FIRST DIVISION 291-1 10875-64, to which motion was attached All claims for money against the decedent,
All claims for money against the decedent, arising
G.R. No. L-31364 March 30, 1979
MISAEL P. VERA, as Commissioner of Internal
Revenue, and JAIME ARANETA, as Regional
Director, Revenue Region No. 14, Bureau of
Internal Revenue, petitioners,
vs.
HON. JOSE F. FERNANDEZ, Judge of the Court
of First Instance of Negros Occidental, Branch V,
and FRANCIS A. TONGOY, Administrator of the
Estate of the late LUIS D. TONGOY respondents.
DE CASTRO, J.:
Appeal from two orders of the Court of First
Instance of Negros Occidental, Branch V in Special
Proceedings No. 7794, entitled: "Intestate Estate of
Luis D. Tongoy," the first dated July 29, 1969
dismissing the Motion for Allowance of Claim and
for an Order of Payment of Taxes by the
Government of the Republic of the Philippines
against the Estate of the late Luis D. Tongoy, for
deficiency income taxes for the years 1963 and
1964 of the decedent in the total amount of
P3,254.80, inclusive 5% surcharge, 1% monthly
interest and compromise penalties, and the second,
dated October 7, 1969, denying the Motion for
reconsideration of the Order of dismissal.
The Motion for allowance of claim and for payment
of taxes dated May 28, 1969 was filed on June 3,
1969 in the abovementioned special proceedings,
(par. 3, Annex A, Petition, pp. 1920, Rollo). The
claim represents the indebtedness to the
Government of the late Luis D. Tongoy for
deficiency income taxes in the total sum of
P3,254.80 as above stated, covered by Assessment
Notices Nos. 11-50-29-1-11061-21-63 and 11-50-
Proof of Claim (Annex B, Petition, pp. 21-22, Rollo).
The Administrator opposed the motion solely on
the ground that the claim was barred under
Section 5, Rule 86 of the Rules of Court (par. 4,
Opposition to Motion for Allowance of Claim, pp.
23-24, Rollo). Finding the opposition well-founded,
the respondent Judge, Jose F. Fernandez, dismissed
the motion for allowance of claim filed by herein
petitioner, Regional Director of the Bureau of
Internal Revenue, in an order dated July 29, 1969
(Annex D, Petition, p. 26, Rollo). On September 18,
1969, a motion for reconsideration was filed, of the
order of July 29, 1969, but was denied in an Order
dated October 7, 1969.
Hence, this appeal on certiorari, petitioner
assigning the following errors:
1. The lower court erred in holding that the claim
for taxes by the government against the estate of
Luis D. Tongoy was filed beyond the period
provided in Section 2, Rule 86 of the Rules of
Court.
2. The lower court erred in holding that the claim
for taxes of the government was already barred
under Section 5, Rule 86 of the Rules of Court.
which raise the sole issue of whether or not the
statute of non-claims Section 5, Rule 86 of the New
Rule of Court, bars claim of the government for
unpaid taxes, still within the period of limitation
prescribed in Section 331 and 332 of the National
Internal Revenue Code.
Section 5, Rule 86, as invoked by the respondent
Administrator in hid Oppositions to the Motion for
Allowance of Claim, etc. of the petitioners reads as
follows:
Page 1 of 34
TAX CASES 1st set
from contracts, express or implied, whether the
same be due, not due, or contingent, all claims for
funeral expenses and expenses for the last sickness
of the decedent, and judgment for money against
the decedent, must be filed within the time limited
in they notice; otherwise they are barred forever,
except that they may be set forth as counter claims
in any action that the executor or administrator
may bring against the claimants. Where the
executor or administrator commence an action, or
prosecutes an action already commenced by the
deceased in his lifetime, the debtor may set forth
may answer the claims he has against the
decedents, instead of presenting them
independently to the court has herein provided,
and mutual claims may be set off against each
other in such action; and in final judgment is
rendered in favored of the decedent, the amount
to determined shall be considered the true balance
against the estate, as though the claim has been
presented directly before the court in the
administration proceedings. Claims not yet due, or
contingent may be approved at their present value.
A perusal of the aforequoted provisions shows that
it makes no mention of claims for monetary
obligation of the decedent created by law, such as
taxes which is entirely of different character from
the claims expressly enumerated therein, such as:
"all claims for money against the decedent arising
from contract, express or implied, whether the
same be due, not due or contingent, all claim for
funeral expenses and expenses for the last sickness
of the decedent and judgment for money against
the decedent." Under the familiar rule of statutory
construction of expressio unius est exclusio alterius,
the mention of one thing implies the exclusion of
another thing not mentioned. Thus, if a statute
enumerates the things upon which it is to operate,
everything else must necessarily, and by
implication be excluded from its operation and
effect (Crawford, Statutory Construction, pp. 334-
335).
In the case of Commissioner of Internal Revenue vs.
Ilagan Electric & Ice Plant, et al., G.R. No. L-23081,
December 30, 1969, it was held that the
assessment, collection and recovery of taxes, as
well as the matter of prescription thereof are
governed by the provisions of the National Internal
revenue Code, particularly Sections 331 and 332
thereof, and not by other provisions of law. (See
also Lim Tio, Dy Heng and Dee Jue vs. Court of Tax
Appeals & Collector of Internal Revenue, G.R. No.
L-10681, March 29, 1958). Even without being
specifically mentioned, the provisions of Section 2
of Rule 86 of the Rules of Court may reasonably be
presumed to have been also in the mind of the
Court as not affecting the aforecited Section of the
National Internal Revenue Code.
In the case of Pineda vs. CFI of Tayabas, 52 Phil.
803, it was even more pointedly held that "taxes
assessed against the estate of a deceased person ...
need not be submitted to the committee on claims
in the ordinary course of administration. In the
exercise of its control over the administrator, the
court may direct the payment of such taxes upon
motion showing that the taxes have been assessed
against the estate." The abolition of the Committee
on Claims does not alter the basic ruling laid down
giving exception to the claim for taxes from being
filed as the other claims mentioned in the Rule
should be filed before the Court. Claims for taxes
may be collected even after the distribution of the
decedent's estate among his heirs who shall be
liable therefor in proportion of their share in the
inheritance. (Government of the Philippines vs.
Pamintuan, 55 Phil. 13).
The reason for the more liberal treatment of claims
for taxes against a decedent's estate in the form of
exception from the application of the statute of
non-claims, is not hard to find. Taxes are the
lifeblood of the Government and their prompt and
certain availability are imperious need.
(Commissioner of Internal Revenue vs. Pineda, G. R.
No. L-22734, September 15, 1967, 21 SCRA 105).
Upon taxation depends the Government ability to
serve the people for whose benefit taxes are
collected. To safeguard such interest, neglect or
omission of government officials entrusted with the
collection of taxes should not be allowed to bring
harm or detriment to the people, in the same
manner as private persons may be made to suffer
individually on account of his own negligence, the
presumption being that they take good care of
their personal affairs. This should not hold true to
government officials with respect to matters not of
their own personal concern. This is the philosophy
behind the government's exception, as a general
rule, from the operation of the principle of
estoppel. (Republic vs. Caballero, L-27437,
September 30, 1977, 79 SCRA 177; Manila Lodge
No. 761, Benevolent and Protective Order of the
Elks Inc. vs. Court of Appeals, L-41001, September
30, 1976, 73 SCRA 162; Sy vs. Central Bank of the
Philippines, L-41480, April 30,1976, 70 SCRA 571;
Balmaceda vs. Corominas & Co., Inc., 66 SCRA 553;
Auyong Hian vs. Court of Tax Appeals, 59 SCRA
110; Republic vs. Philippine Rabbit Bus Lines, Inc.,
66 SCRA 553; Republic vs. Philippine Long Distance
Telephone Company, L-18841, January 27, 1969, 26
SCRA 620; Zamora vs. Court of Tax Appeals, L-
23272, November 26, 1970, 36 SCRA 77; E.
Rodriguez, Inc. vs. Collector of Internal Revenue, L-
23041, July 31, 1969, 28 SCRA 119.) As already
shown, taxes may be collected even after the
distribution of the estate of the decedent among
his heirs (Government of the Philippines vs.
Pamintuan, supra; Pineda vs. CFI of Tayabas, supra
Clara Diluangco Palanca vs. Commissioner of
Internal Revenue, G. R. No. L-16661, January 31,
1962).
Page 2 of 34
TAX CASES 1st set
Furthermore, as held in Commissioner of Internal
Revenue vs. Pineda, supra, citing the last paragraph
of Section 315 of the Tax Code payment of income
tax shall be a lien in favor of the Government of the
Philippines from the time the assessment was
made by the Commissioner of Internal Revenue
until paid with interests, penalties, etc. By virtue of
such lien, this court held that the property of the
estate already in the hands of an heir or transferee
may be subject to the payment of the tax due the
estate. A fortiori before the inheritance has passed
to the heirs, the unpaid taxes due the decedent
may be collected, even without its having been
presented under Section 2 of Rule 86 of the Rules
of Court. It may truly be said that until the property
of the estate of the decedent has vested in the
heirs, the decedent, represented by his estate,
continues as if he were still alive, subject to the
payment of such taxes as would be collectible from
the estate even after his death. Thus in the case
above cited, the income taxes sought to be
collected were due from the estate, for the three
years 1946, 1947 and 1948 following his death in
May, 1945.
Even assuming arguendo that claims for taxes have
to be filed within the time prescribed in Section 2,
Rule 86 of the Rules of Court, the claim in question
may be filed even after the expiration of the time
originally fixed therein, as may be gleaned from the
italicized portion of the Rule herein cited which
reads:
Section 2. Time within which claims shall be filed. -
In the notice provided in the preceding section, the
court shall state the time for the filing of claims
against the estate, which shall not be more than
twelve (12) nor less than six (6) months after the
date of the first publication of the notice. However,
at any time before an order of distribution is
entered, on application of a creditor who has failed
to file his claim within the time previously limited
the court may, for cause shown and on such terms
as are equitable, allow such claim to be flied within
a time not exceeding one (1) month. (Emphasis
supplied)
In the instant case, petitioners filed an application
(Motion for Allowance of Claim and for an Order of
Payment of Taxes) which, though filed after the
expiration of the time previously limited but before
an order of the distribution is entered, should have
been granted by the respondent court, in the
absence of any valid ground, as none was shown,
justifying denial of the motion, specially
considering that it was for allowance Of claim for
taxes due from the estate, which in effect
represents a claim of the people at large, the only
reason given for the denial that the claim was filed
out of the previously limited period, sustaining
thereby private respondents' contention,
erroneously as has been demonstrated.
WHEREFORE, the order appealed from is reverse.
Since the Tax Commissioner's assessment in the
total amount of P3,254.80 with 5 % surcharge and
1 % monthly interest as provided in the Tax Code is
a final one and the respondent estate's sole
defense of prescription has been herein overruled,
the Motion for Allowance of Claim is herein
granted and respondent estate is ordered to pay
and discharge the same, subject only to the
limitation of the interest collectible thereon as
provided by the Tax Code. No pronouncement as
to costs.
SO ORDERED.
VERA v. FERNANDEZ
GR No. L-31364 March 30, 1979
89 SCRA 199
FACTS:
The BIR filed on July 29, 1969 a motion for negligence, the presumption being that they
allowance of claim and for payment of taxes take good care of their personal affairs. This
representing the should not hold true to government officials
with respect to matters not of their own
estate's tax deficiencies in 1963 to 1964 in the personal concern. This is the philosophy behind
intestate proceedings of Luis Tongoy. The the government's exception, as a general rule,
administrator opposed arguing that the claim from the operation of the principle of estoppel.
was already barred by the statute of limitation,
Section 2 and Section 5 of Rule 86 of the Rules
of Court which provides that all claims for
money against the decedent, arising from FIRST DIVISION
contracts, express or implied, whether the same
be due, not due, or contingent, all claims for G.R. No. 134062 April 17, 2007
funeral expenses and expenses for the last
sickness of the decedent, and judgment for
COMMISSIONER OF INTERNAL REVENUE,
money against the decedent, must be filed
Petitioner,
within the time limited in the notice; otherwise
vs.
they are barred forever.
BANK OF THE PHILIPPINE ISLANDS, Respondent.
ISSUE:
DECISION
Does the statute of non-claims of the Rules of
CORONA, J.:
Court bar the claim of the government for
unpaid taxes?
This is a petition for review on certiorari1 of a
decision2 of the Court of Appeals (CA) dated May
HELD:
29, 1998 in CA-G.R. SP No. 41025 which reversed
and set aside the decision3 and resolution4 of the
No. The reason for the more liberal treatment Court of Tax Appeals (CTA) dated November 16,
of claims for taxes against a decedent's estate
1995 and May 27, 1996, respectively, in CTA Case
in the form of exception from the application of No. 4715.
the statute of non-claims, is not hard to find.
Taxes are the lifeblood of the Government and
In two notices dated October 28, 1988, petitioner
their prompt and certain availability are
Commissioner of Internal Revenue (CIR) assessed
imperious need. (CIR vs. Pineda, 21 SCRA 105).
respondent Bank of the Philippine Islands (BPIs)
Upon taxation depends the Government ability
deficiency percentage and documentary stamp
to serve the people for whose benefit taxes are
taxes for the year 1986 in the total amount of
collected. To safeguard such interest, neglect or
P129,488,656.63:
omission of government officials entrusted with
the collection of taxes should not be allowed to
1986 Deficiency Percentage Tax
bring harm or detriment to the people, in the
same manner as private persons may be made
to suffer individually on account of his own
Page 3 of 34
TAX CASES 1st set
 Deficiency percentage tax
Add: 25% surcharge
20% interest from 1-21-87 to 10-28-88
Compromise penalty
TOTAL AMOUNT DUE AND COLLECTIBLE
1986 Deficiency Documentary Stamp Tax
Deficiency percentage tax
Add: 25% surcharge
Compromise penalty
TOTAL AMOUNT DUE AND COLLECTIBLE
Both notices of assessment contained the following
note:
Please be informed that your [percentage and
documentary stamp taxes have] been assessed as
shown above. Said assessment has been based on
return (filed by you) (as verified) (made by this
Office) (pending investigation) (after
investigation). You are requested to pay the above
amount to this Office or to our Collection Agent in
the Office of the City or Deputy Provincial Treasurer
of xxx6
In a letter dated December 10, 1988, BPI, through
counsel, replied as follows:
1. Your "deficiency assessments" are no
assessments at all. The taxpayer is not
informed, even in the vaguest terms, why
it is being assessed a deficiency. The very
purpose of a deficiency assessment is to
inform taxpayer why he has incurred a
deficiency so that he can make an
intelligent decision on whether to pay or
to protest the assessment. This is all the
more so when the assessment involves
astronomical amounts, as in this case.
We therefore request that the examiner
concerned be required to state, even in
the briefest form, why he believes the
taxpayer has a deficiency documentary
and percentage taxes, and as to the
percentage tax, it is important that the
taxpayer be informed also as to what
particular percentage tax the assessment
refers to.
2. As to the alleged deficiency
documentary stamp tax, you are aware of
the compromise forged between your
office and the Bankers Association of the
Philippines [BAP] on this issue and of BPIs
submission of its computations under this
compromise. There is therefore no basis
whatsoever for this assessment, assuming
it is on the subject of the BAP
compromise. On the other hand, if it
relates to documentary stamp tax on some
other issue, we should like to be informed
about what those issues are.
3. As to the alleged deficiency percentage
tax, we are completely at a loss on how
such assessment may be protested since
your letter does not even tell the taxpayer
what particular percentage tax is involved
and how your examiner arrived at the
deficiency. As soon as this is explained and
clarified in a proper letter of assessment,
we shall inform you of the taxpayers
decision on whether to pay or protest the
assessment.7
Page 4 of 34
TAX CASES 1st set
On June 27, 1991, BPI received a letter from CIR
dated May 8, 1991 stating that:
although in all respects, your letter failed to
qualify as a protest under Revenue Regulations No.
12-85 and therefore not deserving of any rejoinder
by this office as no valid issue was raised against
the validity of our assessment still we obliged to
explain the basis of the assessments.
xxx xxx xxx
this constitutes the final decision of this office on
the matter.8
On July 6, 1991, BPI requested a reconsideration of
the assessments stated in the CIRs May 8, 1991
letter.9 This was denied in a letter dated December
12, 1991, received by BPI on January 21, 1992.10
On February 18, 1992, BPI filed a petition for review
in the CTA.11 In a decision dated November 16,
1995, the CTA dismissed the case for lack of
jurisdiction since the subject assessments had
become final and unappealable. The CTA ruled that
BPI failed to protest on time under Section 270 of
the National Internal Revenue Code (NIRC) of 1986
and Section 7 in relation to Section 11 of RA
1125.12 It denied reconsideration in a resolution
dated May 27, 1996.13
On appeal, the CA reversed the tax courts decision
and resolution and remanded the case to the CTA 14
for a decision on the merits.15 It ruled that the
October 28, 1988 notices were not valid
assessments because they did not inform the
taxpayer of the legal and factual bases therefor. It
declared that the proper assessments were those
contained in the May 8, 1991 letter which provided
the reasons for the claimed deficiencies. 16 Thus, it
held that BPI filed the petition for review in the CTA
on time.17 The CIR elevated the case to this Court.
This petition raises the following issues:
1) whether or not the assessments issued
to BPI for deficiency percentage and
documentary stamp taxes for 1986 had
already become final and unappealable
and
2) whether or not BPI was liable for the
said taxes.
The former Section 27018 (now renumbered as
Section 228) of the NIRC stated:
Sec. 270. Protesting of assessment. When the
[CIR] or his duly authorized representative finds
that proper taxes should be assessed, he shall
first notify the taxpayer of his findings. Within a
period to be prescribed by implementing
regulations, the taxpayer shall be required to
respond to said notice. If the taxpayer fails to
respond, the [CIR] shall issue an assessment
based on his findings.
xxx xxx xxx (emphasis supplied)
Were the October 28, 1988 Notices Valid
Assessments?
The first issue for our resolution is whether or not
the October 28, 1988 notices19 were valid
assessments. If they were not, as held by the CA,
then the correct assessments were in the May 8,
1991 letter, received by BPI on June 27, 1991. BPI,
in its July 6, 1991 letter, seasonably asked for a
reconsideration of the findings which the CIR
denied in his December 12, 1991 letter, received by
BPI on January 21, 1992. Consequently, the petition
for review filed by BPI in the CTA on February 18,
1992 would be well within the 30-day period
provided by law.20
The CIR argues that the CA erred in holding that
the October 28, 1988 notices were invalid
assessments. He asserts that he used BIR Form No.
17.08 (as revised in November 1964) which was
designed for the precise purpose of notifying
taxpayers of the assessed amounts due and
demanding payment thereof.21 He contends that
there was no law or jurisprudence then that
required notices to state the reasons for assessing
deficiency tax liabilities.22
BPI counters that due process demanded that the
facts, data and law upon which the assessments
were based be provided to the taxpayer. It insists
that the NIRC, as worded now (referring to Section
228), specifically provides that:
"[t]he taxpayer shall be informed in writing of the
law and the facts on which the assessment is made;
otherwise, the assessment shall be void."
According to BPI, this is declaratory of what sound
tax procedure is and a confirmation of what due
process requires even under the former Section
270.
BPIs contention has no merit. The present Section
228 of the NIRC provides:
Sec. 228. Protesting of Assessment. When the
[CIR] or his duly authorized representative finds
that proper taxes should be assessed, he shall
first notify the taxpayer of his findings:
Provided, however, That a preassessment notice
shall not be required in the following cases:
xxx xxx xxx
The taxpayer shall be informed in writing of the
law and the facts on which the assessment is
made; otherwise, the assessment shall be void.
Page 5 of 34
TAX CASES 1st set
xxx xxx xxx (emphasis supplied)
Admittedly, the CIR did not inform BPI in writing of
the law and facts on which the assessments of the
deficiency taxes were made. He merely notified BPI
of his findings, consisting only of the computation
of the tax liabilities and a demand for payment
thereof within 30 days after receipt.
In merely notifying BPI of his findings, the CIR
relied on the provisions of the former Section 270
prior to its amendment by RA 8424 (also known as
the Tax Reform Act of 1997).23 In CIR v. Reyes,24 we
held that:
In the present case, Reyes was not informed in
writing of the law and the facts on which the
assessment of estate taxes had been made. She
was merely notified of the findings by the CIR, who
had simply relied upon the provisions of former
Section 229 prior to its amendment by [RA] 8424,
otherwise known as the Tax Reform Act of 1997.
First, RA 8424 has already amended the provision
of Section 229 on protesting an assessment. The
old requirement of merely notifying the
taxpayer of the CIR's findings was changed in
1998 to informing the taxpayer of not only the law,
but also of the facts on which an assessment would
be made; otherwise, the assessment itself would be
invalid.
It was on February 12, 1998, that a preliminary
assessment notice was issued against the estate.
On April 22, 1998, the final estate tax assessment
notice, as well as demand letter, was also issued.
During those dates, RA 8424 was already in effect.
The notice required under the old law was no
longer sufficient under the new law.25 (emphasis
supplied; italics in the original)
Accordingly, when the assessments were made
pursuant to the former Section 270, the only
requirement was for the CIR to "notify" or inform
the taxpayer of his "findings." Nothing in the old
law required a written statement to the taxpayer of
the law and facts on which the assessments were
based. The Court cannot read into the law what
obviously was not intended by Congress. That
would be judicial legislation, nothing less.
Jurisprudence, on the other hand, simply required
that the assessments contain a computation of tax
liabilities, the amount the taxpayer was to pay and
a demand for payment within a prescribed period. 26
Everything considered, there was no doubt the
October 28, 1988 notices sufficiently met the
requirements of a valid assessment under the old
law and jurisprudence.
The sentence
[t]he taxpayers shall be informed in writing of the
law and the facts on which the assessment is made;
otherwise, the assessment shall be void
was not in the old Section 270 but was only later
on inserted in the renumbered Section 228 in 1997.
Evidently, the legislature saw the need to modify
the former Section 270 by inserting the
aforequoted sentence.27 The fact that the
amendment was necessary showed that, prior to
the introduction of the amendment, the statute
had an entirely different meaning. 28
Contrary to the submission of BPI, the inserted
sentence in the renumbered Section 228 was not
an affirmation of what the law required under the
former Section 270. The amendment introduced by
RA 8424 was an innovation and could not be
reasonably inferred from the old law. 29 Clearly, the
legislature intended to insert a new provision
regarding the form and substance of assessments
issued by the CIR.30
In ruling that the October 28, 1988 notices were
not valid assessments, the CA explained:
xxx. Elementary concerns of due process of law
should have prompted the [CIR] to inform [BPI] of
the legal and factual basis of the formers decision
to charge the latter for deficiency documentary
stamp and gross receipts taxes.31
In other words, the CAs theory was that BPI was
deprived of due process when the CIR failed to
inform it in writing of the factual and legal bases of
the assessments even if these were not called for
under the old law.
We disagree.
Indeed, the underlying reason for the law was the
basic constitutional requirement that "no person
shall be deprived of his property without due
process of law."32 We note, however, what the CTA
had to say:
xxx xxx xxx
From the foregoing testimony, it can be safely
adduced that not only was [BPI] given the
opportunity to discuss with the [CIR] when the
latter issued the former a Pre-Assessment Notice
(which [BPI] ignored) but that the examiners
themselves went to [BPI] and "we talk to them and
we try to [thresh] out the issues, present evidences
as to what they need." Now, how can [BPI] and/or
its counsel honestly tell this Court that they did not
know anything about the assessments?
Not only that. To further buttress the fact that [BPI]
indeed knew beforehand the assessments[,]
Page 6 of 34
TAX CASES 1st set
contrary to the allegations of its counsel[,] was the
testimony of Mr. Jerry Lazaro, Assistant Manager of
the Accounting Department of [BPI]. He testified to
the fact that he prepared worksheets which contain
his analysis regarding the findings of the [CIRs]
examiner, Mr. San Pedro and that the same
worksheets were presented to Mr. Carlos Tan,
Comptroller of [BPI].
xxx xxx xxx
From all the foregoing discussions, We can now
conclude that [BPI] was indeed aware of the nature
and basis of the assessments, and was given all the
opportunity to contest the same but ignored it
despite the notice conspicuously written on the
assessments which states that "this ASSESSMENT
becomes final and unappealable if not protested
within 30 days after receipt." Counsel resorted to
dilatory tactics and dangerously played with time.
Unfortunately, such strategy proved fatal to the
cause of his client.33
The CA never disputed these findings of fact by the
CTA:
[T]his Court recognizes that the [CTA], which by the
very nature of its function is dedicated exclusively
to the consideration of tax problems, has
necessarily developed an expertise on the subject,
and its conclusions will not be overturned unless
there has been an abuse or improvident exercise of
authority. Such findings can only be disturbed on
appeal if they are not supported by substantial
evidence or there is a showing of gross error or
abuse on the part of the [CTA].34
Under the former Section 270, there were two
instances when an assessment became final and
unappealable: (1) when it was not protested within
30 days from receipt and (2) when the adverse
decision on the protest was not appealed to the
CTA within 30 days from receipt of the final
decision:35
Sec. 270. Protesting of assessment.1a\^/phi1.net
xxx xxx xxx
Such assessment may be protested administratively
by filing a request for reconsideration or
reinvestigation in such form and manner as may be
prescribed by the implementing regulations within
thirty (30) days from receipt of the assessment;
otherwise, the assessment shall become final and
unappealable.
If the protest is denied in whole or in part, the
individual, association or corporation adversely
affected by the decision on the protest may appeal
to the [CTA] within thirty (30) days from receipt of
the said decision; otherwise, the decision shall
become final, executory and demandable.
Implications Of A Valid Assessment
Considering that the October 28, 1988 notices were
valid assessments, BPI should have protested the
same within 30 days from receipt thereof. The
December 10, 1988 reply it sent to the CIR did not
qualify as a protest since the letter itself stated that
"[a]s soon as this is explained and clarified in a
proper letter of assessment, we shall inform you
of the taxpayers decision on whether to pay or
protest the assessment."36 Hence, by its own
declaration, BPI did not regard this letter as a
protest against the assessments. As a matter of
fact, BPI never deemed this a protest since it did
not even consider the October 28, 1988 notices as
valid or proper assessments.
The inevitable conclusion is that BPIs failure to
protest the assessments within the 30-day period
provided in the former Section 270 meant that they
became final and unappealable. Thus, the CTA
correctly dismissed BPIs appeal for lack of
jurisdiction. BPI was, from then on, barred from
disputing the correctness of the assessments or
invoking any defense that would reopen the
question of its liability on the merits.37 Not only
that. There arose a presumption of correctness
when BPI failed to protest the assessments:
Tax assessments by tax examiners are presumed
correct and made in good faith. The taxpayer has
the duty to prove otherwise. In the absence of
proof of any irregularities in the performance of
duties, an assessment duly made by a Bureau of
Internal Revenue examiner and approved by his
superior officers will not be disturbed. All
presumptions are in favor of the correctness of tax
assessments.38
Even if we considered the December 10, 1988 letter
as a protest, BPI must nevertheless be deemed to
have failed to appeal the CIRs final decision
regarding the disputed assessments within the 30-
day period provided by law. The CIR, in his May 8,
1991 response, stated that it was his "final decision
on the matter." BPI therefore had 30 days from
the time it received the decision on June 27, 1991
to appeal but it did not. Instead it filed a request
for reconsideration and lodged its appeal in the
CTA only on February 18, 1992, way beyond the
reglementary period. BPI must now suffer the
repercussions of its omission. We have already
declared that:
the [CIR] should always indicate to the taxpayer
in clear and unequivocal language whenever his
action on an assessment questioned by a taxpayer
constitutes his final determination on the disputed
assessment, as contemplated by Sections 7 and 11
of [RA 1125], as amended. On the basis of his
statement indubitably showing that the
Page 7 of 34
TAX CASES 1st set
Commissioner's communicated action is his
final decision on the contested assessment, the
aggrieved taxpayer would then be able to take
recourse to the tax court at the opportune time.
Without needless difficulty, the taxpayer would
be able to determine when his right to appeal
to the tax court accrues.
The rule of conduct would also obviate all
desire and opportunity on the part of the
taxpayer to continually delay the finality of the
assessment and, consequently, the collection
of the amount demanded as taxes by
repeated requests for recomputation and
reconsideration. On the part of the [CIR], this
would encourage his office to conduct a careful
and thorough study of every questioned
assessment and render a correct and definite
decision thereon in the first instance. This would
also deter the [CIR] from unfairly making the
taxpayer grope in the dark and speculate as to
which action constitutes the decision appealable to
the tax court. Of greater import, this rule of
conduct would meet a pressing need for fair play,
regularity, and orderliness in administrative
action.39 (emphasis supplied)
Either way (whether or not a protest was made), we
cannot absolve BPI of its liability under the subject
tax assessments.
We realize that these assessments (which have
been pending for almost 20 years) involve a
considerable amount of money. Be that as it may,
we cannot legally presume the existence of
something which was never there. The state will be
deprived of the taxes validly due it and the public
will suffer if taxpayers will not be held liable for the
proper taxes assessed against them:
Taxes are the lifeblood of the government, for
without taxes, the government can neither exist nor
endure. A principal attribute of sovereignty, the
exercise of taxing power derives its source from the
very existence of the state whose social contract
with its citizens obliges it to promote public
interest and common good. The theory behind the
exercise of the power to tax emanates from
necessity; without taxes, government cannot fulfill
its mandate of promoting the general welfare and
well-being of the people.40
WHEREFORE, the petition is hereby GRANTED.
The May 29, 1998 decision of the Court of Appeals
in CA-G.R. SP No. 41025 is REVERSED and SET
ASIDE.
SO ORDERED.
CIR v. BPI
G.R. No. 134062, April 17, 2007
521 SCRA 373
FACTS:
Sometime in 1988 the CIR sent two notices of
assessment to the respondent of their
deficiency percentage and documentary stamp
taxes for the year 1986 in the total amount of
P129,488,656.63.
In response, respondent alleged that they were
not properly informed of the deficiency in tax
assessment made against them by the CIR
which violated the rule set forth in NIRC.
Whereas in the said law the taxpayer shall be
informed in writing of the law and the facts on
which the assessment is made otherwise, the
assessment shall be void.
ISSUE:
Whether or not respondent was properly government cannot fulfill its mandate of
informed of the assessment made by the CIR? promoting the general welfare and well-being
of the people.
HELD:
The petition is hereby GRANTED.
Accordingly, when the assessments were made
pursuant to the former Section 270, the only
requirement was for the CIR to "notify" or
inform the taxpayer of his "findings." Nothing
in the old law required a written statement to
the taxpayer of the law and facts on which the
assessments were based. The Court cannot read
into the law what obviously was not intended
EN BANC
by Congress. That would be judicial legislation,
nothing less.
G.R. No. L-22734 September 15, 1967
Jurisprudence, on the other hand, simply
COMMISSIONER OF INTERNAL
required that the assessments contain a
REVENUE, petitioner,
computation of tax liabilities, the amount the
vs.
taxpayer was to pay and a demand for payment
MANUEL B. PINEDA, as one of the heirs of
within a prescribed period.
deceased ATANASIO PINEDA, respondent.
From all the foregoing discussions, We can now
Office of the Solicitor General for petitioner.
conclude that [BPI] was indeed aware of the
Manuel B. Pineda for and in his own behalf as
nature and basis of the assessments, and was
respondent.
given all the opportunity to contest the same
but ignored it despite the notice conspicuously
written on the assessments which states that
"this ASSESSMENT becomes final and
unappealable if not protested within 30 days BENGZON, J.P., J.:
after receipt." Counsel resorted to dilatory
tactics and dangerously played with time. On May 23, 1945 Atanasio Pineda died, survived by
his wife, FelicisimaBagtas, and 15 children, the
Taxes are the lifeblood of the government, for eldest of whom is Manuel B. Pineda, a lawyer.
without taxes, the government can neither exist Estate proceedings were had in the Court of First
nor endure. A principal attribute of sovereignty, Instance of Manila (Case No. 71129) wherein the
the exercise of taxing power derives its source surviving widow was appointed administratrix. The
from the very existence of the state whose estate was divided among and awarded to the
social contract with its citizens obliges it to heirs and the proceedings terminated on June 8,
promote public interest and common good. The 1948. Manuel B. Pineda's share amounted to about
theory behind the exercise of the power to tax P2,500.00.
emanates from necessity; without taxes,
Page 8 of 34
TAX CASES 1st set
After the estate proceedings were closed, the
Bureau of Internal Revenue investigated the
income tax liability of the estate for the years 1945,
1946, 1947 and 1948 and it found that the
corresponding income tax returns were not filed.
Thereupon, the representative of the Collector of
Internal Revenue filed said returns for the estate on
the basis of information and data obtained from
the aforesaid estate proceedings and issued an
assessment for the following:
1. Deficiency income tax
1945 P135.83
1946 436.95
1947 1,206.91 P1,779.69
Add: 5% surcharge
1% monthly interest from
November 30, 1953 to
April 15, 1957
Compromise for late filing
Compromise for late
payment
Total amount due P2,707.44
===========
Additional residence tax for P14.50
2.
1945 ===========
3. Real Estate dealer's tax for the
fourth quarter of 1946 and the P207.50
whole year of 1947 ===========
Manuel B. Pineda, who received the assessment,
contested the same. Subsequently, he appealed to
the Court of Tax Appeals alleging that he was
appealing "only that proportionate part or portion
pertaining to him as one of the heirs."
After hearing the parties, the Court of Tax Appeals
rendered judgment reversing the decision of the
Commissioner on the ground that his right to
assess and collect the tax has prescribed. The
Commissioner appealed and this Court affirmed
the findings of the Tax Court in respect to the
assessment for income tax for the year 1947 but
held that the right to assess and collect the taxes
for 1945 and 1946 has not prescribed. For 1945
and 1946 the returns were filed on August 24,
1953; assessments for both taxable years were
made within five years therefrom or on October 19,
1953; and the action to collect the tax was filed
within five years from the latter date, on August 7,
1957. For taxable year 1947, however, the return
was filed on March 1, 1948; the assessment was
made on October 19, 1953, more than five years
from the date the return was filed; hence, the right
to assess income tax for 1947 had prescribed.
Accordingly, We remanded the case to the Tax
Court for further appropriate proceedings. 1
In the Tax Court, the parties submitted the case for
720.77
decision without additional evidence.
On November 29, 1963 the Court of Tax Appeals
rendered judgment holding Manuel B. Pineda liable
for the payment corresponding to his share of the
following taxes:
Deficiency income tax
1945 P135.83
1946 436.95
Real estate dealer's fixed
tax 4th quarter of 1946
and whole year of 1947 P187.50
The Commissioner of Internal Revenue has
appealed to Us and has proposed to hold Manuel
B. Pineda liable for the payment of all the taxes
found by the Tax Court to be due from the estate
in the total amount of P760.28 instead of only for
the amount of taxes corresponding to his share in
the estate.1awphl.nt
Page 9 of 34
TAX CASES 1st set
Manuel B. Pineda opposes the proposition on the
ground that as an heir he is liable for unpaid
income tax due the estate only up to the extent of
and in proportion to any share he received. He
relies on Government of the Philippine Islands v.
Pamintuan2 where We held that "after the partition
of an estate, heirs and distributees are liable
individually for the payment of all lawful
outstanding claims against the estate in proportion
to the amount or value of the property they have
respectively received from the estate."
We hold that the Government can require Manuel
B. Pineda to pay the full amount of the taxes
assessed.
Pineda is liable for the assessment as an heir and as
a holder-transferee of property belonging to the
estate/taxpayer. As an heir he is individually
answerable for the part of the tax proportionate to
the share he received from the inheritance. 3 His
liability, however, cannot exceed the amount of his
share.4
As a holder of property belonging to the estate,
Pineda is liable for he tax up to the amount of the
property in his possession. The reason is that the
Government has a lien on the P2,500.00 received
by him from the estate as his share in the
inheritance, for unpaid income taxes 4a for which
said estate is liable, pursuant to the last paragraph
of Section 315 of the Tax Code, which we quote
hereunder:
If any person, corporation, partnership,
joint-account (cuenta en participacion),
association, or insurance company liable to
pay the income tax, neglects or refuses to
pay the same after demand, the amount
shall be a lien in favor of the Government
of the Philippines from the time when the
assessment was made by the
 Commissioner of Internal Revenue until
paid with interest, penalties, and costs that
may accrue in addition thereto upon all
property and rights to property belonging
to the taxpayer: . . .
By virtue of such lien, the Government has the right
to subject the property in Pineda's possession, i.e.,
the P2,500.00, to satisfy the income tax assessment
in the sum of P760.28. After such payment, Pineda
will have a right of contribution from his co-
heirs,5 to achieve an adjustment of the proper
share of each heir in the distributable estate.
All told, the Government has two ways of collecting
the tax in question. One, by going after all the heirs
and collecting from each one of them the amount
of the tax proportionate to the inheritance
received. This remedy was adopted in Government
of the Philippine Islands v. Pamintuan, supra. In said
case, the Government filed an action against all the
heirs for the collection of the tax. This action rests
on the concept that hereditary property consists
only of that part which remains after the settlement
of all lawful claims against the estate, for the
settlement of which the entire estate is first
liable.6 The reason why in case suit is filed against
all the heirs the tax due from the estate is levied
proportionately against them is to achieve thereby
two results: first, payment of the tax; and second,
adjustment of the shares of each heir in the
distributed estate as lessened by the tax.
Another remedy, pursuant to the lien created by
Section 315 of the Tax Code upon all property and
rights to property belonging to the taxpayer for
unpaid income tax, is by subjecting said property
of the estate which is in the hands of an heir or
transferee to the payment of the tax due, the
estate. This second remedy is the very avenue the
Government took in this case to collect the tax. The
Bureau of Internal Revenue should be given, in
instances like the case at bar, the necessary
discretion to avail itself of the most expeditious
way to collect the tax as may be envisioned in the
particular provision of the Tax Code above quoted,
because taxes are the lifeblood of government and
their prompt and certain availability is an imperious
need.7 And as afore-stated in this case the suit
seeks to achieve only one objective: payment of
the tax. The adjustment of the respective shares
due to the heirs from the inheritance, as lessened
by the tax, is left to await the suit for contribution
by the heir from whom the Government recovered
said tax.
WHEREFORE, the decision appealed from is
modified. Manuel B. Pineda is hereby ordered to
pay to the Commissioner of Internal Revenue the
sum of P760.28 as deficiency income tax for 1945
and 1946, and real estate dealer's fixed tax for the
fourth quarter of 1946 and for the whole year 1947,
without prejudice to his right of contribution for his
co-heirs. No costs. So ordered.
CIR v. PINEDA
GR No. L-22734, September 15,
1967
21 SCRA 105
FACTS:
Atanasio Pineda died, survived by
his wife, Felicisima Bagtas, and 15
children, the eldest of whom is Atty.
Manuel Pineda. Estate proceedings
were had in Court so that the estate
was divided among and awarded
tothe heirs. Atty Pineda's share
amounted to about P2,500.00. After
the estate proceedings were closed,
the BIR investigated the income tax
liability of the estate for the years
Page 10 of 34
TAX CASES 1st set
1945, 1946, 1947 and 1948 and it
found that the corresponding
income tax returns were not filed.
Thereupon, the representative of
the Collector of Internal Revenue
filed said returns for the estate
issued an assessment and charged
the full amount to the inheritance
due to Atty. Pineda who argued that
he is liable only to extent of his
proportional share in the
inheritance.
ISSUE:
Can BIR collect the full amount of
estate taxes from an heir's
inheritance?
HELD:
Yes. The Government can require
Atty. Pineda to pay the full amount
of the taxes assessed.
The reason is that the Government
has a lien on the P2,500.00
received by him from the estate as
his share in the inheritance, for
unpaid income taxes for which said
estate is liable. By virtue of such
lien, the Government has the right
to subject the property in Pineda's
possession to satisfy the income
tax assessment. After such
payment, Pineda will have a right of
contribution from his co-heirs, to
achieve an adjustment of the
proper share of each heir in the
distributable estate.
All told, the Government has two
ways of collecting the tax in
question. One, by going after all the
heirs and collecting from each one
of them the amount of the tax
proportionate to the inheritance
received; and second, is by
subjecting said property of the
estate which is in the hands of an
heir or transferee to the payment of
the tax due. This second remedy is
the very avenue the Government
took in this case to collect the tax.
The Bureau of Internal Revenue
should be given, in instances like
the case at bar, the necessary
discretion to avail itself of the most
expeditious way to collect the tax
as may be envisioned in the
particular provision of the Tax Code
above quoted, because taxes are
the lifeblood of government and
their prompt and certain availability
is an imperious need.
FIRST DIVISION
G.R. No. L-28896 February 17, 1988
COMMISSIONER OF INTERNAL
REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX
APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so
should be collected without unnecessary hindrance
On the other hand, such collection should be made
in accordance with law as any arbitrariness will
negate the very reason for government itself. It is
therefore necessary to reconcile the apparently
conflicting interests of the authorities and the
taxpayers so that the real purpose of taxation,
which is the promotion of the common good, may
be achieved.
The main issue in this case is whether or not the
Collector of Internal Revenue correctly disallowed
the P75,000.00 deduction claimed by private
respondent Algue as legitimate business expenses
in its income tax returns. The corollary issue is
whether or not the appeal of the private
respondent from the decision of the Collector of
Internal Revenue was made on time and in
accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the
private respondent, a domestic corporation
engaged in engineering, construction and other
allied activities, received a letter from the petitioner
assessing it in the total amount of P83,183.85 as
delinquency income taxes for the years 1958 and
1959. 1 On January 18, 1965, Algue flied a letter of
protest or request for reconsideration, which letter
was stamp received on the same day in the office
of the petitioner. 2 On March 12, 1965, a warrant of
distraint and levy was presented to the private
respondent, through its counsel, Atty. Alberto
Guevara, Jr., who refused to receive it on the
ground of the pending protest. 3 A search of the
protest in the dockets of the case proved fruitless.
Atty. Guevara produced his file copy and gave a
photostat to BIR agent Ramon Reyes, who deferred
service of the warrant. 4 On April 7, 1965, Atty.
Guevara was finally informed that the BIR was not
taking any action on the protest and it was only
then that he accepted the warrant of distraint and
levy earlier sought to be served. 5 Sixteen days later,
on April 23, 1965, Algue filed a petition for review
of the decision of the Commissioner of Internal
Revenue with the Court of Tax Appeals. 6
Page 11 of 34
TAX CASES 1st set
The above chronology shows that the petition was
filed seasonably. According to Rep. Act No. 1125,
the appeal may be made within thirty days after
receipt of the decision or ruling challenged. 7 It is
true that as a rule the warrant of distraint and levy
is "proof of the finality of the assessment" 8 and
renders hopeless a request for
reconsideration," 9being "tantamount to an
outright denial thereof and makes the said request
deemed rejected." 10 But there is a special
circumstance in the case at bar that prevents
application of this accepted doctrine.
The proven fact is that four days after the private
respondent received the petitioner's notice of
assessment, it filed its letter of protest. This was
apparently not taken into account before the
warrant of distraint and levy was issued; indeed,
such protest could not be located in the office of
the petitioner. It was only after Atty. Guevara gave
the BIR a copy of the protest that it was, if at all,
considered by the tax authorities. During the
intervening period, the warrant was premature and
could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the
protest filed by private respondent was not pro
forma and was based on strong legal
considerations. It thus had the effect of suspending
on January 18, 1965, when it was filed, the
reglementary period which started on the date the
assessment was received, viz., January 14, 1965. The
period started running again only on April 7, 1965,
when the private respondent was definitely
informed of the implied rejection of the said
protest and the warrant was finally served on it.
Hence, when the appeal was filed on April 23, 1965,
only 20 days of the reglementary period had been
consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction
of P75,000.00 was properly disallowed because it
was not an ordinary reasonable or necessary
business expense. The Court of Tax Appeals had
seen it differently. Agreeing with Algue, it held that
the said amount had been legitimately paid by the
private respondent for actual services rendered.
The payment was in the form of promotional fees.
These were collected by the Payees for their work
in the creation of the Vegetable Oil Investment
Corporation of the Philippines and its subsequent
purchase of the properties of the Philippine Sugar
Estate Development Company.
Parenthetically, it may be observed that the
petitioner had Originally claimed these
promotional fees to be personal holding company
income 12 but later conformed to the decision of
the respondent court rejecting this assertion. 13 In
fact, as the said court found, the amount was
earned through the joint efforts of the persons
among whom it was distributed It has been
established that the Philippine Sugar Estate
Development Company had earlier appointed
Algue as its agent, authorizing it to sell its land,
factories and oil manufacturing process. Pursuant
to such authority, Alberto Guevara, Jr., Eduardo
Guevara, Isabel Guevara, Edith, O'Farell, and Pablo
Sanchez, worked for the formation of the
Vegetable Oil Investment Corporation, inducing
other persons to invest in it. 14 Ultimately, after its
incorporation largely through the promotion of the
said persons, this new corporation purchased the
PSEDC properties. 15 For this sale, Algue received as
agent a commission of P126,000.00, and it was
from this commission that the P75,000.00
promotional fees were paid to the aforenamed
individuals. 16
There is no dispute that the payees duly reported
their respective shares of the fees in their income
tax returns and paid the corresponding taxes
thereon. 17 The Court of Tax Appeals also found,
after examining the evidence, that no distribution
of dividends was involved. 18
The petitioner claims that these payments are
fictitious because most of the payees are members
of the same family in control of Algue. It is argued
that no indication was made as to how such
payments were made, whether by check or in cash,
and there is not enough substantiation of such
payments. In short, the petitioner suggests a tax
dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction.
We find that these suspicions were adequately met
by the private respondent when its President,
Alberto Guevara, and the accountant, Cecilia V. de
Jesus, testified that the payments were not made in
one lump sum but periodically and in different
amounts as each payee's need arose. 19 It should
be remembered that this was a family corporation
where strict business procedures were not applied
and immediate issuance of receipts was not
required. Even so, at the end of the year, when the
books were to be closed, each payee made an
accounting of all of the fees received by him or her,
to make up the total of P75,000.00. 20 Admittedly,
everything seemed to be informal. This
arrangement was understandable, however, in view
of the close relationship among the persons in the
family corporation.
We agree with the respondent court that the
amount of the promotional fees was not excessive.
The total commission paid by the Philippine Sugar
Estate Development Co. to the private respondent
was P125,000.00. 21After deducting the said fees,
Algue still had a balance of P50,000.00 as clear
profit from the transaction. The amount of
P75,000.00 was 60% of the total commission. This
was a reasonable proportion, considering that it
was the payees who did practically everything,
Page 12 of 34
TAX CASES 1st set
from the formation of the Vegetable Oil Investment
Corporation to the actual purchase by it of the
Sugar Estate properties. This finding of the
respondent court is in accord with the following
provision of the Tax Code:
SEC. 30. Deductions from gross
income.--In computing net
income there shall be allowed as
deductions
(a) Expenses:
(1) In general.--All the ordinary
and necessary expenses paid or
incurred during the taxable year
in carrying on any trade or
business, including a reasonable
allowance for salaries or other
compensation for personal
services actually rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1),
reading as follows:
SEC. 70. Compensation for
personal services.--Among the
ordinary and necessary expenses
paid or incurred in carrying on
any trade or business may be
included a reasonable allowance
for salaries or other compensation
for personal services actually
rendered. The test of deductibility
in the case of compensation
payments is whether they are
reasonable and are, in fact,
payments purely for service. This
test and deductibility in the case
of compensation payments is
whether they are reasonable and
are, in fact, payments purely for
 service. This test and its practical
application may be further stated
and illustrated as follows:
Any amount paid in the form of
compensation, but not in fact as
the purchase price of services, is
not deductible. (a) An ostensible
salary paid by a corporation may
be a distribution of a dividend on
stock. This is likely to occur in the
case of a corporation having few
stockholders, Practically all of
whom draw salaries. If in such a
case the salaries are in excess of
those ordinarily paid for similar
services, and the excessive
payment correspond or bear a
close relationship to the
stockholdings of the officers of
employees, it would seem likely
that the salaries are not paid
wholly for services rendered, but
the excessive payments are a
distribution of earnings upon the
stock. . . . (Promulgated Feb. 11,
1931, 30 O.G. No. 18, 325.)
It is worth noting at this point that most of the
payees were not in the regular employ of Algue nor
were they its controlling stockholders. 23
The Solicitor General is correct when he says that
the burden is on the taxpayer to prove the validity
of the claimed deduction. In the present case,
however, we find that the onus has been
discharged satisfactorily. The private respondent
has proved that the payment of the fees was
necessary and reasonable in the light of the efforts
exerted by the payees in inducing investors and
prominent businessmen to venture in an
experimental enterprise and involve themselves in
a new business requiring millions of pesos. This
was no mean feat and should be, as it was,
sufficiently recompensed.
It is said that taxes are what we pay for civilization
society. Without taxes, the government would be
paralyzed for lack of the motive power to activate
and operate it. Hence, despite the natural
reluctance to surrender part of one's hard earned
income to the taxing authorities, every person who
is able to must contribute his share in the running
of the government. The government for its part, is
expected to respond in the form of tangible and
intangible benefits intended to improve the lives of
the people and enhance their moral and material
values. This symbiotic relationship is the rationale
of taxation and should dispel the erroneous notion
that it is an arbitrary method of exaction by those
in the seat of power.
But even as we concede the inevitability and
indispensability of taxation, it is a requirement in all
democratic regimes that it be exercised reasonably
and in accordance with the prescribed procedure. If
it is not, then the taxpayer has a right to complain
and the courts will then come to his succor. For all
the awesome power of the tax collector, he may
still be stopped in his tracks if the taxpayer can
demonstrate, as it has here, that the law has not
been observed.
We hold that the appeal of the private respondent
from the decision of the petitioner was filed on
time with the respondent court in accordance with
Rep. Act No. 1125. And we also find that the
claimed deduction by the private respondent was
permitted under the Internal Revenue Code and
should therefore not have been disallowed by the
petitioner.
ACCORDINGLY, the appealed decision of the Court
of Tax Appeals is AFFIRMED in toto, without costs.
Page 13 of 34
TAX CASES 1st set
SO ORDERED.
COMMISSIONER v. ALGUE, INC.
GR No. L-28896, February 17, 1988
158 SCRA 9
FACTS:
Private respondent corporation Algue, Inc. filed
its income tax returns for 1958 and 1959
showing deductions, for promotional fees paid,
from their gross income, thus lowering their
taxable income. The BIR assessed Algue based
on such deductions contending that the claimed
deduction is disallowed because it was not an
ordinary, reasonable and necessary expense.
ISSUE:
Should an uncommon business expense be
disallowed as a proper deduction in
computation of income taxes, corollary to the
doctrine that taxes are the lifeblood of the
government?
HELD:
No. Private respondent has proved that the
payment of the fees was necessary and
reasonable in the light of the efforts exerted by
the payees in inducing investors and prominent
businessmen to venture in an experimental
enterprise and involve themselves in a new
business requiring millions of pesos. This was
no mean feat and should be, as it was,
sufficiently recompensed.
It is well-settled that taxes are the lifeblood of
the government and so should be collected
without unnecessary hindrance On the other
hand, such collection should be made in
accordance with law as any arbitrariness will
negate the very reason for government itself. It
is therefore necessary to reconcile the
apparently conflicting interests of the
authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of
the common good, may be achieved.
But even as we concede the inevitability and
indispensability of taxation, it is a requirement
in all democratic regimes that it be exercised
reasonably and in accordance with the
prescribed procedure. If it is not, then the
taxpayer has a right to complain and the courts
will then come to his succor. For all the
awesome power of the tax collector, he may
still be stopped in his tracks if the taxpayer can
demonstrate, as it has here, that the law has not
been observed.
FIRST DIVISION
G.R. No. 124043 October 14, 1998
COMMISSIONER OF INTERNAL REVENUE,
petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS
and YOUNG MEN'S CHRISTIAN ASSOCIATION
OF THE PHILIPPINES, INC., respondents.
PANGANIBAN, J.:
Is the income derived from rentals of real property
owned by the Young Men's Christian Association of
the Philippines, Inc. (YMCA) established as "a
welfare, educational and charitable non-profit
corporation" subject to income tax under the
National Internal Revenue Code (NIRC) and the
Constitution?
The Case
This is the main question raised before us in this
petition for review on certiorari challenging two
Resolutions issued by the Court of Appeals 1 on
September 28, 1995 2 and February 29, 1996 3 in
CA-GR SP No. 32007. Both Resolutions affirmed the
Decision of the Court of Tax Appeals (CTA) allowing
the YMCA to claim tax exemption on the latter's
income from the lease of its real property.
The Facts
The facts are undisputed. 4 Private Respondent
YMCA is a non-stock, non-profit institution, which
conducts various programs and activities that are
beneficial to the public, especially the young
people, pursuant to its religious, educational and
charitable objectives.
In 1980, private respondent earned, among others,
an income of P676,829.80 from leasing out a
portion of its premises to small shop owners, like
restaurants and canteen operators, and P44,259.00
from parking fees collected from non-members. On
July 2, 1984, the commissioner of internal revenue
(CIR) issued an assessment to private respondent,
in the total amount of P415,615.01 including
surcharge and interest, for deficiency income tax,
deficiency expanded withholding taxes on rentals
and professional fees and deficiency withholding
tax on wages. Private respondent formally
Page 14 of 34
TAX CASES 1st set
protested the assessment and, as a supplement to
its basic protest, filed a letter dated October 8,
1985. In reply, the CIR denied the claims of YMCA.
Contesting the denial of its protest, the YMCA filed
a petition for review at the Court of Tax Appeals
(CTA) on March 14, 1989. In due course, the CTA
issued this ruling in favor of the YMCA:
. . . [T]he leasing of [private
respondent's] facilities to small
shop owners, to restaurant and
canteen operators and the
operation of the parking lot are
reasonably incidental to and
reasonably necessary for the
accomplishment of the objectives
of the [private respondents]. It
appears from the testimonies of
the witnesses for the [private
respondent] particularly Mr.
James C. Delote, former
accountant of YMCA, that these
facilities were leased to members
and that they have to service the
needs of its members and their
guests. The rentals were minimal
as for example, the barbershop
was only charged P300 per
month. He also testified that there
was actually no lot devoted for
parking space but the parking was
done at the sides of the building.
The parking was primarily for
members with stickers on the
windshields of their cars and they
charged P.50 for non-members.
The rentals and parking fees were
just enough to cover the costs of
operation and maintenance only.
The earning[s] from these rentals
and parking charges including
those from lodging and other
charges for the use of the
recreational facilities constitute
[the] bulk of its income which [is]
channeled to support its many
activities and attainment of its
objectives. As pointed out earlier,
the membership dues are very
insufficient to support its
program. We find it reasonably
necessary therefore for [private
respondent] to make [the] most
out [of] its existing facilities to
earn some income. It would have
been different if under the
circumstances, [private
respondent] will purchase a lot
and convert it to a parking lot to
cater to the needs of the general
public for a fee, or construct a
building and lease it out to the
highest bidder or at the market
rate for commercial purposes, or
should it invest its funds in the
buy and sell of properties, real or
personal. Under these
circumstances, we could conclude
that the activities are already
profit oriented, not incidental and
reasonably necessary to the
pursuit of the objectives of the
association and therefore, will fall
under the last paragraph of
Section 27 of the Tax Code and
any income derived therefrom
shall be taxable.
Considering our findings that
[private respondent] was not
engaged in the business of
operating or contracting [a]
parking lot, we find no legal basis
also for the imposition of [a]
deficiency fixed tax and [a]
contractor's tax in the amount[s]
of P353.15 and P3,129.73,
respectively.
xxx xxx xxx
WHEREFORE, in view of all the
foregoing, the following
assessments are hereby dismissed
for lack of merit:
1980 Deficiency Fixed Tax
P353,15;
1980 Deficiency Contractor's Tax
P3,129.23;
1980 Deficiency Income Tax
P372,578.20.
While the following assessments are hereby
sustained:
1980 Deficiency Expanded
Withholding Tax P1,798.93;
1980 Deficiency Withholding Tax
on Wages P33,058.82
plus 10% surcharge and 20%
interest per annum from July 2,
1984 until fully paid but not to
exceed three (3) years pursuant to
Section 51(e)(2) & (3) of the
National Internal Revenue Code
effective as of 1984. 5
Dissatisfied with the CTA ruling, the CIR elevated
the case to the Court of Appeals (CA). In its
Page 15 of 34
TAX CASES 1st set
Decision of February 16, 1994, the CA 6 initially
decided in favor of the CIR and disposed of the
appeal in the following manner:
Following the ruling in the afore-
cited cases of Province of Abra vs.
Hernando and Abra Valley College
Inc. vs. Aquino, the ruling of the
respondent Court of Tax Appeals
that "the leasing of petitioner's
(herein respondent's) facilities to
small shop owners, to restaurant
and canteen operators and the
operation of the parking lot are
reasonably incidental to and
reasonably necessary for the
accomplishment of the objectives
of the petitioners, and the income
derived therefrom are tax exempt,
must be reversed.
WHEREFORE, the appealed
decision is hereby REVERSED in so
far as it dismissed the assessment
for:
1980 Deficiency
Income Tax P
353.15
1980 Deficiency
Contractor's Tax
P 3,129.23, &
1980 Deficiency
Income Tax P
372,578.20
7
but the same is AFFIRMED in all other respect.
Aggrieved, the YMCA asked for reconsideration
based on the following grounds:
I head above the water, so to
The findings of facts of the Public
Respondent Court of Tax Appeals
being supported by substantial
evidence [are] final and
conclusive.
II
The conclusions of law of [p]ublic
[r]espondent exempting [p]rivate
[r]espondent from the income on
rentals of small shops and parking
fees [are] in accord with the
applicable law and jurisprudence.
8
Finding merit in the Motion for Reconsideration
filed by the YMCA, the CA reversed itself and
promulgated on September 28, 1995 its first
assailed Resolution which, in part, reads:
The Court cannot depart from the
CTA's findings of fact, as they are
supported by evidence beyond
what is considered as substantial.
xxx xxx xxx
The second ground raised is that
the respondent CTA did not err in
saying that the rental from small
shops and parking fees do not
result in the loss of the
exemption. Not even the
petitioner would hazard the
suggestion that YMCA is designed
for profit. Consequently, the little
income from small shops and
parking fees help[s] to keep its
speak, and allow it to continue
with its laudable work.
The Court, therefore, finds the
second ground of the motion to
be meritorious and in accord with
law and jurisprudence.
WHEREFORE, the motion for
reconsideration is GRANTED; the
respondent CTA's decision is
AFFIRMED in toto. 9
The internal revenue commissioner's own Motion
for Reconsideration was denied by Respondent
Court in its second assailed Resolution of February
29, 1996. Hence, this petition for review under Rule
45 of the Rules of Court. 10
The Issues
Before us, petitioner imputes to the Court of
Appeals the following errors:
I evidence, will be disturbed on appeal unless it is
In holding that it had departed
from the findings of fact of
Respondent Court of Tax Appeals
when it rendered its Decision
dated February 16, 1994; and
II
In affirming the conclusion of
Respondent Court of Tax Appeals
that the income of private
Page 16 of 34
TAX CASES 1st set
respondent from rentals of small
shops and parking fees [is]
exempt from taxation. 11
This Court's Ruling
The petition is meritorious.
First Issue:
Factual Findings of the CTA
Private respondent contends that the February 16,
1994 CA Decision reversed the factual findings of
the CTA. On the other hand, petitioner argues that
the CA merely reversed the "ruling of the CTA that
the leasing of private respondent's facilities to
small shop owners, to restaurant and canteen
operators and the operation of parking lots are
reasonably incidental to and reasonably necessary
for the accomplishment of the objectives of the
private respondent and that the income derived
therefrom are tax exempt." 12 Petitioner insists that
what the appellate court reversed was the legal
conclusion, not the factual finding, of the CTA. 13
The commissioner has a point.
Indeed, it is a basic rule in taxation that the factual
findings of the CTA, when supported by substantial
shown that the said court committed gross error in
the appreciation of facts. 14 In the present case, this
Court finds that the February 16, 1994 Decision of
the CA did not deviate from this rule. The latter
merely applied the law to the facts as found by the
CTA and ruled on the issue raised by the CIR:
"Whether or not the collection or earnings of rental
income from the lease of certain premises and
income earned from parking fees shall fall under
the last paragraph of Section 27 of the National
Internal Revenue Code of 1977, as amended." 15
Clearly, the CA did not alter any fact or evidence. It
merely resolved the aforementioned issue, as
indeed it was expected to. That it did so in a
manner different from that of the CTA did not
necessarily imply a reversal of factual findings.
The distinction between a question of law and a
question of fact is clear-cut. It has been held that
"[t]here is a question of law in a given case when
the doubt or difference arises as to what the law is
on a certain state of facts; there is a question of
fact when the doubt or difference arises as to the
truth or falsehood of alleged facts." 16 In the
present case, the CA did not doubt, much less
change, the facts narrated by the CTA. It merely
applied the law to the facts. That its interpretation
or conclusion is different from that of the CTA is
not irregular or abnormal.
Second Issue:
Is the Rental Income of the YMCA Taxable?
We now come to the crucial issue: Is the rental
income of the YMCA from its real estate subject to
tax? At the outset, we set forth the relevant
provision of the NIRC:
Sec. 27. Exemptions from tax on
corporations. The following
organizations shall not be taxed
under this Title in respect to
income received by them as such
xxx xxx xxx
(g) Civic league or organization
not organized for profit but
operated exclusively for the
promotion of social welfare;
(h) Club organized and operated
exclusively for pleasure,
recreation, and other non-
profitable purposes, no part of
the net income of which inures to
the benefit of any private
stockholder or member;
xxx xxx xxx
Notwithstanding the provisions in
the preceding paragraphs, the
income of whatever kind and
character of the foregoing
organizations from any of their
properties, real or personal, or
from any of their activities
conducted for profit, regardless of
the disposition made of such
income, shall be subject to the tax
imposed under this Code. (as
amended by Pres. Decree No.
1457)
Petitioner argues that while the income received by
the organizations enumerated in Section 27 (now
Section 26) of the NIRC is, as a rule, exempted from
the payment of tax "in respect to income received
by them as such," the exemption does not apply to
income derived ". . . from any of their properties,
real or personal, or from any of their activities
conducted for profit, regardless of the disposition
made of such income . . . ."
Petitioner adds that "rental income derived by a
tax-exempt organization from the lease of its
properties, real or personal, [is] not, therefore,
exempt from income taxation, even if such income
[is] exclusively used for the accomplishment of its
objectives." 17 We agree with the commissioner.
Page 17 of 34
TAX CASES 1st set
Because taxes are the lifeblood of the nation, the
Court has always applied the doctrine of strict in
interpretation in construing tax exemptions. 18
Furthermore, a claim of statutory exemption from
taxation should be manifest. and unmistakable
from the language of the law on which it is based.
Thus, the claimed exemption "must expressly be
granted in a statute stated in a language too clear
to be mistaken." 19
In the instant case, the exemption claimed by the
YMCA is expressly disallowed by the very wording
of the last paragraph of then Section 27 of the
NIRC which mandates that the income of exempt
organizations (such as the YMCA) from any of their
properties, real or personal, be subject to the tax
imposed by the same Code. Because the last
paragraph of said section unequivocally subjects to
tax the rent income of the YMCA from its real
property, 20 the Court is duty-bound to abide
strictly by its literal meaning and to refrain from
resorting to any convoluted attempt at
construction.
It is axiomatic that where the language of the law is
clear and unambiguous, its express terms must be
applied. 21 Parenthetically, a consideration of the
question of construction must not even begin,
particularly when such question is on whether to
apply a strict construction or a liberal one on
statutes that grant tax exemptions to "religious,
charitable and educational propert[ies] or
institutions." 22
The last paragraph of Section 27, the YMCA argues,
should be "subject to the qualification that the
income from the properties must arise from
activities 'conducted for profit' before it may be
considered taxable." 23 This argument is erroneous.
As previously stated, a reading of said paragraph
ineludibly shows that the income from any
property of exempt organizations, as well as that
arising from any activity it conducts for profit, is
taxable. The phrase "any of their activities
conducted for profit" does not qualify the word
"properties." This makes from the property of the
organization taxable, regardless of how that
income is used whether for profit or for lofty
non-profit purposes.
Verba legis non est recedendum. Hence,
Respondent Court of Appeals committed reversible
error when it allowed, on reconsideration, the tax
exemption claimed by YMCA on income it derived
from renting out its real property, on the solitary
but unconvincing ground that the said income is
not collected for profit but is merely incidental to
its operation. The law does not make a distinction.
The rental income is taxable regardless of whence
such income is derived and how it is used or
disposed of. Where the law does not distinguish,
neither should we.
Constitutional Provisions
On Taxation
Invoking not only the NIRC but also the
fundamental law, private respondent submits that
Article VI, Section 28 of par. 3 of the 1987
Constitution, 24 exempts "charitable institutions"
from the payment not only of property taxes but
also of income tax from any source. 25 In support of
its novel theory, it compares the use of the words
"charitable institutions," "actually" and "directly" in
the 1973 and the 1987 Constitutions, on the one
hand; and in Article VI, Section 22, par. 3 of the
1935 Constitution, on the other hand. 26
Private respondent enunciates three points. First,
the present provision is divisible into two
categories: (1) "[c]haritable institutions, churches
and parsonages or convents appurtenant thereto,
mosques and non-profit cemeteries," the incomes
of which are, from whatever source, all tax-exempt;
27
and (2) "[a]ll lands, buildings and improvements
actually and directly used for religious, charitable
or educational purposes," which are exempt only
from property taxes. 28 Second, Lladoc v.
Commissioner of Internal Revenue, 29 which limited
the exemption only to the payment of property
taxes, referred to the provision of the 1935
Constitution and not to its counterparts in the 1973
and the 1987 Constitutions. 30 Third, the phrase
"actually, directly and exclusively used for religious,
charitable or educational purposes" refers not only
to "all lands, buildings and improvements," but also
to the above-quoted first category which includes
charitable institutions like the private respondent. 31
The Court is not persuaded. The debates,
interpellations and expressions of opinion of the
framers of the Constitution reveal their intent
which, in turn, may have guided the people in
ratifying the Charter. 32 Such intent must be
effectuated.
Accordingly, Justice Hilario G. Davide, Jr., a former
constitutional commissioner, who is now a member
of this Court, stressed during the Concom debates
that ". . . what is exempted is not the institution
itself . . .; those exempted from real estate taxes are
lands, buildings and improvements actually,
directly and exclusively used for religious,
charitable or educational
purposes." 33 Father Joaquin G. Bernas, an eminent
authority on the Constitution and also a member of
the Concom, adhered to the same view that the
exemption created by said provision pertained only
to property taxes. 34
In his treatise on taxation, Mr. Justice Jose C. Vitug
concurs, stating that "[t]he tax exemption covers
property taxes only." 35 Indeed, the income tax
exemption claimed by private respondent finds no
Page 18 of 34
TAX CASES 1st set
basis in Article VI, Section 26, par. 3 of the
Constitution.
Private respondent also invokes Article XIV, Section
4, par. 3 of the Character, 36 claiming that the YMCA
"is a non-stock, non-profit educational institution
whose revenues and assets are used actually,
directly and exclusively for educational purposes so
it is exempt from taxes on its properties and
income." 37 We reiterate that private respondent is
exempt from the payment of property tax, but not
income tax on the rentals from its property. The
bare allegation alone that it is a non-stock, non-
profit educational institution is insufficient to justify
its exemption from the payment of income tax.
As previously discussed, laws allowing tax
exemption are construed strictissimi juris. Hence,
for the YMCA to be granted the exemption it
claims under the aforecited provision, it must prove
with substantial evidence that (1) it falls under the
classification non-stock, non-profit educational
institution; and (2) the income it seeks to be
exempted from taxation is used actually, directly,
and exclusively for educational purposes. However,
the Court notes that not a scintilla of evidence was
submitted by private respondent to prove that it
met the said requisites.
Is the YMCA an educational institution within the
purview of Article XIV, Section 4, par. 3 of the
Constitution? We rule that it is not. The term
"educational institution" or "institution of learning"
has acquired a well-known technical meaning, of
which the members of the Constitutional
Commission are deemed cognizant. 38 Under the
Education Act of 1982, such term refers to schools.
39
The school system is synonymous with formal
education, 40 which "refers to the hierarchically
structured and chronologically graded learnings
organized and provided by the formal school
system and for which certification is required in
order for the learner to progress through the
grades or move to the higher levels." 41 The Court
has examined the "Amended Articles of
Incorporation" and "By-Laws" 43 of the YMCA, but
found nothing in them that even hints that it is a
school or an educational institution. 44
Furthermore, under the Education Act of 1982,
even non-formal education is understood to be
school-based and "private auspices such as
foundations and civic-spirited organizations" are
ruled out. 45 It is settled that the term "educational
institution," when used in laws granting tax
exemptions, refers to a ". . . school seminary,
college or educational establishment . . . ." 46
Therefore, the private respondent cannot be
deemed one of the educational institutions
covered by the constitutional provision under
consideration.
. . . Words used in the
Constitution are to be taken in
their ordinary acceptation. While
in its broadest and best sense
education embraces all forms and
phases of instruction,
improvement and development of
mind and body, and as well of
religious and moral sentiments,
yet in the common understanding
and application it means a place
where systematic instruction in
any or all of the useful branches
of learning is given by methods
common to schools and
institutions of learning. That we
conceive to be the true intent and
scope of the term [educational
institutions,] as used in the
Constitution. 47
Moreover, without conceding that Private
Respondent YMCA is an educational institution, the
Court also notes that the former did not submit
proof of the proportionate amount of the subject
income that was actually, directly and exclusively
used for educational purposes. Article XIII, Section
5 of the YMCA by-laws, which formed part of the
evidence submitted, is patently insufficient, since
the same merely signified that "[t]he net income
derived from the rentals of the commercial
buildings shall be apportioned to the Federation
and Member Associations as the National Board
may decide." 48 In sum, we find no basis for
granting the YMCA exemption from income tax
under the constitutional provision invoked.
Cases Cited by Private
Respondent Inapplicable
The cases 49 relied on by private respondent do not
support its cause. YMCA of Manila v. Collector of
Internal Revenue 50 and Abra Valley College, Inc. v.
Aquino 51 are not applicable, because the
controversy in both cases involved exemption from
the payment of property tax, not income tax.
Hospital de San Juan de Dios, Inc. v. Pasay City 52 is
not in point either, because it involves a claim for
exemption from the payment of regulatory fees,
specifically electrical inspection fees, imposed by
an ordinance of Pasay City an issue not at all
related to that involved in a claimed exemption
from the payment of income taxes imposed on
property leases. In Jesus Sacred Heart College v.
Com. of Internal Revenue, 53 the party therein, which
claimed an exemption from the payment of income
tax, was an educational institution which submitted
substantial evidence that the income subject of the
controversy had been devoted or used solely for
educational purposes. On the other hand, the
private respondent in the present case has not
given any proof that it is an educational institution,
Page 19 of 34
TAX CASES 1st set
or that part of its rent income is actually, directly
and exclusively used for educational purposes.
Epilogue
In deliberating on this petition, the Court expresses
its sympathy with private respondent. It appreciates
the nobility of its cause. However, the Court's
power and function are limited merely to applying
the law fairly and objectively. It cannot change the
law or bend it to suit its sympathies and
appreciations. Otherwise, it would be overspilling
its role and invading the realm of legislation.
We concede that private respondent deserves the
help and the encouragement of the government. It
needs laws that can facilitate, and not frustrate, its
humanitarian tasks. But the Court regrets that,
given its limited constitutional authority, it cannot
rule on the wisdom or propriety of legislation. That
prerogative belongs to the political departments of
government. Indeed, some of the members of the
Court may even believe in the wisdom and
prudence of granting more tax exemptions to
private respondent. But such belief, however well-
meaning and sincere, cannot bestow upon the
Court the power to change or amend the law.
WHEREFORE, the petition is GRANTED. The
Resolutions of the Court of Appeals dated
September 28, 1995 and February 29, 1996 are
hereby REVERSED and SET ASIDE. The Decision of
the Court of Appeals dated February 16, 1995 is
REINSTATED, insofar as it ruled that the income
derived by petitioner from rentals of its real
property is subject to income tax. No
pronouncement as to costs.
SO ORDERED.
CIR v. YMCA
GR No. 124043, October 14, 1998
298 SCRA 83
FACTS:
Private Respondent YMCA--a non-stock, non-
profit institution, which conducts various
programs beneficial to the public pursuant to
its religious, educational and charitable
objectives--leases out a portion of its premises
to small shop owners, like restaurants and
canteen operators, deriving substantial income
for such. Seeing this, the commissioner of
internal revenue (CIR) issued an assessment to
private respondent for deficiency income tax,
deficiency expanded withholding taxes on
rentals and professional fees and deficiency
withholding tax on wages. YMCA opposed
arguing that its rental income is not subject to
tax, mainly because of the provisions of Section
27 of NIRC which provides that civic league or
organizations not organized for profit but
operate exclusively for promotion of social
welfare and those organized exclusively for
pleasure, recreation and other non-profitable
businesses shall not be taxed.
ISSUE:
Is the contention of YMCA tenable?
HELD:
No. Because taxes are the lifeblood of the
nation, the Court has always applied the
doctrine of strict in interpretation in construing
tax exemptions. Furthermore, a claim of
statutory exemption from taxation should be
manifest and unmistakable from the language
of the law on which it is based. Thus, the
claimed exemption "must expressly be granted
in a statute stated in a language too clear to be
mistaken."
SECOND DIVISION
G.R. No. 112024 January 28, 1999
PHILIPPINE BANK OF COMMUNICATIONS,
petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE,
COURT OF TAX APPEALS and COURT OF
APPEALS, respondent.
QUISUMBING, J.:
This petition for review assails the Resolution 1 of
the Court of Appeals dated September 22, 1993
affirming the Decision 2 and a Resolution 3 of the
Court Of Tax Appeals which denied the claims of
the petitioner for tax refund and tax credits, and
disposing as follows:
IN VIEW OF ALL, THE
FOREGOING, the instant petition
for review, is DENIED due course.
The Decision of the Court of Tax
Appeals dated May 20, 1993 and
its resolution dated July 20, 1993,
are hereby AFFIRMED in toto.
SO ORDERED. 4
The Court of Tax Appeals earlier ruled as follows:
WHEREFORE, Petitioner's claim for
refund/tax credits of overpaid
income tax for 1985 in the
amount of P5,299,749.95 is
hereby denied for having been
filed beyond the reglementary
period. The 1986 claim for refund
amounting to P234,077.69 is
likewise denied since petitioner
has opted and in all likelihood
automatically credited the same
to the succeeding year. The
petition for review is dismissed for
lack of merit.
SO ORDERED. 5
The facts on record show the antecedent
circumstances pertinent to this case.
Petitioner, Philippine Bank of Communications
(PBCom), a commercial banking corporation duly
organized under Philippine laws, filed its quarterly
income tax returns for the first and second quarters
of 1985, reported profits, and paid the total income
tax of P5,016,954.00. The taxes due were settled by
applying PBCom's tax credit memos and
accordingly, the Bureau of Internal Revenue (BIR)
issued Tax Debit Memo Nos. 0746-85 and 0747-85
for P3,401,701.00 and P1,615,253.00, respectively.
Subsequently, however, PBCom suffered losses so
that when it filed its Annual Income Tax Returns for
the year-ended December 31, 1986, the petitioner
likewise reported a net loss of P14,129,602.00, and
thus declared no tax payable for the year.
But during these two years, PBCom earned rental
income from leased properties. The lessees
withheld and remitted to the BIR withholding
creditable taxes of P282,795.50 in 1985 and
P234,077.69 in 1986.
On August 7, 1987, petitioner requested the
Commissioner of Internal Revenue, among others,

Page 20 of 34
TAX CASES 1st set
for a tax credit of P5,016,954.00 representing the Excess Tax Payments which relied
overpayment of taxes in the first and second P5,299,749.50* P234,077.69 in good faith on
quarters of 1985. the formal
=============== assurances of
Thereafter, on July 25, 1988, petitioner filed a claim ============= BIR in RMC No.
for refund of creditable taxes withheld by their 7-85 and did not
lessees from property rentals in 1985 for * CTA's decision immediately file
P282,795.50 and in 1986 for P234,077.69. reflects PBCom's with the CTA a
1985 tax claim as petition for
Pending the investigation of the respondent P5,299,749.95. A review asking for
Commissioner of Internal Revenue, petitioner forty five the refund/tax
instituted a Petition for Review on November 18, centavo credit of its
1988 before the Court of Tax Appeals (CTA). The difference was 1985-86 excess
petition was docketed as CTA Case No. 4309 noted. quarterly income
entitled: "Philippine Bank of Communications vs. tax payments
Commissioner of Internal Revenue." On May 20, 1993, the CTA rendered a decision can be
which, as stated on the outset, denied the request prejudiced by
The losses petitioner incurred as per the summary of petitioner for a tax refund or credit in the sum the subsequent
of petitioner's claims for refund and tax credit for amount of P5,299,749.95, on the ground that it was BIR rejection,
1985 and 1986, filed before the Court of Tax filed beyond the two-year reglementary period applied
Appeals, are as follows: provided for by law. The petitioner's claim for retroactivity, of
refund in 1986 amounting to P234,077.69 was its assurances in
likewise denied on the assumption that it was RMC No. 7-85
1985 1986
automatically credited by PBCom against its tax that the
payment in the succeeding year. prescriptive

period for the
refund/tax credit
Net Income (Loss) On June 22, 1993, petitioner filed a Motion for
of excess
(P25,317,288.00) (P14,129,602.00) Reconsideration of the CTA's decision but the same
quarterly income
was denied due course for lack of merit. 6
tax payments is
Tax Due NIL NIL not two years
Thereafter, PBCom filed a petition for review of said
but ten (10). 7
Quarterly tax. decision and resolution of the CTA with the Court
of Appeals. However on September 22, 1993, the
II. Whether the
Court of Appeals affirmed in toto the CTA's
Payments Made 5,016,954.00 Court of Appeals
resolution dated July 20, 1993. Hence this petition
seriously erred in
now before us.
Tax Withheld at Source affirming the
282,795.50 234,077.69 CTA decision
The issues raised by the petitioner are:
which denied
PBCom's claim
I. Whether for the refund of

taxpayer PBCom P234,077.69

Page 21 of 34
TAX CASES 1st set
 income tax
overpaid in 1986
on the mere
speculation,
without proof,
that there were
taxes due in
1987 and that
PBCom availed
of tax-crediting
that year. 8
Simply stated, the main question is: Whether or not
the Court of Appeals erred in denying the plea for
tax refund or tax credits on the ground of
prescription, despite petitioner's reliance on RMC
No. 7-85, changing the prescriptive period of two
years to ten years?
Petitioner argues that its claims for refund and tax
credits are not yet barred by prescription relying on
the applicability of Revenue Memorandum Circular
No. 7-85 issued on April 1, 1985. The circular states
that overpaid income taxes are not covered by the
two-year prescriptive period under the tax Code
and that taxpayers may claim refund or tax credits
for the excess quarterly income tax with the BIR
within ten (10) years under Article 1144 of the Civil
Code. The pertinent portions of the circular reads:
REVENUE MEMORANDUM
CIRCULAR NO. 7-85
SUBJECT: PROCESSING OF
REFUND OR TAX CREDIT OF
EXCESS CORPORATE INCOME
TAX RESULTING FROM THE
FILING OF THE FINAL
ADJUSTMENT RETURN.
TO: All Internal Revenue Officers
and Others Concerned.
Sec. 85 And 86 Of the National income taxes, this Office has
Internal Revenue Code provide: promulgated Revenue
Memorandum Order No. 32-76
xxx xxx xxx dated June 11, 1976, containing
the procedure in processing said
The foregoing provisions are returns. Under these procedures,
implemented by Section 7 of the returns are merely pre-
Revenue Regulations Nos. 10-77 audited which consist mainly of
which provide; checking mathematical accuracy
of the figures of the return. After
xxx xxx xxx which, the refund or tax credit is
granted, and, this procedure was
adopted to facilitate immediate
It has been observed, however,
action on cases like this.
that because of the excess tax
payments, corporations file claims
for recovery of overpaid income In this regard, therefore, there is
tax with the Court of Tax Appeals no need to file petitions for
within the two-year period from review in the Court of Tax Appeals
the date of payment, in in order to preserve the right to
accordance with sections 292 and claim refund or tax credit the two
295 of the National Internal year period. As already stated,
Revenue Code. It is obvious that actions hereon by the Bureau are
the filing of the case in court is to immediate after only a cursory
preserve the judicial right of the pre-audit of the income tax
corporation to claim the refund or returns. Moreover, a taxpayer may
tax credit. recover from the Bureau of
Internal Revenue excess income
tax paid under the provisions of
It should he noted, however, that
Section 86 of the Tax Code within
this is not a case of erroneously or
10 years from the date of
illegally paid tax under the
payment considering that it is an
provisions of Sections 292 and
obligation created by law (Article
295 of the Tax Code.
1144 of the Civil Code). 9
(Emphasis supplied.)
In the above provision of the
Regulations the corporation may
Petitioner argues that the government is barred
request for the refund of the
from asserting a position contrary to its declared
overpaid income tax or claim for
circular if it would result to injustice to taxpayers.
automatic tax credit. To insure
Citing ABS CBN Broadcasting Corporation vs. Court
prompt action on corporate
of Tax Appeals 10 petitioner claims that rulings or
annual income tax returns
circulars promulgated by the Commissioner of
showing refundable amounts
Internal Revenue have no retroactive effect if it
arising from overpaid quarterly
Page 22 of 34
TAX CASES 1st set
would be prejudicial to taxpayers, In ABS-CBN case,
the Court held that the government is precluded
from adopting a position inconsistent with one
previously taken where injustice would result
therefrom or where there has been a
misrepresentation to the taxpayer.
Petitioner contends that Sec. 246 of the National
Internal Revenue Code explicitly provides for this
rules as follows:
Sec. 246 Non-retroactivity of
rulings Any revocation,
modification or reversal of any of
the rules and regulations
promulgated in accordance with
the preceding section or any of
the rulings or circulars
promulgated by the
Commissioner shall not be given
retroactive application if the
revocation, modification or
reversal will be prejudicial to the
taxpayers except in the following
cases:
a). where the taxpayer
deliberately misstates or omits
material facts from his return or
in any document required of
him by the Bureau of Internal
Revenue;
b). where the facts subsequently
gathered by the Bureau of
Internal Revenue are materially
different from the facts on
which the ruling is based;
c). where the taxpayer acted in
bad faith.
Respondent Commissioner of Internal Revenue,
through Solicitor General, argues that the two-year
prescriptive period for filing tax cases in court
concerning income tax payments of Corporations is
reckoned from the date of filing the Final Adjusted
Income Tax Return, which is generally done on
April 15 following the close of the calendar year. As
precedents, respondent Commissioner cited cases
which adhered to this principle, to wit ACCRA
Investments Corp. vs. Court of Appeals, et al., 11 and
Commissioner of Internal Revenue vs. TMX Sales,
Inc., et al.. 12 Respondent Commissioner also states
that since the Final Adjusted Income Tax Return of
the petitioner for the taxable year 1985 was
supposed to be filed on April 15, 1986, the latter
had only until April 15, 1988 to seek relief from the
court. Further, respondent Commissioner stresses
that when the petitioner filed the case before the
CTA on November 18, 1988, the same was filed
beyond the time fixed by law, and such failure is
fatal to petitioner's cause of action.
After a careful study of the records and applicable
jurisprudence on the matter, we find that, contrary
to the petitioner's contention, the relaxation of
revenue regulations by RMC 7-85 is not warranted
as it disregards the two-year prescriptive period set
by law.
Basic is the principle that "taxes are the lifeblood of
the nation." The primary purpose is to generate
funds for the State to finance the needs of the
citizenry and to advance the common weal. 13 Due
process of law under the Constitution does not
require judicial proceedings in tax cases. This must
necessarily be so because it is upon taxation that
the government chiefly relies to obtain the means
to carry on its operations and it is of utmost
importance that the modes adopted to enforce the
collection of taxes levied should be summary and
interfered with as little as possible. 14
Page 23 of 34
TAX CASES 1st set
From the same perspective, claims for refund or tax
credit should be exercised within the time fixed by
law because the BIR being an administrative body
enforced to collect taxes, its functions should not
be unduly delayed or hampered by incidental
matters.
Sec. 230 of the National Internal Revenue Code
(NIRC) of 1977 (now Sec. 229, NIRC of 1997)
provides for the prescriptive period for filing a
court proceeding for the recovery of tax
erroneously or illegally collected, viz.:
Sec. 230. Recovery of tax
erroneously or illegally collected.
No suit or proceeding shall be
maintained in any court for the
recovery of any national internal
revenue tax hereafter alleged to
have been erroneously or illegally
assessed or collected, or of any
penalty claimed to have been
collected without authority, or of
any sum alleged to have been
excessive or in any manner
wrongfully collected, until a claim
for refund or credit has been duly
filed with the Commissioner; but
such suit or proceeding may be
maintained, whether or not such
tax, penalty, or sum has been paid
under protest or duress.
In any case, no such suit or
proceedings shall begun after the
expiration of two years from the
date of payment of the tax or
penalty regardless of any
supervening cause that may arise
after payment; Provided however,
That the Commissioner may, even
without a written claim therefor,
 refund or credit any tax, where on
the face of the return upon which
payment was made, such
payment appears clearly to have
been erroneously paid. (Emphasis
supplied)
The rule states that the taxpayer may file a claim
for refund or credit with the Commissioner of
Internal Revenue, within two (2) years after
payment of tax, before any suit in CTA is
commenced. The two-year prescriptive period
provided, should be computed from the time of
filing the Adjustment Return and final payment of
the tax for the year.
In Commissioner of Internal Revenue vs. Philippine
American Life Insurance Co., 15 this Court explained
the application of Sec. 230 of 1977 NIRC, as
follows:
Clearly, the prescriptive period of
two years should commence to
run only from the time that the
refund is ascertained, which can
only be determined after a final
adjustment return is
accomplished. In the present case,
this date is April 16, 1984, and two
years from this date would be
April 16, 1986. . . . As we have
earlier said in the TMX Sales case,
Sections 68. 16 69, 17 and 70 18 on
Quarterly Corporate Income Tax
Payment and Section 321 should
be considered in conjunction with
it 19
When the Acting Commissioner of Internal
Revenue issued RMC 7-85, changing the
prescriptive period of two years to ten years on
claims of excess quarterly income tax payments,
such circular created a clear inconsistency with the
provision of Sec. 230 of 1977 NIRC. In so doing, the
BIR did not simply interpret the law; rather it
legislated guidelines contrary to the statute passed
by Congress.
It bears repeating that Revenue memorandum-
circulars are considered administrative rulings (in
the sense of more specific and less general
interpretations of tax laws) which are issued from
time to time by the Commissioner of Internal
Revenue. It is widely accepted that the
interpretation placed upon a statute by the
executive officers, whose duty is to enforce it, is
entitled to great respect by the courts.
Nevertheless, such interpretation is not conclusive
and will be ignored if judicially found to be
erroneous. 20 Thus, courts will not countenance
administrative issuances that override, instead of
remaining consistent and in harmony with the law
they seek to apply and implement. 21
In the case of People vs. Lim, 22 it was held that
rules and regulations issued by administrative
officials to implement a law cannot go beyond the
terms and provisions of the latter.
Appellant contends that Section 2
of FAO No. 37-1 is void because it
is not only inconsistent with but is
contrary to the provisions and
spirit of Act. No 4003 as
amended, because whereas the
prohibition prescribed in said
Fisheries Act was for any single
period of time not exceeding five
years duration, FAO No 37-1 fixed
no period, that is to say, it
establishes an absolute ban for all
time. This discrepancy between
Act No. 4003 and FAO No. 37-1
was probably due to an oversight
Page 24 of 34
TAX CASES 1st set
on the part of Secretary of
Agriculture and Natural
Resources. Of course, in case of
discrepancy, the basic Act
prevails, for the reason that the
regulation or rule issued to
implement a law cannot go
beyond the terms and provisions
of the
latter. . . . In this connection, the
attention of the technical men in
the offices of Department Heads
who draft rules and regulation is
called to the importance and
necessity of closely following the
terms and provisions of the law
which they intended to
implement, this to avoid any
possible misunderstanding or
confusion as in the present case. 23
Further, fundamental is the rule that the State
cannot be put in estoppel by the mistakes or errors
of its officials or agents. 24 As pointed out by the
respondent courts, the nullification of RMC No. 7-
85 issued by the Acting Commissioner of Internal
Revenue is an administrative interpretation which is
not in harmony with Sec. 230 of 1977 NIRC. for
being contrary to the express provision of a statute.
Hence, his interpretation could not be given weight
for to do so would, in effect, amend the statute.
It is likewise argued that the
Commissioner of Internal
Revenue, after promulgating RMC
No. 7-85, is estopped by the
principle of non-retroactively of
BIR rulings. Again We do not
agree. The Memorandum Circular,
stating that a taxpayer may
recover the excess income tax
paid within 10 years from date of
 payment because this is an
obligation created by law, was
issued by the Acting
Commissioner of Internal
Revenue. On the other hand, the
decision, stating that the taxpayer
should still file a claim for a
refund or tax credit and
corresponding petition fro review
within the
two-year prescription period, and
that the lengthening of the period
of limitation on refund from two
to ten years would be adverse to
public policy and run counter to
the positive mandate of Sec. 230,
NIRC, - was the ruling and judicial
interpretation of the Court of Tax
Appeals. Estoppel has no
application in the case at bar
because it was not the
Commissioner of Internal Revenue
who denied petitioner's claim of
refund or tax credit. Rather, it was
the Court of Tax Appeals who
denied (albeit correctly) the claim
and in effect, ruled that the RMC
No. 7-85 issued by the
Commissioner of Internal Revenue
is an administrative interpretation
which is out of harmony with or
contrary to the express provision
of a statute (specifically Sec. 230,
NIRC), hence, cannot be given
weight for to do so would in
effect amend the statute. 25
Art. 8 of the Civil Code 26 recognizes judicial
decisions, applying or interpreting statutes as part
of the legal system of the country. But
administrative decisions do not enjoy that level of
recognition. A memorandum-circular of a bureau
head could not operate to vest a taxpayer with
shield against judicial action. For there are no
vested rights to speak of respecting a wrong
construction of the law by the administrative
officials and such wrong interpretation could not
place the Government in estoppel to correct or
overrule the same. 27 Moreover, the non-
retroactivity of rulings by the Commissioner of
Internal Revenue is not applicable in this case
because the nullity of RMC No. 7-85 was declared
by respondent courts and not by the Commissioner
of Internal Revenue. Lastly, it must be noted that,
as repeatedly held by this Court, a claim for refund
is in the nature of a claim for exemption and
should be construed in strictissimi juris against the
taxpayer. 28
On the second issue, the petitioner alleges that the
Court of Appeals seriously erred in affirming CTA's
decision denying its claim for refund of
P234,077.69 (tax overpaid in 1986), based on mere
speculation, without proof, that PBCom availed of
the automatic tax credit in 1987.
29
Sec. 69 of the 1977 NIRC (now Sec. 76 of the
1997 NIRC) provides that any excess of the total
quarterly payments over the actual income tax
computed in the adjustment or final corporate
income tax return, shall either (a) be refunded to
the corporation, or (b) may be credited against the
estimated quarterly income tax liabilities for the
quarters of the succeeding taxable year.
The corporation must signify in its annual
corporate adjustment return (by marking the
option box provided in the BIR form) its intention,
whether to request for a refund or claim for an
automatic tax credit for the succeeding taxable
year. To ease the administration of tax collection,
these remedies are in the alternative, and the
choice of one precludes the other.
Page 25 of 34
TAX CASES 1st set
As stated by respondent Court of Appeals:
Finally, as to the claimed refund of
income tax over-paid in 1986
the Court of Tax Appeals, after
examining the adjusted final
corporate annual income tax
return for taxable year 1986,
found out that petitioner opted to
apply for automatic tax credit.
This was the basis used (vis-avis
the fact that the 1987 annual
corporate tax return was not
offered by the petitioner as
evidence) by the CTA in
concluding that petitioner had
indeed availed of and applied the
automatic tax credit to the
succeeding year, hence it can no
longer ask for refund, as to [sic]
the two remedies of refund and
tax credit are alternative. 30
That the petitioner opted for an automatic tax
credit in accordance with Sec. 69 of the 1977 NIRC,
as specified in its 1986 Final Adjusted Income Tax
Return, is a finding of fact which we must respect.
Moreover, the 1987 annual corporate tax return of
the petitioner was not offered as evidence to
contovert said fact. Thus, we are bound by the
findings of fact by respondent courts, there being
no showing of gross error or abuse on their part to
disturb our reliance thereon. 31
WHEREFORE, the, petition is hereby DENIED, The
decision of the Court of Appeals appealed from is
AFFIRMED, with COSTS against the
petitioner.1wphi1.nt
SO ORDERED.
PHIL. BANK OF COMMUNICATIONS v. CIR
GR No. 112024, January 28, 1999
302 SCRA 250
FACTS:
Petitioner PBCom filed its first and second
quarter income tax returns, reported profits,
and paid income taxes amounting to P5.2M in
1985. However, at the end of the year PBCom
suffered losses so that when it filed its Annual
Income Tax Returns for the year-ended
December 31, 1986, the petitioner likewise
reported a net loss of P14.1 M, and thus
declared no tax payable for the year. In 1988,
the bank requested from CIR for a tax credit
and tax refunds representing overpayment of
taxes. Pending investigation of the respondent
CIR
petitioner instituted a Petition for Review
before the Court of Tax Appeals (CTA). CTA
denied its petition for tax credit and refund for
failing to file within the prescriptive period to
which the petitioner belies arguing the Revenue
Circular No.7-85 issued by the CIR itself states
that claim for overpaid taxes are not covered by
the two-year prescriptive period mandated
under the Tax Code.
ISSUE:
Is the contention of the petitioner correct? Is
the revenue circular a valid exemption to the
NIRC?
HELD:
No. The relaxation of revenue regulations by
RMC 7-85 is not warranted as it disregards the
two-year prescriptive period set by law.
Basic is the principle that "taxes are the
lifeblood of the nation." The primary purpose is
to generate funds for the State to finance the
needs of the citizenry and to advance the
common weal. Due process of law under the
Constitution does not require judicial
proceedings in tax cases. This must necessarily
be so because it is upon taxation that the
government chiefly relies to obtain the means
to carry on its operations and it is of utmost
importance that the modes adopted to enforce
the collection of taxes levied should be
summary and interfered with as little as
possible.
From the same perspective, claims for refund or
tax credit should be exercised within the time
fixed by law because the BIR being an
administrative body enforced to collect taxes,
its functions should not be unduly delayed or
hampered by incidental matters.
EN BANC
G.R. No. L-22074 April 30, 1965
THE PHILIPPINE GUARANTY CO., INC.,
petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE
and THE COURT OF TAX APPEALS, respondents.
Josue H. Gustilo and Ramirez and Ortigas for
petitioner.
Office of the Solicitor General and Attorney V.G.
Saldajena for respondents.
Page 26 of 34
TAX CASES 1st set
BENGZON, J.P., J.:
The Philippine Guaranty Co., Inc., a domestic
insurance company, entered into reinsurance
contracts, on various dates, with foreign insurance
companies not doing business in the Philippines
namely: Imperio Compaia de Seguros, La Union y
El Fenix Espaol, Overseas Assurance Corp., Ltd.,
Socieded Anonima de Reaseguros Alianza, Tokio
Marino & Fire Insurance Co., Ltd., Union Assurance
Society Ltd., Swiss Reinsurance Company and Tariff
Reinsurance Limited. Philippine Guaranty Co., Inc.,
thereby agreed to cede to the foreign reinsurers a
portion of the premiums on insurance it has
originally underwritten in the Philippines, in
consideration for the assumption by the latter of
liability on an equivalent portion of the risks
insured. Said reinsurrance contracts were signed by
Philippine Guaranty Co., Inc. in Manila and by the
foreign reinsurers outside the Philippines, except
the contract with Swiss Reinsurance Company,
which was signed by both parties in Switzerland.
The reinsurance contracts made the
commencement of the reinsurers' liability
simultaneous with that of Philippine Guaranty Co.,
Inc. under the original insurance. Philippine
Guaranty Co., Inc. was required to keep a register in
Manila where the risks ceded to the foreign
reinsurers where entered, and entry therein was
binding upon the reinsurers. A proportionate
amount of taxes on insurance premiums not
recovered from the original assured were to be
paid for by the foreign reinsurers. The foreign
reinsurers further agreed, in consideration for
managing or administering their affairs in the
Philippines, to compensate the Philippine Guaranty
Co., Inc., in an amount equal to 5% of the
reinsurance premiums. Conflicts and/or differences
between the parties under the reinsurance
contracts were to be arbitrated in Manila.
Philippine Guaranty Co., Inc. and Swiss Reinsurance
Company stipulated that their contract shall be
construed by the laws of the Philippines.
Pursuant to the aforesaid reinsurance contracts,
Philippine Guaranty Co., Inc. ceded to the foreign
reinsurers the following premiums:
1953 . . . . . . . . . . . . . . . . . . . . .
1954 . . . . . . . . . . . . . . . . . . . . .
Said premiums were excluded by Philippine
Guaranty Co., Inc. from its gross income when it file
its income tax returns for 1953 and 1954.
Furthermore, it did not withhold or pay tax on
them. Consequently, per letter dated April 13, 1959,
the Commissioner of Internal Revenue assessed
against Philippine Guaranty Co., Inc. withholding
tax on the ceded reinsurance premiums, thus:
1953
Gross premium per
investigation . . . . . . . . . .
Withholding tax due thereon at
24% . . . . . . . .
25%
surcharge . . . . . . . . . . . . . . . . . . . . . . .
...
Compromise for non-filing of
withholding
income tax return . . . . . . . . . . . . . . . .
.........
TOTAL AMOUNT DUE &
COLLECTIBLE . . . .
1954
Gross premium per
investigation . . . . . . . . . .
Withholding tax due thereon at
24% . . . . . . . .
25%
surcharge . . . . . . . . . . . . . . . . . . . . . . .
...
P842,466.71
721,471.85 Compromise for non-filing of
withholding
income tax return . . . . . . . . . . . . . . . .
.........
TOTAL AMOUNT DUE &
COLLECTIBLE . . . .
Philippine Guaranty Co., Inc., protested the
assessment on the ground that reinsurance
premiums ceded to foreign reinsurers not doing
business in the Philippines are not subject to
P768,580.00 withholding tax. Its protest was denied and it
appealed to the Court of Tax Appeals.
P184,459.00
On July 6, 1963, the Court of Tax Appeals rendered
judgment with this dispositive portion:
46,114.00
IN VIEW OF THE FOREGOING
CONSIDERATIONS, petitioner Philippine
Guaranty Co., Inc. is hereby ordered to pay
to the Commissioner of Internal Revenue
100.00
the respective sums of P202,192.00 and
P173,153.00 or the total sum of
P375,345.00 as withholding income taxes
for the years 1953 and 1954, plus the
P230,673.00
statutory delinquency penalties thereon.
=========
With costs against petitioner.
= Philippines and later signed by the foreign
Philippine Guaranty Co, Inc. has appealed,
questioning the legality of the Commissioner of
Page 27 of 34
TAX CASES 1st set
Internal Revenue's assessment for withholding tax
P780.880.68 on the reinsurance premiums ceded in 1953 and
1954 to the foreign reinsurers.
P184,411.00
Petitioner maintain that the reinsurance premiums
in question did not constitute income from sources
within the Philippines because the foreign
P184,411.00
reinsurers did not engage in business in the
Philippines, nor did they have office here.
The reinsurance contracts, however, show that the
100.00
transactions or activities that constituted the
undertaking to reinsure Philippine Guaranty Co.,
Inc. against loses arising from the original
insurances in the Philippines were performed in the
P234,364.00
Philippines. The liability of the foreign reinsurers
=========
commenced simultaneously with the liability of
=
Philippine Guaranty Co., Inc. under the original
insurances. Philippine Guaranty Co., Inc. kept in
Manila a register of the risks ceded to the foreign
reinsurers. Entries made in such register bound the
foreign resinsurers, localizing in the Philippines the
actual cession of the risks and premiums and
assumption of the reinsurance undertaking by the
foreign reinsurers. Taxes on premiums imposed by
Section 259 of the Tax Code for the privilege of
doing insurance business in the Philippines were
payable by the foreign reinsurers when the same
were not recoverable from the original assured. The
foreign reinsurers paid Philippine Guaranty Co., Inc.
an amount equivalent to 5% of the ceded
premiums, in consideration for administration and
management by the latter of the affairs of the
former in the Philippines in regard to their
reinsurance activities here. Disputes and differences
between the parties were subject to arbitration in
the City of Manila. All the reinsurance contracts,
except that with Swiss Reinsurance Company, were
signed by Philippine Guaranty Co., Inc. in the
reinsurers abroad. Although the contract between
Philippine Guaranty Co., Inc. and Swiss Reinsurance
Company was signed by both parties in
Switzerland, the same specifically provided that its
provision shall be construed according to the laws
of the Philippines, thereby manifesting a clear
intention of the parties to subject themselves to
Philippine law.
Section 24 of the Tax Code subjects foreign
corporations to tax on their income from sources
within the Philippines. The word "sources" has been
interpreted as the activity, property or service
giving rise to the income. 1 The reinsurance
premiums were income created from the
undertaking of the foreign reinsurance companies
to reinsure Philippine Guaranty Co., Inc., against
liability for loss under original insurances. Such
undertaking, as explained above, took place in the
Philippines. These insurance premiums, therefore,
came from sources within the Philippines and,
hence, are subject to corporate income tax.
The foreign insurers' place of business should not
be confused with their place of activity. Business
should not be continuity and progression of
transactions 2 while activity may consist of only a
single transaction. An activity may occur outside
the place of business. Section 24 of the Tax Code
does not require a foreign corporation to engage
in business in the Philippines in subjecting its
income to tax. It suffices that the activity creating
the income is performed or done in the Philippines.
What is controlling, therefore, is not the place of
business but the place of activity that created an
income.
Petitioner further contends that the reinsurance
premiums are not income from sources within the
Philippines because they are not specifically
mentioned in Section 37 of the Tax Code. Section
37 is not an all-inclusive enumeration, for it merely
directs that the kinds of income mentioned therein
should be treated as income from sources within
the Philippines but it does not require that other
kinds of income should not be considered
likewise.1wph1.t
The power to tax is an attribute of sovereignty. It is
a power emanating from necessity. It is a necessary
burden to preserve the State's sovereignty and a
means to give the citizenry an army to resist an
aggression, a navy to defend its shores from
invasion, a corps of civil servants to serve, public
improvement designed for the enjoyment of the
citizenry and those which come within the State's
territory, and facilities and protection which a
government is supposed to provide. Considering
that the reinsurance premiums in question were
afforded protection by the government and the
recipient foreign reinsurers exercised rights and
privileges guaranteed by our laws, such reinsurance
premiums and reinsurers should share the burden
of maintaining the state.
Petitioner would wish to stress that its reliance in
good faith on the rulings of the Commissioner of
Internal Revenue requiring no withholding of the
tax due on the reinsurance premiums in question
relieved it of the duty to pay the corresponding
withholding tax thereon. This defense of petitioner
may free if from the payment of surcharges or
penalties imposed for failure to pay the
corresponding withholding tax, but it certainly
would not exculpate if from liability to pay such
withholding tax The Government is not estopped
from collecting taxes by the mistakes or errors of
its agents.3
In respect to the question of whether or not
reinsurance premiums ceded to foreign reinsurers
not doing business in the Philippines are subject to
withholding tax under Section 53 and 54 of the Tax
Code, suffice it to state that this question has
already been answered in the affirmative in
Page 28 of 34
TAX CASES 1st set
Alexander Howden & Co., Ltd. vs. Collector of
Internal Revenue, L-19393, April 14, 1965.
Finally, petitioner contends that the withholding tax
should be computed from the amount actually
remitted to the foreign reinsurers instead of from
the total amount ceded. And since it did not remit
any amount to its foreign insurers in 1953 and
1954, no withholding tax was due.
The pertinent section of the Tax Code States:
Sec. 54. Payment of corporation income tax
at source. In the case of foreign
corporations subject to taxation under this
Title not engaged in trade or business
within the Philippines and not having any
office or place of business therein, there
shall be deducted and withheld at the
source in the same manner and upon the
same items as is provided in Section fifty-
three a tax equal to twenty-four per
centum thereof, and such tax shall be
returned and paid in the same manner and
subject to the same conditions as provided
in that section.
The applicable portion of Section 53 provides:
(b) Nonresident aliens. All persons,
corporations and general copartnerships
(compaias colectivas), in what ever
capacity acting, including lessees or
mortgagors of real or personal property,
trustees acting in any trust capacity,
executors, administrators, receivers,
conservators, fiduciaries, employers, and
all officers and employees of the
Government of the Philippines having the
control, receipt, custody, disposal, or
payment of interest, dividends, rents,
salaries, wages, premiums, annuities,
 compensation, remunerations,
emoluments, or other fixed or
determinable annual or periodical gains,
profits, and income of any nonresident
alien individual, not engaged in trade or
business within the Philippines and not
having any office or place of business
therein, shall (except in the case provided
for in subsection [a] of this section) deduct
and withhold from such annual or
periodical gains, profits, and income a tax
equal to twelve per centum thereof:
Provided That no deductions or
withholding shall be required in the case
of dividends paid by a foreign corporation
unless (1) such corporation is engaged in
trade or business within the Philippines or
has an office or place of business therein,
and (2) more than eighty-five per centum
of the gross income of such corporation
for the three-year period ending with the
close of its taxable year preceding the
declaration of such dividends (or for such
part of such period as the corporation has
been in existence)was derived from
sources within the Philippines as
determined under the provisions of
section thirty-seven: Provided, further, That
the Collector of Internal Revenue may
authorize such tax to be deducted and
withheld from the interest upon any
securities the owners of which are not
known to the withholding agent.
The above-quoted provisions allow no deduction
from the income therein enumerated in
determining the amount to be withheld. According,
in computing the withholding tax due on the
reinsurance premium in question, no deduction
shall be recognized.
WHEREFORE, in affirming the decision appealed
from, the Philippine Guaranty Co., Inc. is hereby
ordered to pay to the Commissioner of Internal
Revenue the sums of P202,192.00 and P173,153.00,
or a total amount of P375,345.00, as withholding
tax for the years 1953 and 1954, respectively. If the
amount of P375,345.00 is not paid within 30 days
from the date this judgement becomes final, there
shall be collected a surcharged of 5% on the
amount 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. With costs againsts petitioner.
PHIL. GUARANTY CO., INC. v. CIR
GR No. L-22074, April 30, 1965
13 SCRA 775
FACTS:
The petitioner Philippine Guaranty Co., Inc., a
domestic insurance company, entered into
reinsurance contracts with foreign insurance
companies not doing business in the country,
thereby ceding to foreign reinsurers a portion
of the premiums on insurance it has originally
underwritten in the Philippines. The premiums
paid by such companies were excluded by the
petitioner from its gross income when it filed its
income tax returns for 1953 and 1954.
Furthermore, it did not withhold or pay tax on
them. Consequently, the CIR assessed against
the petitioner withholding taxes on the ceded
reinsurance premiums to which the latter
protested the assessment on the ground that
the premiums are not subject to tax for the
premiums did not constitute income from
sources within the Philippines because the
foreign reinsurers did not engage in business in
Page 29 of 34
TAX CASES 1st set
the Philippines, and CIR's previous rulings did
not require insurance companies to withhold
income tax due from foreign companies.
ISSUE:
Are insurance companies not required to
withhold tax on reinsurance premiums ceded to
foreign insurance companies, which deprives
the government from collecting the tax due
from them?
HELD:
No. The power to tax is an attribute of
sovereignty. It is a power emanating from
necessity. It is a necessary burden to preserve
the State's sovereignty and a means to give the
citizenry an army to resist an aggression, a navy
to defend its shores from invasion, a corps of
civil servants to serve, public improvement
designed for the enjoyment of the citizenry and
those which come within the State's territory,
and facilities and protection which a
government is supposed to provide.
Considering that the reinsurance premiums in
question were afforded protection by the
government and the recipient foreign reinsurers
exercised rights and privileges guaranteed by
our laws, such reinsurance premiums and
reinsurers should share the burden of
maintaining the state.
The petitioner's defense of reliance of good
faith on rulings of the CIR requiring no
withholding of tax due on reinsurance
premiums may free the taxpayer from the
payment of surcharges or penalties imposed for
failure to pay the corresponding withholding
tax, but it certainly would not exculpate it from
liability to pay such withholding tax. The
Government is not estopped from collecting
taxes by the mistakes or errors of its agents.

THIRD DIVISION
G.R. No. 125704 August 28, 1998
PHILEX MINING CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE,
COURT OF APPEALS, and THE COURT OF TAX
APPEALS, respondents.
ROMERO, J.:
Petitioner Philex Mining Corp. assails the decision
of the Court of Appeals promulgated on April 8,
1996 in CA-G.R. SP No. 36975 1 affirming the Court
of Tax Appeals decision in CTA Case No. 4872
dated March 16, 1995 2 ordering it to pay the
amount of P110,677,668.52 as excise tax liability for
the period from the 2nd quarter of 1991 to the 2nd
quarter of 1992 plus 20% annual interest from
August 6, 1994 until fully paid pursuant to Sections
248 and 249 of the Tax Code of 1977.
The facts show that on August 5, 1992, the BIR sent
a letter to Philex asking it to settle its tax liabilities
for the 2nd, 3rd and 4th quarter of 1991 as well as
the 1st and 2nd quarter of 1992 in the total
amount of P123,821.982.52 computed as follows:
PERIOD COVERED BASIC TAX 25%
SURCHARGE INTEREST TOTAL EXCISE
TAX DUE
2nd Qtr., 1991 12,911,124.60 3,227,781.15 =========
3,378,116.16 19,517,021.91 =========
=========
3rd Qtr., 1991 14,994,749.21 3,748,687.30 =========
2,978,409.09 21,721,845.60
In a letter dated August 20, 1992, 4 Philex protested
4th Qtr., 1991 19,406,480.13 4,851,620.03 the demand for payment of the tax liabilities
2,631,837.72 26,889,937.88 stating that it has pending claims for VAT input
credit/refund for the taxes it paid for the years
1989 to 1991 in the amount of P119,977,037.02
plus interest. Therefore these claims for tax
credit/refund should be applied against the tax
47,312,353.94 liabilities, citing our ruling in Commissioner of
11,828,088.48 Internal Revenue v. Itogon-Suyoc Mines, Inc. 5
8,988,362.97
68,128,805.39 In reply, the BIR, in a letter dated September 7,
1992, 6 found no merit in Philex's position. Since
these pending claims have not yet been
established or determined with certainty, it follows
that no legal compensation can take place. Hence,
the BIR reiterated its demand that Philex settle the
1st Qtr., 1992 23,341,849.94 5,835,462.49
amount plus interest within 30 days from the
1,710,669.82 30,887,982.25
receipt of the letter.
2nd Qtr., 1992 19,671,691.76 4,917,922.94
In view of the BIR's denial of the offsetting of
215,580.18 24,805,194.88
Philex's claim for VAT input credit/refund against
its excise tax obligation, Philex raised the issue to
the Court of Tax Appeals on November 6, 1992. 7 In
the course of the proceedings, the BIR issued Tax
Credit Certificate SN 001795 in the amount of
43,013,541.70 P13,144,313.88 which, applied to the total tax
10,753,385.43 liabilities of Philex of P123,821,982.52; effectively
1,926,250.00 lowered the latter's tax obligation to
55,693,177.13 P110,677,688.52.
Despite the reduction of its tax liabilities, the CTA
still ordered Philex to pay the remaining balance of
P110,677,688.52 plus interest, elucidating its
90,325,895.64 reason, to wit:
22,581,473.91
10,914,612.97 Thus, for legal compensation to
123,821,982.52 3 take place, both obligations must
Page 30 of 34
TAX CASES 1st set
 be liquidated and demandable.
"Liquidated" debts are those
where the exact amount has
already been determined (PARAS,
Civil Code of the Philippines,
Annotated, Vol. IV, Ninth Edition,
p. 259). In the instant case, the
claims of the Petitioner for VAT
refund is still pending litigation,
and still has to be determined by
this Court (C.T.A. Case No. 4707).
A fortiori, the liquidated debt of
the Petitioner to the government
cannot, therefore, be set-off
against the unliquidated claim
which Petitioner conceived to
exist in its favor (see Compaia
General de Tabacos vs. French
and Unson, No. 14027, November
8, 1918, 39 Phil. 34). 8
Moreover, the Court of Tax Appeals ruled that
"taxes cannot be subject to set-off on
compensation since claim for taxes is not a debt or
contract." 9 The dispositive portion of the CTA
decision 10 provides:
In all the foregoing, this Petition
for Review is hereby DENIED for
lack of merit and Petitioner is
hereby ORDERED to PAY the
Respondent the amount of
P110,677,668.52 representing
excise tax liability for the period
from the 2nd quarter of 1991 to
the 2nd quarter of 1992 plus 20%
annual interest from August 6,
1994 until fully paid pursuant to
Section 248 and 249 of the Tax
Code, as amended.
Aggrieved with the decision, Philex appealed the
case before the Court of Appeals docketed as CA-
GR. CV No. 36975. 11 Nonetheless, on April 8, 1996,
the Court of Appeals a Affirmed the Court of Tax
Appeals observation. The pertinent portion of
which reads: 12
WHEREFORE, the appeal by way
of petition for review is hereby
DISMISSED and the decision
dated March 16, 1995 is
AFFIRMED.
Philex filed a motion for reconsideration which was,
nevertheless, denied in a Resolution dated July 11,
1996. 13
not creditors and debtors of each other. 17 There is
However, a few days after the denial of its motion
for reconsideration, Philex was able to obtain its
VAT input credit/refund not only for the taxable
year 1989 to 1991 but also for 1992 and 1994,
computed as follows: 14
Period Covered Tax Credit Date
By Claims For Certificate of
VAT refund/credit Number Issue
Amount
1994 (2nd Quarter) 007730 11
July 1996 P25,317,534.01
1994 (4th Quarter) 007731 11 July
1996 P21,791,020.61
1989 007732 11 July 1996
P37,322,799.19
1990-1991 007751 16 July 1996
P84,662,787.46
Page 31 of 34
TAX CASES 1st set
1992 (1st-3rd Quarter) 007755 23
July 1996 P36,501,147.95
In view of the grant of its VAT input credit/refund,
Philex now contends that the same should, ipso
jure, off-set its excise tax liabilities 15 since both had
already become "due and demandable, as well as
fully liquidated;" 16 hence, legal compensation can
properly take place.
We see no merit in this contention.
In several instances prior to the instant case, we
have already made the pronouncement that taxes
cannot be subject to compensation for the simple
reason that the government and the taxpayer are
a material distinction between a tax and debt.
Debts are due to the Government in its corporate
capacity, while taxes are due to the Government in
its sovereign capacity. 18 We find no cogent reason
to deviate from the aforementioned distinction.
Prescinding from this premise, in Francia v.
Intermediate Appellate Court, 19 we categorically
held that taxes cannot be subject to set-off or
compensation, thus:
We have consistently ruled that
there can be no off-setting of
taxes against the claims that the
taxpayer may have against the
government. A person cannot
refuse to pay a tax on the ground
that the government owes him an
amount equal to or greater than
the tax being collected. The
collection of a tax cannot await
the results of a lawsuit against the
government.
The ruling in Francia has been applied to the
subsequent case of Caltex Philippines, Inc. v.
Commission on Audit, 20 which reiterated that:
. . . a taxpayer may not offset
taxes due from the claims that he
may have against the
government. Taxes cannot be the
subject of compensation because
the government and taxpayer are
not mutually creditors and
debtors of each other and a claim
for taxes is not such a debt,
demand, contract or judgment as
is allowed to be set-off.
Further, Philex's reliance on our holding in
Commissioner of Internal Revenue v. Itogon-Suyoc
Mines Inc., wherein we ruled that a pending refund
may be set off against an existing tax liability even
though the refund has not yet been approved by
the Commissioner, 21 is no longer without any
support in statutory law.
It is important to note, that the premise of our
ruling in the aforementioned case was anchored on
Section 51 (d) of the National Revenue Code of
1939. However, when the National Internal
Revenue Code of 1977 was enacted, the same
provision upon which the Itogon-Suyoc
pronouncement was based was omitted. 22
Accordingly, the doctrine enunciated in Itogon-
Suyoc cannot be invoked by Philex.
Despite the foregoing rulings clearly adverse to
Philex's position, it asserts that the imposition of
surcharge and interest for the non-payment of the
excise taxes within the time prescribed was
unjustified. Philex posits the theory that it had no
obligation to pay the excise tax liabilities within the
prescribed period since, after all, it still has pending
claims for VAT input credit/refund with BIR. 23
We fail to see the logic of Philex's claim for this is
an outright disregard of the basic principle in tax
law that taxes are the lifeblood of the government
and so should be collected without unnecessary
hindrance. 24 Evidently, to countenance Philex's
whimsical reason would render ineffective our tax
collection system. Too simplistic, it finds no support
in law or in jurisprudence.
To be sure, we cannot allow Philex to refuse the
payment of its tax liabilities on the ground that it
has a pending tax claim for refund or credit against
the government which has not yet been granted. It
must be noted that a distinguishing feature of a tax
is that it is compulsory rather than a matter of
bargain. 25 Hence, a tax does not depend upon the
consent of the taxpayer. 26 If any taxpayer can defer
the payment of taxes by raising the defense that it
still has a pending claim for refund or credit, this
would adversely affect the government revenue
system. A taxpayer cannot refuse to pay his taxes
when they fall due simply because he has a claim
against the government or that the collection of
the tax is contingent on the result of the lawsuit it
filed against the government. 27 Moreover, Philex's
theory that would automatically apply its VAT input
credit/refund against its tax liabilities can easily
give rise to confusion and abuse, depriving the
government of authority over the manner by which
taxpayers credit and offset their tax liabilities.
Corollarily, the fact that Philex has pending claims
for VAT input claim/refund with the government is
immaterial for the imposition of charges and
penalties prescribed under Section 248 and 249 of
the Tax Code of 1977. The payment of the
surcharge is mandatory and the BIR is not vested
with any authority to waive the collection thereof.
28
The same cannot be condoned for flimsy
reasons, 29 similar to the one advanced by Philex in
justifying its non-payment of its tax liabilities.
Page 32 of 34
TAX CASES 1st set
Finally, Philex asserts that the BIR violated Section
106 (e) 30 of the National Internal Revenue Code of
1977, which requires the refund of input taxes
within 60 days, 31 when it took five years for the
latter to grant its tax claim for VAT input
credit/refund. 32
In this regard, we agree with Philex. While there is
no dispute that a claimant has the burden of proof
to establish the factual basis of his or her claim for
tax credit or refund, 33 however, once the claimant
has submitted all the required documents it is the
function of the BIR to assess these documents with
purposeful dispatch. After all, since taxpayers owe
honestly to government it is but just that
government render fair service to the taxpayers. 34
In the instant case, the VAT input taxes were paid
between 1989 to 1991 but the refund of these
erroneously paid taxes was only granted in 1996.
Obviously, had the BIR been more diligent and
judicious with their duty, it could have granted the
refund earlier. We need not remind the BIR that
simple justice requires the speedy refund of
wrongly-held taxes. 35 Fair dealing and nothing less,
is expected by the taxpayer from the BIR in the
latter's discharge of its function. As aptly held in
Roxas v. Court of Tax Appeals: 36
The power of taxation is
sometimes called also the power
to destroy. Therefore it should be
exercised with caution to
minimize injury to the proprietary
rights of a taxpayer. It must be
exercised fairly, equally and
uniformly, lest the tax collector kill
the "hen that lays the golden egg"
And, in order to maintain the
general public's trust and
confidence in the Government
 this power must be used justly
and not treacherously.
Despite our concern with the lethargic manner by
which the BIR handled Philex's tax claim, it is a
settled rule that in the performance of
governmental function, the State is not bound by
the neglect of its agents and officers. Nowhere is
this more true than in the field of taxation. 37 Again,
while we understand Philex's predicament, it must
be stressed that the same is not a valid reason for
the non-payment of its tax liabilities.
To be sure, this is not to state that the taxpayer is
devoid of remedy against public servants or
employees, especially BIR examiners who, in
investigating tax claims are seen to drag their feet
needlessly. First, if the BIR takes time in acting
upon the taxpayer's claim for refund, the latter can
seek judicial remedy before the Court of Tax
Appeals in the manner prescribed by law. 38
Second, if the inaction can be characterized as
willful neglect of duty, then recourse under the Civil
Code and the Tax Code can also be availed of.
Art. 27 of the Civil Code provides:
Art. 27. Any person suffering
material or moral loss because a
public servant or employee
refuses or neglects, without just
cause, to perform his official duty
may file an action for damages
and other relief against the latter,
without prejudice to any
disciplinary action that may be
taken.
More importantly, Section 269 (c) of the National
Internal Revenue Act of 1997 states:
xxx xxx xxx
(c) Wilfully neglecting to give
receipts, as by law required for
any sum collected in the
performance of duty or wilfully
neglecting to perform, any other
duties enjoyed by law.
Simply put, both provisions abhor official inaction,
willful neglect and unreasonable delay in the
performance of official duties. 39 In no uncertain
terms must we stress that every public employee or
servant must strive to render service to the people
with utmost diligence and efficiency. Insolence and
delay have no place in government service. The
BIR, being the government collecting arm, must
and should do no less. It simply cannot be
apathetic and laggard in rendering service to the
taxpayer if it wishes to remain true to its mission of
hastening the country's development. We take
judicial notice of the taxpayer's generally negative
perception towards the BIR; hence, it is up to the
latter to prove its detractors wrong.
In sum, while we can never condone the BIR's
apparent callousness in performing its duties, still,
the same cannot justify Philex's non-payment of its
tax liabilities. The adage "no one should take the
law into his own hands" should have guided
Philex's action.
WHEREFORE, in view of the foregoing, the instant
petition is hereby DISMISSED. The assailed decision
of the Court of Appeals dated April 8, 1996 is
hereby AFFIRMED.
SO ORDERED.
PHILEX MINING CORP. v. CIR
GR No. 125704, August 28, 1998
294 SCRA 687
FACTS:
Page 33 of 34
TAX CASES 1st set
Petitioner Philex Mining Corp. assails the
decision of the Court of Appeals affirming the
Court of Tax Appeals decision ordering it to pay
the amount of P110.7 M as excise tax liability
for the period from the 2nd quarter of 1991 to
the 2nd quarter of 1992 plus 20% annual
interest from 1994 until fully paid pursuant to
Sections 248 and 249 of the Tax Code of 1977.
Philex protested the demand for payment of
the tax liabilities stating that it has pending
claims for VAT input credit/refund for the taxes
it paid for the years 1989 to 1991 in the amount
of P120 M plus interest. Therefore these claims
for tax credit/refund should be applied against
the tax liabilities.
ISSUE: Can there be an off-setting between the
tax liabilities vis-a-vis claims of tax refund of
the petitioner?
HELD: No. Philex's claim is an outright
disregard of the basic principle in tax law that
taxes are the lifeblood of the government and
so should be collected without unnecessary
hindrance. Evidently, to countenance Philex's
whimsical reason would render ineffective our
tax collection system. Too simplistic, it finds no
support in law or in jurisprudence.
To be sure, Philex cannot be allowed to refuse
the payment of its tax liabilities on the ground
that it has a pending tax claim for refund or
credit against the government which has not
yet been granted. Taxes cannot be subject to
compensation for the simple reason that the
government and the taxpayer are not creditors
and debtors of each other. There is a material
distinction between a tax and debt. Debts are
due to the Government in its corporate
capacity, while taxes are due to the Government
in its sovereign capacity. xxx
There can be no off-setting of taxes against the
claims that the taxpayer may have against the
government. A person cannot refuse to pay a
tax on the ground that the government owes
him an amount equal to or greater than the tax
being collected. The collection of a tax cannot
await the results of a lawsuit against the
government.

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