1 and MCP-4, were no longer properties of the Maritime
Company of the Philippines. The power of the court in execution of judgments
extends only to properties unquestionably belonging to the judgment debtor.
Execution sales affect the rights of the judgment debtor only, and the
purchaser in an auction sale acquires only such right as the judgment debtor
had at the time of sale. It is also well-settled that the sheriff is not authorized
to attach or levy on property not belonging to the judgment debtor.
Nor is there any merit in the contention of the NLRC that taxes are absolutely
preferred claims only with respect to movable or immovable properties on
which they are due and that since the taxes sought to be collected in this
case are not due on the barges in question the government's claim cannot
prevail over the claims of employees of the Maritime Company of the
Philippines which, pursuant to Art. 110 of the Labor Code, "enjoy first
preference."
In Republic v. Peralta

12

this Court rejected a similar contention. Through Mr.

Justice Feliciano we held:

. . . [T]he claim of the Bureau of Internal Revenue for unpaid tobacco

inspection fees constitutes a claim for unpaid internal revenue taxes which
gives rise to a tax lien upon all the properties and assets, movable or
immovable, of the insolvent as taxpayer. Clearly, under Articles 2241 No. 1,

2242 No. 1, and 2246-2249 of the Civil Code, this tax claim must be given
preference over any other claim of any other creditor, in respect of any and all
properties of the insolvent.
xxx xxx xxx
Article 110 of the Labor Code does not purport to create a lien in favor of
workers or employees for unpaid wages either upon all of the properties or
upon any particular property owned by their employer. Claims for unpaid
wages do not therefore fall at all within the category of specially preferred
claims established under Articles 2241 and 2242 of the Civil Code, except to
the extent that such claims for unpaid wages are already covered by Article
2241, number 6: "claims for laborer's wages, on the goods manufactured or
the work done," or by Article 2242, number 3: "claims of laborers and other
workers engaged in the construction, reconstruction or repair of buildings,
canals and other works, upon said buildings, canals or other works." To the
extent that claims for unpaid wages fall outside the scope of Article 2241,
number 6 and 2242, number 3, they would come with the ambit of the
category of ordinary preferred credits under Article 2244.
Applying Article 2241, number 6 to the instant case, the claims of the Unions
for separation pay of their members constitute liens attaching to the
processed leaf tobacco, cigars and cigarettes and other products produced or
manufactured by the Insolvent, but not to other assets owned by the
Insolvent. And even in respect of such tobacco and tobacco products
produced by the Insolvent, the claims of the Unions may be given effect only
after the Bureau of Internal Revenue's claim for unpaid tobacco inspection
fees shall have been satisfied out of the products so manufactured by the
Insolvent.
Article 2242, number 3, also creates a lien or encumbrance upon a building or
other real property of the Insolvent in favor of workmen who constructed or
repaired such building or other real property. Article 2242, number 3, does not
however appear relevant in the instant case, since the members of the
Unions to whom separation pay is due rendered services to the Insolvent not
(so far as the record of this case would show) in the construction or repair of
buildings or other real property, but rather, in the regular course of the
manufacturing operations of the Insolvent. The Unions' claims do not
therefore constitute a lien or encumbrance upon any immovable property
owned by the insolvent, but rather, as already indicated, upon the Insolvent's
existing inventory (if any) of processed tobacco and tobacco products.
In addition, we have held 13 that Art. 110 of the Labor Code applies only in case of
bankruptcy or judicial liquidation of the employer. This is clear from the text of the
law.

Art. 110. Worker preference in case of bankruptcy. In the event of

bankruptcy or liquidation of an employer's business, his workers shall enjoy
first preference as regards wages due them for services rendered during the
period prior to the bankruptcy or liquidation, any provision of law to the
contrary notwithstanding. Unpaid wages shall be paid in full before other
creditors may establish any claims to a share in the assets of the employer.
This case does not involve the liquidation of the employer's business.
WHEREFORE, the petition for certiorari is GRANTED and the resolution
dated April 4, 1986 of respondent NLRC in NLRC Case No. NCR-12-4233-84
is SET ASIDE insofar as it denies the government's claim for taxes, and
respondent deputy sheriff Carmelo V. Cachero or his successor is ORDERED
to remit the proceeds of the auction sale to the Bureau of Internal Revenue to
be applied as part payment of respondent Maritime Company's tax liabilities.
SO ORDERED.
BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellant,
vs.
WENCESLAO TRINIDAD, Collector of Internal Revenue, defendantappellee.
Yeager and Armstrong for appellant.
No appearance for appellee.

JOHNSON, J.:
There is a practically no dispute about the facts in this case. They are as
follows:
On the 13th day of July, 1916, the defendant Collector of Internal
Revenue, through his duly authorized agent at Zamboanga, seized and
distrained certain personal property, consisting of machinery for sawing
lumber which is particularly enumerated and described in paragraph 3 of the
complaint, and advertised the same for sale, to realize the sum of P2,159.79,
alleged to be due to the Government of the Philippine Islands from Pujalte
and Co., as forestry charges.
The defendant claimed that said personality belonged to the said
company, was used in the business on which the taxes were due, and
was liable to seizure to cover said taxes.

On the other hand, the plaintiff claimed to be the owner of said property,
and demanded its release. The demand being denied, the plaintiff paid to
the defendant the said sum of P2,159.79 under protest to prevent the
sale of said property, and immediately brought the present action in the Court
of First Instance of Zamboanga to recover the said sum of P2,159.78 together
with interest and costs. The lower court, after due trial, dismissed the
plaintiff's complaint and absolved the defendant from all liability thereunder.
From that judgment the plaintiff appealed to this court.
The property in question formerly belonged to the Taba Saw Mill Co., a
copartnership formed by Pujalte and Co. and one Ramon Murga. In April,
1914, Ramon Murga sold all his rights, title, and interest in and to the said
copartnership to Pujalte and Co., which thereby became the sole owner of the
concern.
It appears from plaintiff's Exhibit AA, which was admitted in evidence without
objection on the part of the defendant, that on the 26th day of September,
1912, the said Taba Saw Mill Co. conveyed to the plaintiff bank, by way
of chattel mortgage, the property here in question together with other
personalities, as security for the payment to said bank of two certain
promissory notes for the sum of P180,000. Said chattel mortgage was duly
registered in the office of the register of deeds of Zamboanga on the 26th day
of December, 1912. On that date the property in question was free from all
tax liens; at least, the plaintiff mortgagee had no notice thereof. On the 13th
day of July, 1916, when the amount here in question was found to be due to
the Government from Pujalte and Co. as forestry charges, and when the
property in question was seized by the defendant, the said chattel mortgage
was still subsisting. It is admitted that at the time of its seizure the said
property was being used in the sawmill of Pujalte and Co.
Upon the foregoing facts the lower court absolved the defendant from all
liability under the plaintiff's complaint, for the following reasons:
1. That the party who was liable to pay the taxes for which the property in
question was distrained was not the plaintiff but Pujalte and Co.; and that the
plaintiff having "voluntarily and spontaneously" paid the debt of the latter, had
no cause of action against the defendant collector, and could only recover the
sum so paid by it from Pujalte and Co., under article 1158 of the Civil Code
(p. 15, B. of E.); that the plaintiff should have proceeded under section 141 of
Act No. 2339 (now sec. 1580 of Act No. 2711), and not under section 140 of
the said Act (sec. 1579 of Act No. 2711).
2. That "even supposing for a moment" that the plaintiff had a right of action
against the defendant to recover the sum paid by it to the latter, yet this action
must fail because the property in question, having been used by Pujalte and

Co. in its business of cutting and sawing lumber, was liable to seizure and
distraint under section 149 of Act No. 2339.
We are of the opinion that neither of the foregoing reasons is sound, and that
the judgment of the lower court should be revoked.
First. There is absolutely no basis for the finding of the trial court that "the
plaintiff bank had voluntarily and spontaneously paid the debt of a third party,
that is, that of the firm of Pujalte and Co." (p. 15, B. of E.). Paragraph 7 of the
plaintiff's complaint alleges: "That thereupon, involuntarily and under due
protest in writing, the plaintiff bank made payment of the required sum of
P2,159.79 in order to secure the release of its seized property." These
allegations were specially admitted by the defendant (par. 5, stipulation,
Plaintiff's Exhibit G).
Section 140 of the Internal Revenue Law (Act No. 2339 provides as follows:
SEC. 140. Recovery of tax paid under protest. When the validity of any tax
in questioned, or amount disputed, or other question raised as to liability
therefor, the person against whom or against whose property the same is
sought to be enforced shall pay the tax under instant protest, or upon protest
within ten days, and shall thereupon request the decision of the Collector of
Internal Revenue. If the decision of the Collector of Internal Revenue is
adverse, or if no decision is made by him within six months from the date
when his decision was requested, the taxpayer may proceed, at any time
within two years after the payment of the tax, to bring an action against the
Collector of Internal Revenue for the recovery of the sum alleged to have
been illegally collected, the process to be served upon him, upon the
provincial treasurer, or upon the officer collecting the tax.
Section 141 of the same Act provides:
SEC. 141. Action to contest forfeiture of chatted. In case of the seizure of
personal property under claim of forfeiture the owner, desiring to contest the
validity of the forfeiture, may at any time before sale or destruction of the
property bring an action against the person seizing the property or having
possession thereof to recover the same, and upon giving proper bond may
enjoin the sale; or after the sale and within six months he may bring an action
to recover the net proceeds realized at the sale.
The lower court was of the opinion that the plaintiff should have
proceeded under the latter section above quoted and not under the
former. It cannot be maintained that the personal property here in
question was seized by the defendant "under claim of forfeiture;" nor
could it have been legally seized under claim of forfeiture. It was seized
to enforce an alleged tax lien, under section 149 of Act No. 2339 (sec.

1588, Act No. 2711), which was quoted by the lower court in its decision (p.
19 B. of E.) and which in no way provides for the forfeiture of the property on
which such a lien attaches.
Forfeiture is "the divestiture of property without compensation, in
consequence of an offense. The effect of such forfeiture is to transfer the title
to the specific thing from the owner to the sovereign power." (12 R. C. L.,
124.) There is a great difference between a seizure under forfeiture and a
seizure to enforce a tax lien. In the former all the proceeds derived from the
sale of the thing forfeited are turned over to the Collector of Internal Revenue
(sec. 148, Act No. 2339) in the latter the residue of such proceeds over and
above what is required to pay the tax sought to be realized, including
expenses, is returned to the owner of the property (second paragraph, sec.
152, Act No. 2339). Clearly, the remedy applicable to the present case is that
provided for in section 140, above quoted, and which the plaintiff invoked.
(See Hongkong and Shanghai Banking Corporation vs. Rafferty, 39 Phil.,
145, 147.)
Second. At the time of the seizure of the property here in question, the
plaintiff held a valid and subsisting chattel mortgage on the same, duly
registered in the registry of deeds. "A chattel mortgage is a conditional
sale of personal property as security for the payment of a debt, or the
performance of some other obligation specified therein, the condition being
that the sale shall be void upon the seller paying the purchaser a sum of
money or doing some other act named." (Sec. 3, Act No. 1508.)
"Therefore, so long as the mortgage exists, the dominion with respect to the
mortgaged personal property rests with the creditor-pledgee from the time of
the inscription of the mortgage in the registry, and the furniture ceases to be
the property of the debtor for the reason that it has become the property of
the creditor, in like manner as the domination of a thing sold is transferred to
the purchaser and ceases to belong to the vendor from the moment of the
delivery thereof, as a result of the sale." (Meyers vs. Thein, 15 Phil., 303,
303-309; see also Bachrach vs. Mantel, 25 Phil., 410; In re Du Tec Chuan, 34
Phil., 488, 490.)
1awph!l.net

The chattel mortgage in question was registered in the registry of deeds on

the 26th day of December, 1912. The forest charges sought to be collected
by the defendant were found to be due from Pujalte and Co. on the 13th day
of July, 1916, and on that date the property covered by said chattel mortgage
was seized by the defendant to enforce the payment of said forest charges. It
is clear from these facts and from the legal provisions and jurisprudence
above quoted that the plaintiff-mortgagee, and not Pujalte and Co., the
mortgagor, was, and had been for more than three years, the legal owner of
the property in question at the time the same was seized by the defendant.
And even granting, without deciding, that the forest charges are a tax on

business or occupation within the meaning of section 149 of Act No. 2339
(sec. 1588, Act No. 2711), yet we are of the opinion and so decide that the
mere fact that said property was used in the business of Pujalte and Co.
could not and did not make such property liable for the payment of taxes due
from said company, said property belonging as it did to an innocent third
party. "The property used in the business or occupation," referred to in said
section 149, can only mean property belonging to the owner of the business
or occupation. Any other construction would be unwarranted and unjust.
For the foregoing reasons the judgment appealed from is hereby revoked,
and it is hereby ordered and decreed that a judgment be entered in favor of
the plaintiff and against the defendant, ordering the latter to refund to the
former the sum of P2,159.79, with interest thereon at the legal rate from the
13th day of July, 1916, until paid, and without any finding as to costs. So
ordered.
Araullo, Avancea and Villamor, JJ., concur.

!
G.R. No. 44372
BENITO GARCIA, plaintiff-appellee,
vs.
THE COLLECTOR OF INTERNAL
REVENUE, defendant-appellant.
Solicitor-General Hilado for appellant.
Apolonio Suntay for appellee.

CONCEPCION, J.:

The Collector of Internal Revenue, defendant herein, required
Benito Garcia to pay a specific tax of P204.08 after the latter had
been sentenced in a criminal case to pay a fine for having taken
six hundred and sixteen liters of alcohol from the distillery of
Jose B. Suntay for the purpose of removing the same to a
distant store without having previously paid the corresponding
specific tax therefor.

Appelle paid the tax under protest, filing afterwards a complaint

to recover its amount. The court decided the case in favor of
plaintiff, and the Collector of Internal Revenue appealed from the
decision to this court.

Appellant, in his brief, assigned the following as errors committed
by the lower court:

The lower court erred in holding that the Government had made a
claim against Benito Garcia for the amount of P204.08 as specific
tax, in criminal case No. 5922 of the Court of First Instance of
Bulacan, and that the court, in its decision, declined to award it to
the Government.

The lower court erred in holding that the manufacturer of alcohol
ordinarily pays the tax and that, as the manufacturer of the alcohol
in question was Jose B. Suntay, and Benito Garcia was a mere
employee, the latter cannot be made to pay the tax in question.

The lower court erred in ordering the defendant to pay the plaintiff
the amount of P204.08, plus costs.

The lower court erred in denying the motion for new trial filed by
the defendant.

In the decision appealed from the court has proceeded upon the
assumption that in the criminal case filed against plaintiff herein,
the Government had sought payment from him of the amount
of P204.08 as specific tax; but that the court in its decision
refused to impose the same for the alleged reason that, as the
alcohol in question had been confiscated an as the value of the

same was probably greater than the amount of the tax, the
Government already has had an opportunity to recover it.

In truth, however, the payment of the tax was not sought in
the criminal case above referred to because the object of the
information was the imposition upon the offender of the
corresponding penalty for violation of section 2727 of the
Revised Administrative Code. The tax should have been
recovered by the Collector of Internal Revenue independently of
the criminal action instituted by the People of the Philippines
against the accused Benito Garcia. Therefore, the fact that in the
judgment rendered in said case no pronouncement whatsoever as
regard said tax had been made, was no bar to the Government's
recovering it afterwards, a s the Collector of Internal Revenue,
appellant herein, has done in his own name.

Furthermore, the confiscation in the criminal case was an
accessory penalty imposed by article 25 of the Revised Penal
Code, which is entirely different from the payment of the tax.

Another ground of the appealed decision, according t the
reasoning of the court, is that the payment of the tax is in reality
made by the consumer, although the distiller has to pay it first,
charging the same later in the price of the sale. In the present
case, says the court, the plaintiff Garcia never had the
opportunity to sell the alcohol and consequently would never
be reimbursed for the amount of the corresponding specific
tax. All this loses its apparent merit by the single consideration
that one who violates the law must suffer all the consequences the
law is confiscation.

According to section 1479 of the Revised Administrative Code,

the tax should be paid immediately before the removal of the
article from the place of production. The law does not say that the
tax may be paid immediately before the sale.

The second error committed by the court consists in holding that
the distiller of alcohol ordinarily is the one who pays the tax and
inasmuch as Jose B. Suntay was the distiller of the alcohol in
question, while Benito Garcia was mere employee, the latter could
not be compelled to pay tax referred to. This is an inaccurate
interpretation of the law. Section 1479 aforecited of the Revised
Administrative Code provides that the specific taxes on domestic
products shall be paid by the manufacturer, producer, owner or
person having possession of the same. It is a fact that the six
hundred and sixteen liters of alcohol were found in the possession
of plaintiff when he transferred them from the factory to a distant
store and there is neither allegation nor evidence that plaintiff had
taken the alcohol from the distillery to remove the same to the
store by order of his principal, Jose B. Suntay. In order to avoid
dispute and to determine easily the person who should pay the
specific tax, section 1479 of the Revised Administrative Code has
farsightedly provided that the manufacturer, producer, owner or
person having possession of the article shall pay the tax.

The judgment appealed from is reversed without a special
pronouncement as the costs. So ordered.

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
WESTERN PACIFIC CORPORATION, respondent.
Office of the Solicitor General for petitioner.
R. Melo and A. S. Velasquez for respondent.

PAREDES, J.:
On March 2, 1959, the respondent Western Pacific Corporation, was
assessed for P3,731.00, as deficiency income tax for the year 1953. This
assessment was brought about by the disallowance of P8,265.82, listed in
respondent's return for 1953, as expense items, and P10,387.50, as written
off "bad debts." The assessment was received by respondent on the same
date (March 2, 1959). On March 5, 1959, the Commissioner of Internal
Revenue wrote the respondent corporation a letter of demand for the
payment of the amount, including therein a breakdown of said assessment.
Under date of June 29, 1959, respondent corporation, thru Ruifino Melo &
Company, Consulting and Examining Auditors, requested for nonassessment, claiming that there has been prescription in making the
assessment, that the expense items and bad debts were allowable deduction.
The letter was accompanied by a Resolution of the corporation, dated
February 2, 1954, where it was resolved to write off the debts of the people
appearing in another annex. The Commissioner on July 30, 1959 replied to
the request, denying the same, and demanding the payment of the amount
due within thirty (30) days from receipt of said demand. On September 19,
1958, respondent corporation requested that it be permitted until September
25, 1959, to submit formal objections to the assessment. The formal
objections appearing in the letter of September 22, 1959, were identical to
those of the June 29, 1959 communication, reason for which the
Commissioner did not give any favorable action. The last letter of the
Commissioner, dated October 28, 1959, among others, requested payment of
the assessment within ten (10) days from receipt thereof.
On December 18, 1959, respondent Western Pacific Corporation, presented
with the Court of Tax Appeals a petition for Review of assessment made by
the Commissioner, on three (3) counts, to wit:
(1) whether or not the making of the assessment had prescribed;
(2) whether expenses incurred in securing IGC Licenses are capital
expenditures, and, as such, not deductible from the income; and
(3) whether the bad debts written off should likewise be deducted.
When the issues were joined, by the filing of the Answer, and after hearing,
the CTA rendered judgment absolving the Western Pacific Corporation from
the assessment. It, however, ruled out prescription, stating that March 2,
1959, was the last day of the five (5) year period within which to make the
assessment. On this point, the CTA ruled:
However, we do not agree with petitioner that the assessment in question
was issued beyond the 5-year statutory limitation. February 28, 1959 fell on a

Saturday. Pursuant to Republic Act No. 1880, as, implemented by Executive

Order No. 25, effective July 1, 1959, all bureaus and offices of the
government, except schools, court, hospitals and health clinics, hold
office only five days a week or from Monday to Friday. Saturday and Sunday,
are constituted public holidays or days of exemption from labor or work as far
as government offices, including that of respondent Commissioner, are
concerned. The offices and bureaus concerned are officially closed on those
days. So that on February 28, 1959 and March 1, 1959, which were Saturday
and Sunday, respectively, the office of respondent was officially closed. And
where the last day for doing an act required by law falls on a holiday, the act
may be done on the next succeeding business day. (Section 31, Revised
Administrative Code.) Similarly, in computing any period of time prescribed by
statute, the day of the act after which the designated period of time begins to
run is not included. But the last day of the period so computed is to be
included, unless it is a Sunday or a legal holiday, in which event the time shall
run until the end of the next day which is neither a Sunday or a holiday
(Section 1, Rule 28, Rules of Court). Consequently, since February 28, 1959
was a Saturday and the next day, March 1, 1959, a Sunday, respondent had
until the next succeeding business day, March 2, 1959, Monday, within which
to issue the deficiency assessment. The assessment in question having been
issued on March 2, 1959, it was, therefore, seasonably made.
We concur in the above findings and conclusions, convinced as We are, that
they are actually and legally correct..
The above ruling notwithstanding, the Commissioner of Internal Revenue
appealed against the judgment which absolved respondent Western Pacific
Corporation from liability, alleging that the CTA erred:.
(1) In taking cognizance of the case, notwithstanding lack of jurisdiction; and
(2) Granting it had jurisdiction, in considering the expense items and the
written off bad debts as deductible.
1wph1.t

Without going into the merits of the decision absolving the respondent
corporation of tax liability, We find that the assessment made by the
Commissioner should be maintained, for the simple reason that when the
petition for review was brought to the CTA by the respondent corporation, the
said Court no longer had jurisdiction to entertain the same.
The assessment had long become final. A petition for review should be
presented, within the reglementary period, as provided for in Section 11,
Republic Act No. 1125, which is "thirty (30) days from receipt of the
assessment." The thirty (30) day period is jurisdictional (Pangasinan
Transportation Co. vs. Blaquera, L-13101, April 29, 1960).

It will be noted that the assessment was received by the respondent

corporation on March 2, 1959. It was only on June 29, 1959, when said
corporation formally assailed the assessment, on the grounds of
prescription in making the assessment and the impropriety of the
disallowance of the listed deductions. From March 3 to June 29, 1959,
manifestly more than thirty (30) days had lapsed and the assessment became
final, executory and demandable (Ventanilla vs. Bd. of Tax Appeals, et al.,
L-7384, Dec. 19, 1955). Of course, in the interim, a number of
communications were exchanged between the parties, the latest of which
was dated October 28, 1959. Even if this date is considered as the
commencement of the thirty (30) day period, still the petition for review
with the CTA was out of time, because it was only on December 18,
1959, that said petition was presented. Failure to comply with the thirtyday statutory period would bar appeal and deprive the CTA of its
jurisdiction to entertain and determine the correctness of the
assessment (Gibbs & Gibbs vs. Coll. of Int. Rev. & CTA, L-13453, Feb. 29,
1960).
IN VIEW OF THE FOREGOING, the decision of the CTA is hereby set aside
for having been rendered without jurisdiction, the assessment in question
having been already final, executory and demandable before the petition for
review was presented; and another entered, ordering respondent Western
Pacific Corporation to pay the assessment made by the Collector of Internal
Revenue, and the further amount of 5% surcharge and 1% monthly interest
on the amount assessed, from April 1, 1959 until date of full payment. Costs
against the respondent corporation.

!
THE COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
PHOENIX ASSURANCE CO., LTD., respondent.
----------------------------G.R. No. L-19903

May 20, 1965

PHOENIX ASSURANCE, CO., LTD., petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
Office of the Solicitor General for petitioner-respondent Commissioner of
Internal Revenue.
Sycip, Salazar, Luna & Associates and A. S. Monzon, B. V. Abela & J. M.
Castillo for respondent-petitioner Phoenix Assurance Co., Ltd.

BENGZON, J.P., J.:

From a judgment of the Court of Tax Appeals in C.T.A. Cases Nos. 305 and
543, consolidated and jointly heard therein, these two appeals were taken.
Since they involve the same facts and interrelated issues, the appeals are
herein decided together.
Phoenix Assurance Co., Ltd., a foreign insurance corporation organized
under the laws of Great Britain, is licensed to do business in the Philippines
with head office in London. Through its head office, it entered in London into
worldwide reinsurance treaties with various foreign insurance companies. It
agree to cede a portion of premiums received on original insurances
underwritten by its head office, subsidiaries, and branch offices throughout
the world, in consideration for assumption by the foreign insurance
companies of an equivalent portion of the liability from such original
insurances.
1wph1.t

Pursuant to such reinsurance treaties, Phoenix Assurance Co., Ltd., ceded

portions of the premiums it earned from its underwriting business in the
Philippines, as follows:
Year
Amount Ceded
1952
P316,526.75
1953
P246,082.04
1954
P203,384.69
upon which the Commissioner of Internal Revenue, by letter of May 6, 1958,
assessed the following withholding tax:
Year
Withholding Tax
1952
P 75,966.42
1953
59,059.68
1954
48,812.32
Total

!
P183,838.42
=============

On April 1, 1951, Phoenix Assurance Co., Ltd. filed its Philippine income tax
return for 1950, claiming therein, among others, a deduction of P37,147.04 as
net addition to marine insurance reserve equivalent to 40% of the gross
marine insurance premiums received during the year. The Commissioner of
Internal Revenue disallowed P11,772.57 of such claim for deduction and
subsequently assessed against Phoenix Assurance Co., Ltd. the sum of
P1,884.00 as deficiency income tax. The disallowance resulted from the fixing
by the Commissioner of the net addition to the marine insurance reserve at
100% of the marine insurance premiums received during the last three
months of the year. The Commissioner assumed that "ninety and third, days
are approximately the length of time required before shipments reach their
destination or before claims are received by the insurance companies."
On April 1, 1953, Phoenix Assurance Co., Ltd. filed its Philippine income tax
return for 1952, declaring therein a deduction from gross income of
P35,912.25 as part of the head office expenses incurred for its Philippine
business, computed at 5% on its gross Philippine income.
On August 30, 1955 it amended its income tax return for 1952 by excluding
from its gross income the amount of P316,526.75 representing reinsurance
premiums ceded to foreign reinsurers and further eliminating deductions
corresponding to the coded premiums. The amended return showed an
income tax due in the amount of P2,502.00. The Commissioner of Internal
Revenue disallowed P15,826.35 of the claimed deduction for head office
expenses and assessed a deficiency tax of P5,667.00 on July 24, 1958.
On April 30, 1954, Phoenix Assurance Co., Ltd. filed its Philippine income tax
return for 1953 and claimed therein a deduction from gross income of
P33,070.88 as head office expenses allocable to its Philippine business,
equivalent to 5%, of its gross Philippine income. On August 30, 1955 it
amended its 1953 income tax return to exclude from its gross income the
amount of P246,082.04 representing reinsurance premiums ceded to foreign
reinsurers. At the same time, it requested the refund of P23,409.00 as
overpaid income tax for 1953. To avoid the prescriptive period provided for in
Section 306 of the Tax Code, it filed a petition for review on April 11, 1956 in
the Court of Tax Appeals praying for such refund. After verification of the
amended income tax return the Commissioner of Internal Revenue
disallowed P12,304.10 of the deduction representing head office expenses
allocable to Philippine business thereby reducing the refundable amount to
P20,180.00.
On April 29, 1955, Phoenix Assurance Co., Ltd. filed its Philippine income tax
return for 1954 claiming therein, among others, a deduction from gross
income of P99,624.75 as head office expenses allocable to its Philippine
business, computed at 5% of its gross Philippine income. It also excluded

from its gross income the amount of P203,384.69 representing reinsurance

premiums ceded to foreign reinsurers not doing business in the Philippines.
On August 1, 1958 the Bureau of Internal Revenue released the following
assessment for deficiency income tax for the years 1952 and 1954 against
Phoenix Assurance Co., Ltd.:
1952
Net income per audited return
P 12,511.61
Unallowable deduction & additional income:
Overclaimed Head Office expenses:
Amount claimed . . . . . . . . . . . .
P 35,912.25
Amount allowed . . . . . . . . . . . .
20,085.90
P 15,826.35
Net income per investigation

!
P 28,337.96

Tax due thereon

P 5,667.00
===========
1954
Net income per audited
P160,320.21
Unallowable deduction & additional income:
Overclaimed Head Office expenses:
Amount claimed . . . . . . . . . . . .
P29,624.73
Amount allowed . . . . . . . . . . . .
19,455.50
10,16.23
Net income per investigation

!
P170,489.41

Tax due thereon

P 39,737.00
Less: amount already assessed

36,890.00
DEFICIENCY TAX DUE

P 2,847.00
===========
The above assessment resulted from the disallowance of a portion of the
deduction claimed by Phoenix Assurance Co., Ltd. as head office expenses
allocable to its business in the Philippines fixed by the Commissioner at 5% of
the net Philippine income instead of 5% of the gross Philippine income as
claimed in the returns.
Phoenix Assurance Co., Ltd. protested against the aforesaid assessments for
withholding tax and deficiency income tax. However, the Commissioner of
Internal Revenue denied such protest. Subsequently, Phoenix Assurance Co.,
Ltd. appealed to the Court of Tax Appeals. In a decision dated February 14,
1962, the Court of Tax Appeals allowed in full the decision claimed by
Phoenix Assurance Co., Ltd. for 1950 as net addition to marine insurance
reserve; determined the allowable head office expenses allocable to
Philippine business to be 5% of the net income in the Philippines; declared
the right of the Commissioner of Internal Revenue to assess deficiency
income tax for 1952 to have prescribed; absolved Phoenix Assurance Co.,
Ltd. from payment of the statutory penalties for non-filing of withholding tax
return; and, rendered the following judgment:
WHEREFORE, petitioner Phoenix Assurance Company, Ltd. is hereby
ordered to pay the Commissioner of Internal Revenue the respective amounts
of P75,966.42, P59,059.68 and P48,812.32, as withholding tax for the years
1952, 1953 and 1954, and P2,847.00 as income tax for 1954, or the total sum
of P186,685.42 within thirty (30) days from the date this decision becomes
final. Upon the other hand, the respondent Commissioner is ordered to refund
to petitioner the sum of P20,180.00 as overpaid income tax for 1953, which
sum is to be deducted from the total sum of P186,685.42 due as taxes.
If any amount of the tax is not paid within the time prescribed above, there
shall be collected a surcharge of 5% of the tax unpaid, plus interest at the
rate of 1% a month from the date of delinquency to the date of payment,
provided that the maximum amount that may be collected as interest shall not
exceed the amount corresponding to a period of three (3) years. Without
pronouncement as to costs.
Phoenix Assurance Co., Ltd. and the Commissioner of Internal Revenue have
appealed to this Court raising the following issues: (1) Whether or not
reinsurance premiums ceded to foreign reinsurers not doing business in the
Philippines pursuant to reinsurance contracts executed abroad are subject to
withholding tax; (2) Whether or not the right of the Commissioner of Internal
Revenue to assess deficiency income tax for the year 1952 against Phoenix
Assurance Co., Ltd., has prescribed; (3) Whether or not the deduction of
claimed by the Phoenix Assurance Co., Ltd.as net addition to reserve for the
year 1950 is excessive; (4) Whether or not the deductions claimed by

Phoenix Assurance Co., Ltd. for head office expenses allocable to Philippine
business for the years 1952, 1953 and 1954 are excessive.
The question of whether or not reinsurance premiums ceded to foreign
reinsurers not doing business in the Philippines pursuant to contracts
executed abroad are income from sources within the Philippines subject to
withholding tax under Sections 53 and 54 of the Tax Code has already been
resolved in the affirmative in British Traders' Insurance Co., Ltd.v.
Commisioner of Internal Revenue, L-20501, April 30, 1965. 1
We come to the issue of prescription. Phoenix Assurance Co., Ltd. filed its
income tax return for 1952 on April 1, 1953 showing a loss of P199,583.93. It
amended said return on August 30, 1955 reporting a tax liability of P2,502.00.
On July 24, 1958, after examination of the amended return, the
Commissioner of Internal Revenue assessed deficiency income tax in the
sum of P5,667.00. The Court of Tax Appeals found the right of the
Commissioner of Internal Revenue barred by prescription, the same having
been exercised more than five years from the date the original return was
filed. On the other hand, the Commissioner of Internal Revenue insists that
his right to issue the assessment has not prescribed inasmuch as the same
was availed of before the 5-year period provided for in Section 331 of the Tax
Code expired, counting the running of the period from August 30, 1955, the
date when the amended return was filed.
Section 331 of the Tax Code, which limits the right of the Commissioner of
Internal Revenue to assess income tax within five years from the Filipino of
the income tax return, states:
SEC. 331. Period of limitation upon assessment and collection. Except as
provided in the succeeding section internal revenue taxes shall be assessed
within five years after the return was filed, and no proceeding in court without
assessment for the collection of such taxes shall be begun after the expiration
of such period. For the purposes of this section, a return filed before the last
day prescribed by law for the filing thereof shall be considered as filed on
such last day: Provided, That this limitation shall not apply to cases already
investigated prior to the approval of this Code.
The question is: Should the running of the prescriptive period commence from
the filing of the original or amended return?
The Court of Tax Appears that the original return was a complete return
containing "information on various items of income and deduction from which
respondent may intelligently compute and determine the tax liability of
petitioner, hence, the prescriptive period should be counted from the filing of
said original return. On the other hand, the Commissioner of Internal
Revenue maintains that:

"... the deficiency income tax in question could not possibly be determined, or
assessed, on the basis of the original return filed on April 1, 1953, for
considering that the declared loss amounted to P199,583.93, the mere
disallowance of part of the head office expenses could not probably result in
said loss being completely wiped out and Phoenix being liable to deficiency
tax. Not until the amended return was filed on August 30, 1955 could the
Commissioner assess the deficiency income tax in question."
Accordingly, he would wish to press for the counting of the prescriptive period
from the filing of the amended return.
To our mind, the Commissioner's view should be sustained. The changes and
alterations embodied in the amended income tax return consisted of the
exclusion of reinsurance premiums received from domestic insurance
companies by Phoenix Assurance Co., Ltd.'s London head office, reinsurance
premiums ceded to foreign reinsurers not doing business in the Philippines
and various items of deduction attributable to such excluded reinsurance
premiums thereby substantially modifying the original return. Furthermore,
although the deduction for head office expenses allocable to Philippine
business, whose disallowance gave rise to the deficiency tax, was claimed
also in the original return, the Commissioner could not have possibly
determined a deficiency tax thereunder because Phoenix Assurance Co., Ltd.
declared a loss of P199,583.93 therein which would have more than offset
such disallowance of P15,826.35. Considering that the deficiency
assessment was based on the amended return which, as aforestated, is
substantially different from the original return, the period of limitation of the
right to issue the same should be counted from the filing of the amended
income tax return. From August 30, 1955, when the amended return was
filed, to July 24, 1958, when the deficiency assessment was issued, less than
five years elapsed. The right of the Commissioner to assess the deficiency
tax on such amended return has not prescribed.
To strengthen our opinion, we believe that to hold otherwise, we would be
paving the way for taxpayers to evade the payment of taxes by simply
reporting in their original return heavy losses and amending the same more
than five years later when the Commissioner of Internal Revenue has lost his
authority to assess the proper tax thereunder. The object of the Tax Code is
to impose taxes for the needs of the Government, not to enhance tax
avoidance to its prejudice.
We next consider Phoenix Assurance Co., Ltd.'s claim for deduction of
P37,147.04 for 1950 representing net addition to reserve computed at 40% of
the marine insurance premiums received during the year. Treating said said
deduction to be excessive, the Commissioner of Internal Revenue reduced
the same to P25,374.47 which is equivalent to 100% of all marine insurance
premiums received during the last months of the year.

Paragraph (a) of Section 32 of the Tax Code states:

SEC. 32. Special provisions regarding income and deductions of insurance
companies, whether domestic or foreign. (a) Special deductions allowed to
insurance companies. In the case of insurance companies, except
domestic life insurance companies and foreign life insurance companies
doing business in the Philippines, the net additions, if any, required by law to
be made within the year to reserve funds and the sums other than dividends
paid within the year on policy and annuity contracts may be deducted from
their gross income: Provided, however, That the released reserve be treated
as income for the year of release.
Section 186 of the Insurance Law requires the setting up of reserves for
liability on marine insurance:
SEC. 186. ... Provided, That for marine risks the insuring company shall be
required to charge as the liability for reinsurance fifty per centum of the
premiums written in the policies upon yearly risks, and the full premiums
written in the policies upon all other marine risks not terminated (Emphasis
supplied.)
The reserve required for marine insurance is determined on two bases: 50%
of premiums under policies on yearly risks and 100% of premiums under
policies of marine risks not terminated during the year. Section 32 (a) of the
Tax Code quoted above allows the full amount of such reserve to be
deducted from gross income.
It may be noteworthy to observe that the formulas for determining the marine
reserve employed by Phoenix Assurance Co., Ltd. and the Commissioner of
Internal Revenue 40% of premiums received during the year and 100% of
premiums received during the last three months of the year, respectively
do not comply with Section 186. Said determination runs short of the
requirement. For purposes of the Insurance Law, this Court therefore cannot
countenance the same. The reserve called for in Section 186 is a safeguard
to the general public and should be strictly followed not only because it is an
express provision but also as a matter of public policy. However, for income
tax purposes a taxpayer is free to deduct from its gross income a lesser
amount, or not to claim any deduction at all. What is prohibited by the income
tax law is to claim a deduction beyond the amount authorized therein.
Phoenix Assurance Co., Ltd.'s claim for deduction of P37,147.04 being less
than the amount required in Section 186 of the Insurance Law, the same
cannot be and is not excessive, and should therefore be fully allowed. *
We come now to the controversy on the taxpayer's claim for deduction on
head office expenses incurred during 1952, 1953, and 1954 allocable to its

Philippine business computed at 5% of its gross income in the Philippines

The Commissioner of Internal Revenue redetermined such deduction at 5%
on Phoenix Assurance Co., Ltd's net income thereby partially disallowing the
latter's claim. The parties are agreed as to the percentage 5% but differ
as to the basis of computation. Phoenix Assurance Co. Lt. insists that the 5%
head office expenses be determined from the gross income, while the
Commissioner wants the computation to be made on the net income. What,
therefore, needs to be resolved is: Should the 5% be computed on the gross
or net income?
The record shows that the gross income of Phoenix Assurance Co., Ltd.
consists of income from its Philippine business as well as reinsurance
premiums received for its head office in London and reinsurance premiums
ceded to foreign reinsurance. Since the items of income not belonging to its
Philippine business are not taxable to its Philippine branch, they should be
excluded in determining the head office expenses allowable to said Philippine
branch. This conclusion finds support in paragraph 2, subsection (a), Section
30 of the Tax Code, quoted hereunder:
(2) Expenses allowable to non-resident alien individuals and foreign
corporations. In the case of a non-resident alien individual or a foreign
corporation, the expenses deductible are the, necessary expenses paid or
incurred in carrying on any business or trade conducted within the Philippines
exclusively. (Emphasis supplied.)
Consequently, the deficiency assessments for 1952, 1953 and 1954, resulting
from partial disallowance of deduction representing head office expenses, are
sustained.
Finally, the Commissioner of Internal Revenue assails the dispositive portion
of the Tax Court's decision limiting the maximum amount of interest collectible
for deliquency of an amount corresponding to a period of three years. He
contends that since such limitation was incorporated into Section 51 of the
Tax Code by Republic Act 2343 which took effect only on June 20, 1959, it
must not be applied retroactively on withholding tax for the years 1952, 1953
and 1954.
The imposition of interest on unpaid taxes is one of the statutory penalties for
tax delinquency, from the payments of which the Court of Tax Appeals
absolved the Phoenix Assurance Co., Ltd. on the equitable ground that the
latter's failure to pay the withholding tax was due to the Commissioner's
opinion that no withholding tax was due. Consequently, the taxpayer could be
held liable for the payment of statutory penalties only upon its failure to
comply with the Tax Court's judgment rendered on February 14. 1962, after
Republic Act 2343 took effect. This part of the ruling of the lower court ought
not to be disturbed.

WHEREFORE, the decision appealed from is modified, Phoenix Assurance

Co., Ltd. is hereby ordered to pay the Commissioner, of Internal Revenue the
amount of P75,966.42, P59,059.68 and P48,812.32 as withholding tax for the
years 1952, 1953 and 1954, respectively, and the sums of P5,667.00 and
P2,847.00 as income tax for 1952 and 1954 or a total of P192,352.42. The
Commissioner of Internal Revenue is ordered to refund to Phoenix Assurance
Co., Ltd. the amount of P20,180.00 as overpaid income tax for 1953, which
should be deducted from the amount of P192,352.42.
If the amount of P192,352.42 or a portion thereof is not paid within thirty (30)
days from the date this judgment becomes final, there should be collected a
surcharge and interest as provided for in Section 51(c) (2) of the Tax Code.
No costs. It is so ordered.
Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera,
Paredes, Dizon, Regala, Makalintal and Zaldivar, JJ., concur.
BASILAN ESTATES, INC. v. CIR
G.R. No. L-22492 September 5, 1967
Bengzon, J.P., J.
Doctrine:
The income tax law does not authorize the depreciation of an asset beyond its acquisition
cost. Hence, a deduction over and above such cost cannot be claimed and allowed. The
reason is that deductions from gross income are privileges, not matters of right. They are
not created by implication but upon clear expression in the law.
Facts:
Basilan Estates, Inc. claimed deductions for the depreciation of its assets on the basis of
their acquisition cost. As of January 1, 1950 it changed the depreciable value of said
assets by increasing it to conform with the increase in cost for their replacement.
Accordingly, from 1950 to 1953 it deducted from gross income the value of depreciation
computed on the reappraised value.
CIR disallowed the deductions claimed by petitioner, consequently assessing the latter of
deficiency income taxes.
Issue:
Whether or not the depreciation shall be determined on the acquisition cost rather than the
reappraised value of the assets
Held:
Yes. The following tax law provision allows a deduction from gross income for depreciation
but limits the recovery to the capital invested in the asset being depreciated:
(1)In general. A reasonable allowance for deterioration of property arising out of its use
or employment in the business or trade, or out of its not being used: Provided, That when
the allowance authorized under this subsection shall equal the capital invested by the
taxpayer . . . no further allowance shall be made. . . .

The income tax law does not authorize the depreciation of an asset beyond its acquisition
cost. Hence, a deduction over and above such cost cannot be claimed and allowed. The
reason is that deductions from gross income are privileges, not matters of right. They are
not created by implication but upon clear expression in the law [Gutierrez v. Collector of
Internal Revenue, L-19537, May 20, 1965].
Depreciation is the gradual diminution in the useful value of tangible property resulting
from wear and tear and normal obsolescense. It commences with the acquisition of the
property and its owner is not bound to see his property gradually waste, without making
provision out of earnings for its replacement.
The recovery, free of income tax, of an amount more than the invested capital in an asset
will transgress the underlying purpose of a depreciation allowance. For then what the
taxpayer would recover will be, not only the acquisition cost, but also some profit.
Recovery in due time thru depreciation of investment made is the philosophy behind
depreciation allowance; the idea of profit on the investment made has never been the
underlying reason for the allowance of a deduction for depreciation.

JOSE A. ARCHES, petitioner-appellant,

vs.
ANACLETO I. BELLOSILLO and JAIME ARANETA, respondents-appellees.
Jose A. Arches for petitioner-appellant.
Office of the Solicitor General Arturo A. Alafriz, Solicitor A.B. Afurong and Atty.
S.S. Soriano for respondents-appellees.
BENGZON, J.P., J.:
Petitioner-appellant Jose Arches filed on February 27, 1954 his income tax
return for 1953. Within five years thereafter, or on February 26, 1959,
deficiency income tax and residence tax assessments were issued against
him.
Said assessments not having been disputed, the Republic represented by the
Bureau of Internal Revenue Regional, Director, filed suit on December 29,
1960, in the municipal court of Roxas City, to recover from petitionerappellant the sum of P4,441.25 as deficiency income tax and additional
residence tax for 1953. Arches then moved to dismiss the complaint on the
ground that it did not expressly show the approval of the Revenue
Commissioner, as required by Section 308 of the Tax Code, and on the
further ground of prescription of the action.
1wph1.t

The municipal court denied the motion. Petitioner-appellant, his motion to

reconsider having been denied also, resorted to the Court of First Instance of
Capiz on a petition for certiorari and prohibition assailing the order denying
his motion to dismiss. The trial court dismissed the petition. Hence, this
appeal.

The only question here is the correctness of dismissal of the petition by the
Court of First Instance. The order was predicated upon the impropriety of the
writ. We find no error committed by said court.
The municipal court had jurisdiction over the parties and over the subject
matter, the amount demanded being less than P5,000.00.1 The suit below
instituted by the Republic, based on an uncontested assessment, was one
merely for the recovery of a sum of money where the amount demanded
constitutes the jurisdictional test.2
Petitioner-appellant would make much of the lack of approval of the Revenue
Commissioner. First of all, in this case, such requisite is not jurisdictional, but
one relating to capacity to sue or affecting the cause of action only.3 So, in
ruling on said question, whatever error if any the municipal court
committed, was merely an error of judgment, not correctible by certiorari.4
Neither was there grave abuse of the discretion on the part of the municipal
court in ruling that the express approval of the Revenue Commissioner
himself was not necessary. The court relied upon Memorandum Order No.
V-634 of the Revenue Commissioner, approved by the Finance Secretary of
July 1, 1956, wherein the former's functions regarding the administration and
enforcement of revenue laws and regulations powers broad enough to
cover the approval of court actions as required in Section 308 of the Tax
Code were expressly delegated to the Regional Directors. This regulation,
the issuance of which was authorized by statute, has the force and effect of
law.5 To rely upon it, hence, would not be tantamount to whimsical, capricious
and arbitrary exercise of judgment.
The verification by the Regional Director of the complaint constitutes sufficient
approval thereof already. It states, inter alia, that said Director has caused the
preparation of the complaint and that he has read the allegations thereof and
they are true and correct to the best of his knowledge and belief. Pleadings
are to be liberally construed.6
Assuming, therefore, in gratia argumenti, that the suit is being erroneously
but not invalidly entertained, for lack of express approval of the
Commissioner or the Regional Director, certiorari would still not lie. An order
denying a motion to dismiss is interlocutory and the remedy of the
unsuccessful movant is to await the judgment on the merits and then appeal
therefrom.7 And, as the Court of First Instance rightly observed, there was no
showing of a special reason or urgent need to stop the proceedings at such
early stage in the municipal court.
Petitioner-appellant would also raise the question of prescription. Again, this
is not jurisdictional. And, We have already ruled8 that the proper prescriptive
period for bringing civil actions is five years from the date of the assessment,

under Section 332 of the Tax Code. The three-year period urged by
petitioner-appellant under Section 51 (d) refers only to the summary remedies
of distraint and levy. Here, the action was commenced one year, ten months
and three days after the assessments were made; hence, well within the
period.
Wherefore, the dismissal of appellant's petition for certiorari by the Court of
First Instance is hereby affirmed. Costs against petitioner-appellant. So
ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Zaldivar,
Sanchez and Castro, JJ., concur.

OMMISSIONER OF INTERNAL REVENUE, petitioner,

vs. COURT OF APPEALS, COURT OF TAX
APPEALS and CARNATION PHILIPPINES, INC.
(now merged with Nestle Phils. Inc.), respondent.
SYNOPSIS
In 1982, Carnation Phils., Inc., filed its Corporation Annual Income
Tax Return for taxable year ending September 30, 1981; and its
Manufacturers/Producers Percentage Tax Return for the quarter ending
September 30, 1981. On October 13, 1986, March 16, 1987 and May 18,
1987, Carnation, through its Senior Vice President Jaime O. Lardizabal,
signed three separate waivers of the Statute of Limitations under the
National Internal Revenue Code. The waivers were not signed by the BIR
Commissioner or any of his agents. On August 5, 1987, Carnation
received BIRs letter of demand asking said corporation to pay their
deficiency income tax and deficiency sales tax on undeclared sales, all for
the year 1981. The demand letter was accompanied by assessment
notices.
Carnation disputed the assessments and requested a
reconsideration and reinvestigation thereof. The protests were denied.
Carnation appealed to the Court of Tax Appeals which nullified the
assessments for having been issued beyond the five-year prescriptive
period provided by law. On appeal, the Court of Appeals affirmed the
decision of the Court of Tax Appeals. Hence, the present petition. The
issue to be resolved by the Court is whether or not the three (3) waivers
signed by Carnation are valid and binding as to toll the running of the
prescriptive period for assessment and not bar the Government from
issuing subject deficiency tax assessments.

The Supreme Court affirmed the decision of the Court of Appeals.

The Court ruled that the waivers in question reveal that they are in no wise
unequivocal, and therefore necessitates for its binding effect the
concurrence of the Commissioner of Internal Revenue. Neither implied
consent can be presumed nor can it be contended that the waiver required
under Section 319 of the Tax Code is one which is unilateral nor can it be
said that concurrence to such an agreement is a mere formality because it
is the very signatures of both the Commissioner of the Internal Revenue,
and the taxpayer which give birth to such a valid agreement.
SYLLABUS
TAXATION; NATIONAL INTERNAL REVENUE CODE; EXCEPTIONS AS TO
PERIOD OF LIMITATION OF ASSESSMENT AND COLLECTION OF
TAXES; NEITHER IMPLIED CONSENT CAN BE PRESUMED NOR CAN IT
BE CONTENDED THAT THE WAIVER REQUIRED UNDER SEC. 319 OF
THE TAX CODE IS ONE WHICH IS UNILATERAL NOR CAN IT BE SAID
THAT CONCURRENCE TO SUCH AN AGREEMENT IS A MERE
FORMALITY BECAUSE IT IS THE VERY SIGNATURES OF BOTH THE
COMMISSIONER OF INTERNAL REVENUE AND THE TAXPAYER WHICH
GIVE BIRTH TO SUCH VALID AGREEMENT. The waivers in question reveal
that they are in no wise unequivocal, and therefore necessitates for its binding effect
the concurrence of the Commissioner of Internal Revenue. In fact, in his reply dated
April 18, 1995, the Solicitor General, representing the Commissioner of Internal
Revenue, admitted that subject waivers executed by Carnation were for and in
consideration of the approval by the Commissioner of Internal Revenue of its request
for reinvestigation and/or reconsideration of its internal revenue case involving tax
assessments for the fiscal year ended September 30, 1981 which were all pending at
the time. On this basis neither implied consent can be presumed nor can it be
contended that the waiver required under Sec. 319 of the Tax Code is one which is
unilateral nor can it be said that concurrence to such an agreement is a mere formality
because it is the very signatures of both the Commissioner of Internal Revenue and the
taxpayer which give birth to such a valid agreement.

DECISION
PURISIMA, J.:

Before the Court is an appeal from the decision of the Court of

Appeals[1] dated May 31, 1994, which affirmed in toto the decision of the
Court of Tax Appeals[2] dated January 26, 1993, the dispositive portion of
which reads:

WHEREFORE, the Court, finds the assessments for allegedly deficient

income and sales taxes for petitioners fiscal year ending September 30,
1981 covered by Demand Letter NO. FAS-1B-81-87 and Assessment
Notices Nos. FAS-1-81-87-005824, FAS-4-81-87-005825 and
FAS-4-81-87-005826 (all dated July 29, 1987) in the total amount of
P19,535,183.44 to be NULL AND VOID for having been issued beyond
the five-year prescriptive period provided by law.[3]

The undisputed facts of the case as recited in the Decision (Annex
A) of the Court of Appeals, are:[4]
On January 15, 1982, Carnation Phils. Inc. (Carnation), filed its
Corporation Annual Income Tax Return for taxable year ending September
30, 1981; and its Manufacturers/Producers Percentage Tax Return for the
quarter ending September 30, 1981.[5]

On October 13, 1986, March 16, 1987 and May 18, 1987, Carnation,
through its Senior Vice President Jaime O. Lardizabal, signed three
separate waivers of the Statute of Limitations Under the National Internal
Revenue Code wherein it:

x x x waives the running of the prescriptive period provided for in
sections 318 and 319 and other related provisions of the National Internal
Revenue Code and consents to the assessment and collection of the taxes
which may be found due after reinvestigation and reconsideration at any
time before or after the lapse of the period of limitations fixed by said
sections 318 and 319 and other relevant provisions of the National
Internal Revenue Code, but not after (13 April 1987 for the earlierexecuted waiver, or June 14, 1987 for the later waiver, or July 30, 1987 for
the subsequent waiver, as the case may be). However, the taxpayer
(petitioner herein) does not waive any prescription already accrued in its
favor.

The waivers were not signed by the BIR Commissioner or any of his
agents.

On August 5, 1987, Carnation received BIRs letter of demand dated July
29, 1987 asking the said corporation to pay P1,442,586.56 as deficiency
income tax, P14,152,683.85 as deficiency sales tax and P3,939,913.03 as

deficiency sales tax on undeclared sales, all for the year 1981. This
demand letter was accompanied by assessment Notices Nos.
FAS-4-81-87-005824, FAS-4-81-87-005825 and FAS-4-81-87-005826.

In a basic protest dated August 17, 1987, Carnation disputed the
assessments and requested a reconsideration and reinvestigation thereof.

On September 30, 1987, Carnation filed a supplemental protest.

These protests were denied by the BIR Commissioner in a letter dated
March 15, 1988

Whereupon, Carnation appealed to the CTA.

On January 26, 1993, the CTA issued the questioned order, the dispositive
portion of which reads:

WHEREFORE, the Court finds the assessments for allegedly deficient
income and sales taxes for petitioners fiscal year ending September 30,
1981 covered by Demand Letter No. FAS-1B-81-87 and assessment
Notices No. FAS-1-81-87-005824, FAS-4-81-87-005825, and
FAS-4-81-87-005826 (all dated July 29, 1987) in the total amount of
P19,535,183.44 to be NULL AND VOID for having been issued beyond the
five-year prescriptive period provided by law.

The pivot of inquiry here is whether or not the three (3) waivers
signed by the private respondent are valid and binding[6] as to toll the
running of the prescriptive period for assessment and not bar the
Government from issuing subject deficiency tax assessments.
Section 318 (now Section 203) of the National Internal Revenue Code,
the law then applicable reads:
SEC 318. Period of Limitations upon assessment and collection. - Except
as provided in the succeeding section, internal revenue taxes shall be
assessed within five years after the return was filed, and no proceeding in
court without assessment for the collection of such taxes shall be begun
after the expiration of such period. For the purpose of this section, a return
filed before the last day prescribed by law for the filing thereof shall be
considered as filed on such last day: Provided, That This limitation shall

not apply to cases already investigated prior to the approval of this

Code.[7] (underscoring ours)

The decision of the Court of Appeals affirming what the Court of Tax
Appeals decided, established that subject assessments of July 29, 1987
were issued outside the statutory prescriptive period. Carnation filed its
annual income tax and percentage tax returns for the fiscal year ending
September 30, 1981 on January 15, 1982[8] and November 20, 1981,[9]
respectively. In accordance with the above-quoted provision of law, private
respondents 1981 income and sales taxes could have been validly assessed
only until January 14, 1987 and November 19, 1986, respectively.[10]
However, Carnations income and sales taxes were assessed only on July
29, 1987, beyond the five-year prescriptive period.[11]
Petitioner BIR Commissioner contends that the waivers signed by
Carnation were valid although not signed by the BIR Commissioner
because (a) when the BIR agents/examiners extended the period to audit
and investigate Carnations tax returns, the BIR gave its implied consent to
such waivers; (b) the signature of the Commissioner is a mere formality
and the lack of it does not vitiate the binding effect of the waivers; and (c)
that a waiver is not a contract but a unilateral act of renouncing ones right
to avail of the defense of prescription and remains binding in accordance
with the terms and conditions set forth in the waiver.[12]
Petitioners submission is inaccurate. The same tax code is clear on
the matter, to wit:
SEC. 319. Exceptions as to period of limitation of assessment and
collection of taxes. -- (a) x x x

(b) Where before the expiration of the time prescribed in the preceding
section for the assessment of the tax, both the Commissioner of Internal
Revenue and the taxpayer have consented in writing to its assessment after
such time, the tax may be assessed at any time prior to the expiration of the
period agreed upon. The period so agreed upon may be extended by
subsequent agreement in writing made before the expiration of the period
previously agreed upon.

The Court of Appeals itself also passed upon the validity of the
waivers executed by Carnation, observing thus:

We cannot go along with the petitioners theory. Section 319 of the Tax
code earlier quoted is clear and explicit that the waiver of the five-year
prescriptive period must be in writing and signed by both the BIR
Commissioner and the taxpayer.

Here, the three waivers signed by Carnation do not bear the written
consent of the BIR Commissioner as required by law.

We agree with the CTA in holding these waivers to be invalid and
without any binding effect on petitioner (Carnation) for the reason that
there was no consent by the respondent (Commissioner of Internal
Revenue).

The ruling of the Supreme Court in Collector of Internal Revenue vs.
Solano,[13] is in point, thus:

x x x The only agreement that could have suspended the running of the
prescriptive period for the collection of the tax in question is, as correctly
pointed out by the Court of Tax Appeals, a written agreement between
Solano and the Collector, entered into before the expiration of the of the
five-year prescriptive period, extending the limitation prescribed by law.

For sure, no such written agreement concerning the said three waivers
exists between the petitioner and private respondent Carnation.[14]

Verily, we discern no basis for overruling the aforesaid conclusions
arrived at by the Court of Appeals. In fact, there is every reason to leave
undisturbed the said conclusions, having in mind the precept that all
doubts as to the correctness of such conclusions will be resolved in favor
of the Court of Appeals.[15] Besides being a reiteration of the holding of
the Court of Tax Appeals, such decision should be accorded respect. Thus,
the Court held in Philippine Refining Co. vs. Court of Appeals,[16] that the
Court of Tax Appeals is a highly specialized body specifically created for
the purpose of reviewing tax cases. 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.[17] This point becomes more
evident in the case under consideration where the findings and conclusions

of both the Court of Tax Appeals and the Court of Appeals appear
untainted by any abuse of authority, much less grave abuse of discretion.
Indeed, we find the decision of the latter affirming that of the former free
from any palpable error.[18]
What is more, the waivers in question reveal that they are in no wise
unequivocal, and therefore necessitates for its binding effect the
concurrence of the Commissioner of Internal Revenue. In fact, in his reply
dated April 18, 1995, the Solicitor General, representing the Commissioner
of Internal Revenue, admitted that subject waivers executed by Carnation
were for and in consideration of the approval by the Commissioner of
Internal Revenue of its request for reinvestigation and/or reconsideration
of its internal revenue case involving tax assessments for the fiscal year
ended September 30, 1981 which were all pending at the time. On this
basis neither implied consent can be presumed nor can it be contended that
the waiver required under Sec. 319 of the Tax Code is one which is
unilateral nor can it be said that concurrence to such an agreement is a
mere formality because it is the very signatures of both the Commissioner
of Internal Revenue and the taxpayer which give birth to such a valid
agreement.
WHEREFORE, the decision of the Court of Appeals is hereby
AFFIRMED. No pronouncement as to costs.
SO ORDERED.