G.R. No.

159647 April 15, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioners,

vs.
CENTRAL LUZON DRUG CORPORATION, Respondent.

DECISION

PANGANIBAN, J.:

The 20 percent discount required by the law to be given to senior citizens is a tax credit, not merely a tax deduction from
the gross income or gross sale of the establishment concerned. A tax credit is used by a private establishment only after
the tax has been computed; a tax deduction, before the tax is computed. RA 7432 unconditionally grants a tax credit to all
covered entities. Thus, the provisions of the revenue regulation that withdraw or modify such grant are void. Basic is the
rule that administrative regulations cannot amend or revoke the law.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to set aside the August 29, 2002
Decision2 and the August 11, 2003 Resolution3 of the Court of Appeals (CA) in CA-GR SP No. 67439. The assailed
Decision reads as follows:

"WHEREFORE, premises considered, the Resolution appealed from is AFFIRMED in toto. No costs."4

The assailed Resolution denied petitioner’s Motion for Reconsideration.

The Facts

The CA narrated the antecedent facts as follows:

"Respondent is a domestic corporation primarily engaged in retailing of medicines and other pharmaceutical products. In
1996, it operated six (6) drugstores under the business name and style ‘Mercury Drug.’

"From January to December 1996, respondent granted twenty (20%) percent sales discount to qualified senior citizens on
their purchases of medicines pursuant to Republic Act No. [R.A.] 7432 and its Implementing Rules and Regulations. For
the said period, the amount allegedly representing the 20% sales discount granted by respondent to qualified senior
citizens totaled ₱904,769.00.

"On April 15, 1997, respondent filed its Annual Income Tax Return for taxable year 1996 declaring therein that it incurred
net losses from its operations.

"On January 16, 1998, respondent filed with petitioner a claim for tax refund/credit in the amount of ₱904,769.00 allegedly
arising from the 20% sales discount granted by respondent to qualified senior citizens in compliance with [R.A.] 7432.
Unable to obtain affirmative response from petitioner, respondent elevated its claim to the Court of Tax Appeals [(CTA or
Tax Court)] via a Petition for Review.

"On February 12, 2001, the Tax Court rendered a Decision5 dismissing respondent’s Petition for lack of merit. In said
decision, the [CTA] justified its ruling with the following ratiocination:

‘x x x, if no tax has been paid to the government, erroneously or illegally, or if no amount is due and collectible from the
taxpayer, tax refund or tax credit is unavailing. Moreover, whether the recovery of the tax is made by means of a claim for
refund or tax credit, before recovery is allowed[,] it must be first established that there was an actual collection and receipt
by the government of the tax sought to be recovered. x x x.

‘x x x x x x x x x

‘Prescinding from the above, it could logically be deduced that tax credit is premised on the existence of tax liability on the
part of taxpayer. In other words, if there is no tax liability, tax credit is not available.’

"Respondent lodged a Motion for Reconsideration. The [CTA], in its assailed resolution,6 granted respondent’s motion for
reconsideration and ordered herein petitioner to issue a Tax Credit Certificate in favor of respondent citing the decision of
the then Special Fourth Division of [the CA] in CA G.R. SP No. 60057 entitled ‘Central [Luzon] Drug Corporation vs.
Commissioner of Internal Revenue’ promulgated on May 31, 2001, to wit:

‘However, Sec. 229 clearly does not apply in the instant case because the tax sought to be refunded or credited by
petitioner was not erroneously paid or illegally collected. We take exception to the CTA’s sweeping but unfounded
statement that ‘both tax refund and tax credit are modes of recovering taxes which are either erroneously or illegally paid
to the government.’ Tax refunds or credits do not exclusively pertain to illegally collected or erroneously paid taxes as they
may be other circumstances where a refund is warranted. The tax refund provided under Section 229 deals exclusively
with illegally collected or erroneously paid taxes but there are other possible situations, such as the refund of excess
estimated corporate quarterly income tax paid, or that of excess input tax paid by a VAT-registered person, or that of
excise tax paid on goods locally produced or manufactured but actually exported. The standards and mechanics for the
grant of a refund or credit under these situations are different from that under Sec. 229. Sec. 4[.a)] of R.A. 7432, is yet
another instance of a tax credit and it does not in any way refer to illegally collected or erroneously paid taxes, x x x.’"7

Ruling of the Court of Appeals

The CA affirmed in toto the Resolution of the Court of Tax Appeals (CTA) ordering petitioner to issue a tax credit
certificate in favor of respondent in the reduced amount of ₱903,038.39. It reasoned that Republic Act No. (RA) 7432
required neither a tax liability nor a payment of taxes by private establishments prior to the availment of a tax credit.
Moreover, such credit is not tantamount to an unintended benefit from the law, but rather a just compensation for the
taking of private property for public use.

Hence this Petition.8

The Issues

Petitioner raises the following issues for our consideration:

"Whether the Court of Appeals erred in holding that respondent may claim the 20% sales discount as a tax credit instead
of as a deduction from gross income or gross sales.

"Whether the Court of Appeals erred in holding that respondent is entitled to a refund."9

These two issues may be summed up in only one: whether respondent, despite incurring a net loss, may still claim the 20
percent sales discount as a tax credit.

The Court’s Ruling

The Petition is not meritorious.

Sole Issue:

Claim of 20 Percent Sales Discount

as  Tax Credit  Despite  Net Loss

Section 4a) of RA 743210 grants to senior citizens the privilege of obtaining a 20 percent discount on their purchase of
medicine from any private establishment in the country.11 The latter may then claim the cost of the discount as a tax
credit.12 But can such credit be claimed, even though an establishment operates at a loss?

We answer in the affirmative.

Tax Credit versus

Tax Deduction

Although the term is not specifically defined in our Tax Code,13 tax credit generally refers to an amount that is "subtracted
directly from one’s total tax liability."14 It is an "allowance against the tax itself"15 or "a deduction from what is owed"16 by a
taxpayer to the government. Examples of tax credits are withheld taxes, payments of estimated tax, and investment tax
credits.17

Tax credit should be understood in relation to other tax concepts. One of these is tax deduction -- defined as a subtraction
"from income for tax purposes,"18 or an amount that is "allowed by law to reduce income prior to [the] application of the tax
rate to compute the amount of tax which is due."19 An example of a tax deduction is any of the allowable deductions
enumerated in Section 3420 of the Tax Code.

A tax credit differs from a tax deduction. On the one hand, a tax credit reduces the tax due, including -- whenever
applicable -- the income tax that is determined after applying the corresponding tax rates to taxable income.21 A tax
deduction, on the other, reduces the income that is subject to tax22 in order to arrive at taxable income.23 To think of the
former as the latter is to avoid, if not entirely confuse, the issue. A tax credit is used only after the tax has been computed;
a tax deduction, before.

Tax Liability Required

for  Tax Credit

Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax liability before the tax credit can be
applied. Without that liability, any tax credit application will be useless. There will be no reason for deducting the latter
when there is, to begin with, no existing obligation to the government. However, as will be presented shortly,
the existence of a tax credit or its grant by law is not the same as the availment or use of such credit. While the grant is
mandatory, the availment or use is not.

If a net loss is reported by, and no other taxes are currently due from, a business establishment, there will obviously be no
tax liability against which any tax credit can be applied.24 For the establishment to choose the immediate availment of
a tax credit will be premature and impracticable. Nevertheless, the irrefutable fact remains that, under RA 7432, Congress
has granted without conditions a tax credit benefit to all covered establishments.

Although this tax credit benefit is available, it need not be used by losing ventures, since there is no tax liability that calls
for its application. Neither can it be reduced to nil by the quick yet callow stroke of an administrative pen, simply because
no reduction of taxes can instantly be effected. By its nature, the tax credit may still be deducted from a future, not
a present, tax liability, without which it does not have any use. In the meantime, it need not move. But it breathes.

Prior Tax Payments Not

Required for  Tax Credit

While a tax liability is essential to the availment or use of any tax credit, prior tax payments are not. On the contrary, for
the existence or grant solely of such credit, neither a tax liability nor a prior tax payment is needed. The Tax Code is in
fact replete with provisions granting or allowing tax credits, even though no taxes have been previously paid.

For example, in computing the estate tax due, Section 86(E) allows a tax credit -- subject to certain limitations -- for estate
taxes paid to a foreign country. Also found in Section 101(C) is a similar provision for donor’s taxes -- again when paid to
a foreign country -- in computing for the donor’s tax due. The tax credits in both instances allude to the prior payment of
taxes, even if not made to our government.

Under Section 110, a VAT (Value-Added Tax)- registered person engaging in transactions -- whether or not subject to the
VAT -- is also allowed a tax credit that includes a ratable portion of any input tax not directly attributable to either activity.
This input tax may either be the VAT on the purchase or importation of goods or services that is merely due from -- not
necessarily paid by -- such VAT-registered person in the course of trade or business; or the transitional input tax
determined in accordance with Section 111(A). The latter type may in fact be an amount equivalent to only eight percent
of the value of a VAT-registered person’s beginning inventory of goods, materials and supplies, when such amount -- as
computed -- is higher than the actual VAT paid on the said items.25 Clearly from this provision, the tax credit refers to an
input tax that is either due only or given a value by mere comparison with the VAT actually paid -- then later prorated. No
tax is actually paid prior to the availment of such credit.

In Section 111(B), a one and a half percent input tax credit that is merely presumptive is allowed. For the purchase of
primary agricultural products used as inputs -- either in the processing of sardines, mackerel and milk, or in the
manufacture of refined sugar and cooking oil -- and for the contract price of public work contracts entered into with the
government, again, no prior tax payments are needed for the use of the tax credit.

More important, a VAT-registered person whose sales are zero-rated or effectively zero-rated may, under Section 112(A),
apply for the issuance of a tax credit certificate for the amount of creditable input taxes merely due -- again not necessarily
paid to -- the government and attributable to such sales, to the extent that the input taxes have not been applied against
output taxes.26 Where a taxpayer
is engaged in zero-rated or effectively zero-rated sales and also in taxable or exempt sales, the amount of creditable input
taxes due that are not directly and entirely attributable to any one of these transactions shall be proportionately allocated
on the basis of the volume of sales. Indeed, in availing of such tax credit for VAT purposes, this provision -- as well as the
one earlier mentioned -- shows that the prior payment of taxes is not a requisite.

It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of a tax credit allowed, even though no
prior tax payments are not required. Specifically, in this provision, the imposition of a final withholding tax rate on cash
and/or property dividends received by a nonresident foreign corporation from a domestic corporation is subjected to the
condition that a foreign tax credit will be given by the domiciliary country in an amount equivalent to taxes that are merely
deemed paid.27 Although true, this provision actually refers to the tax credit as a condition only for the imposition of a lower
tax rate, not as a deduction from the corresponding tax liability. Besides, it is not our government but the domiciliary
country that credits against the income tax payable to the latter by the foreign corporation, the tax to be foregone or
spared.28

In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows as credits, against the income tax
imposable under Title II, the amount of income taxes merely incurred -- not necessarily paid -- by a domestic corporation
during a taxable year in any foreign country. Moreover, Section 34(C)(5) provides that for such taxes incurred but not
paid, a tax credit may be allowed, subject to the condition precedent that the taxpayer shall simply give a bond with
sureties satisfactory to and approved by petitioner, in such sum as may be required; and further conditioned upon
payment by the taxpayer of any tax found due, upon petitioner’s redetermination of it.

In addition to the above-cited provisions in the Tax Code, there are also tax treaties and special laws that grant or
allow tax credits, even though no prior tax payments have been made.

Under the treaties in which the tax credit method is used as a relief to avoid double taxation, income that is taxed in
the state of source is also taxable in the state of residence, but the tax paid in the former is merely allowed as a credit
against the tax levied in the latter.29 Apparently, payment is made to the state of source, not the state of residence. No tax,
therefore, has been previously paid to the latter.

Under special laws that particularly affect businesses, there can also be tax credit incentives. To illustrate, the incentives
provided for in Article 48 of Presidential Decree No. (PD) 1789, as amended by Batas Pambansa Blg. (BP) 391,
include tax credits equivalent to either five percent of the net value earned, or five or ten percent of the net local content of
exports.30 In order to avail of such credits under the said law and still achieve its objectives, no prior tax payments are
necessary.

From all the foregoing instances, it is evident that prior tax payments are not indispensable to the availment of a tax credit.
Thus, the CA correctly held that the availment under RA 7432 did not require prior tax payments by private establishments
concerned.31 However, we do not agree with its finding32 that the carry-over of tax credits under the said special law to
succeeding taxable periods, and even their application against internal revenue taxes, did not necessitate the existence of
a tax liability.

The examples above show that a tax liability is certainly important in the availment or use, not the existence or grant, of
a tax credit. Regarding this matter, a private establishment reporting a net loss in its financial statements is no different
from another that presents a net income. Both are entitled to the tax credit provided for under RA 7432, since the law itself
accords that unconditional benefit. However, for the losing establishment to immediately apply such credit, where no tax is
due, will be an improvident usance.

Sections 2.i and 4 of Revenue

Regulations No. 2-94 Erroneous

RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts they grant.33 In turn, the
Implementing Rules and Regulations, issued pursuant thereto, provide the procedures for its availment.34 To deny such
credit, despite the plain mandate of the law and the regulations carrying out that mandate, is indefensible.

First, the definition given by petitioner is erroneous. It refers to tax credit as the amount representing the 20 percent
discount that "shall be deducted by the said establishments from their gross income for income tax purposes and from
their gross sales for value-added tax or other percentage tax purposes."35 In ordinary business language, the tax
credit represents the amount of such discount. However, the manner by which the discount shall be credited against taxes
has not been clarified by the revenue regulations.

By ordinary acceptation, a discount is an "abatement or reduction made from the gross amount or value of anything."36 To
be more precise, it is in business parlance "a deduction or lowering of an amount of money;"37 or "a reduction from the full
amount or value of something, especially a price."38 In business there are many kinds of discount, the most common of
which is that affecting the income statement39 or financial report upon which the income tax is based.

Business Discounts

Deducted from  Gross Sales

A cash discount, for example, is one granted by business establishments to credit customers for their prompt payment.40 It
is a "reduction in price offered to the purchaser if payment is made within a shorter period of time than the maximum time
specified."41 Also referred to as a sales discount on the part of the seller and a purchase discount on the part of the buyer,
it may be expressed in such
terms as "5/10, n/30."42

A quantity discount, however, is a "reduction in price allowed for purchases made in large quantities, justified by savings
in packaging, shipping, and handling."43 It is also called a volume or bulk discount.44

A "percentage reduction from the list price x x x allowed by manufacturers to wholesalers and by wholesalers to
retailers"45 is known as a trade discount. No entry for it need be made in the manual or computerized books of accounts,
since the purchase or sale is already valued at the net price actually charged the buyer.46 The purpose for the discount is
to encourage trading or increase sales, and the prices at which the purchased goods may be resold are also
suggested.47 Even a chain discount -- a series of discounts from one list price -- is recorded at net.48

Finally, akin to a trade discount is a functional discount. It is "a supplier’s price discount given to a purchaser based on the
[latter’s] role in the [former’s] distribution system."49 This role usually involves warehousing or advertising.

Based on this discussion, we find that the nature of a sales discount is peculiar. Applying generally accepted accounting
principles (GAAP) in the country, this type of discount is reflected in the income statement50 as a line item deducted --
along with returns, allowances, rebates and other similar expenses -- from gross sales to arrive at net sales.51 This type of
presentation is resorted to, because the accounts receivable and sales figures that arise from sales discounts, -- as well
as from quantity, volume or bulk discounts -- are recorded in the manual and computerized books of accounts and
reflected in the financial statements at the gross amounts of the invoices.52 This manner of recording credit sales -- known
as the gross method -- is most widely used, because it is simple, more convenient to apply than the net method, and
produces no material errors over time.53
However, under the net method used in recording trade, chain or functional discounts, only the net amounts of the
invoices -- after the discounts have been deducted -- are recorded in the books of accounts54 and reflected in the financial
statements. A separate line item cannot be shown,55 because the transactions themselves involving both accounts
receivable and sales have already been entered into, net of the said discounts.

The term sales discounts is not expressly defined in the Tax Code, but one provision adverts to amounts whose sum --
along with sales returns, allowances and cost of goods sold56 -- is deducted from gross sales to come up with the gross
income, profit or margin57 derived from business.58 In another provision therein, sales discounts that are granted and
indicated in the invoices at the time of sale -- and that do not depend upon the happening of any future event -- may be
excluded from the gross sales within the same quarter they were given.59 While determinative only of the VAT, the latter
provision also appears as a suitable reference point for income tax purposes already embraced in the former. After all,
these two provisions affirm that sales discounts are amounts that are always deductible from gross sales.

Reason for the Senior Citizen Discount:

The Law, Not Prompt Payment

A distinguishing feature of the implementing rules of RA 7432 is the private establishment’s outright deduction of the
discount from the invoice price of the medicine sold to the senior citizen.60 It is, therefore, expected that for each retail sale
made under this law, the discount period lasts no more than a day, because such discount is given -- and the net amount
thereof collected -- immediately upon perfection of the sale.61 Although prompt payment is made for an arm’s-length
transaction by the senior citizen, the real and compelling reason for the private establishment giving the discount is that
the law itself makes it mandatory.

What RA 7432 grants the senior citizen is a mere discount privilege, not a sales discount or any of the above discounts in
particular. Prompt payment is not the reason for (although a necessary consequence of) such grant. To be sure, the
privilege enjoyed by the senior citizen must be equivalent to the tax credit benefit enjoyed by the private establishment
granting the discount. Yet, under the revenue regulations promulgated by our tax authorities, this benefit has been
erroneously likened and confined to a sales discount.

To a senior citizen, the monetary effect of the privilege may be the same as that resulting from a sales discount. However,
to a private establishment, the effect is different from a simple reduction in price that results from such discount. In other
words, the tax credit benefit is not the same as a sales discount. To repeat from our earlier discourse, this benefit cannot
and should not be treated as a tax deduction.

To stress, the effect of a sales discount on the income statement and income tax return of an establishment covered by
RA 7432 is different from that resulting from the availment or use of its tax credit benefit. While the former is a
deduction before, the latter is a deduction after, the income tax is computed. As mentioned earlier, a discount is not
necessarily a sales discount, and a tax credit for a simple discount privilege should not be automatically treated like
a sales discount. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not distinguish, we ought not
to distinguish.

Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent discount deductible
from gross income for income tax purposes, or from gross sales for VAT or other percentage tax purposes. In effect,
the tax credit benefit under RA 7432 is related to a sales discount. This contrived definition is improper, considering that
the latter has to be deducted from gross sales in order to compute the gross income in the income statement and cannot
be deducted again, even for purposes of computing the income tax.

When the law says that the cost of the discount may be claimed as a tax credit, it means that the amount -- when claimed
-- shall be treated as a reduction from any tax liability, plain and simple. The option to avail of the tax credit benefit
depends upon the existence of a tax liability, but to limit the benefit to a sales discount -- which is not even identical to the
discount privilege that is granted by law -- does not define it at all and serves no useful purpose. The definition must,
therefore, be stricken down.

Laws Not Amended

by Regulations

Second, the law cannot be amended by a mere regulation. In fact, a regulation that "operates to create a rule out of
harmony with
the statute is a mere nullity";62 it cannot prevail.

It is a cardinal rule that courts "will and should respect the contemporaneous construction placed upon a statute by the
executive officers whose duty it is to enforce it x x x."63 In the scheme of judicial tax administration, the need for certainty
and predictability in the implementation of tax laws is crucial.64 Our tax authorities fill in the details that "Congress may not
have the opportunity or competence to provide."65 The regulations these authorities issue are relied upon by taxpayers,
who are certain that these will be followed by the courts.66 Courts, however, will not uphold these authorities’
interpretations when clearly absurd, erroneous or improper.

In the present case, the tax authorities have given the term tax credit in Sections 2.i and 4 of RR 2-94 a meaning utterly in
contrast to what RA 7432 provides. Their interpretation has muddled up the intent of Congress in granting a mere
discount privilege, not a sales discount. The administrative agency issuing these regulations may not enlarge, alter or
restrict the provisions of the law it administers; it cannot engraft additional requirements not contemplated by the
legislature.67

In case of conflict, the law must prevail.68 A "regulation adopted pursuant to law is law."69 Conversely, a regulation or any
portion thereof not adopted pursuant to law is no law and has neither the force nor the effect of law.70

Availment of  Tax

Credit Voluntary

Third, the word may in the text of the statute71 implies that the

availability of the tax credit benefit is neither unrestricted nor mandatory.72 There is no absolute right conferred upon
respondent, or any similar taxpayer, to avail itself of the tax credit remedy whenever it chooses; "neither does it impose a
duty on the part of the government to sit back and allow an important facet of tax collection to be at the sole control and
discretion of the taxpayer."73 For the tax authorities to compel respondent to deduct the 20 percent discount from either
its gross income or its gross sales74 is, therefore, not only to make an imposition without basis in law, but also to blatantly
contravene the law itself.

What Section 4.a of RA 7432 means is that the tax credit benefit is merely permissive, not imperative. Respondent is
given two options -- either to claim or not to claim the cost of the discounts as a tax credit. In fact, it may even ignore the
credit and simply consider the gesture as an act of beneficence, an expression of its social conscience.

Granting that there is a tax liability and respondent claims such cost as a tax credit, then the tax credit can easily be
applied. If there is none, the credit cannot be used and will just have to be carried over and revalidated75 accordingly. If,
however, the business continues to operate at a loss and no other taxes are due, thus compelling it to close shop, the
credit can never be applied and will be lost altogether.

In other words, it is the existence or the lack of a tax liability that determines whether the cost of the discounts can be
used as a tax credit. RA 7432 does not give respondent the unfettered right to avail itself of the credit whenever it pleases.
Neither does it allow our tax administrators to expand or contract the legislative mandate. "The ‘plain meaning rule’
or verba legis in statutory construction is thus applicable x x x. Where the words of a statute are clear, plain and free from
ambiguity, it must be given its literal meaning and applied without attempted interpretation."76

Tax Credit  Benefit

Deemed  Just Compensation

Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State of its power of eminent domain. Be it stressed that
the privilege enjoyed by senior citizens does not come directly from the State, but rather from the private establishments
concerned. Accordingly, the tax credit benefit granted to these establishments can be deemed as their just
compensation for private property taken by the State for public use.77

The concept of public use is no longer confined to the traditional notion of use by the public, but held synonymous
with public interest, public benefit, public welfare, and public convenience.78 The discount privilege to which our senior
citizens are entitled is actually a benefit enjoyed by the general public to which these citizens belong. The discounts given
would have entered the coffers and formed part of the gross sales of the private establishments concerned, were it not for
RA 7432. The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private
property for public use or benefit.

As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just compensation. This
term refers not only to the issuance of a tax credit certificate indicating the correct amount of the discounts given, but also
to the promptness in its release. Equivalent to the payment of property taken by the State, such issuance -- when not
done within a reasonable time from the grant of the discounts -- cannot be considered as just compensation. In effect,
respondent is made to suffer the consequences of being immediately deprived of its revenues while awaiting actual
receipt, through the certificate, of the equivalent amount it needs to cope with the reduction in its revenues.79

Besides, the taxation power can also be used as an implement for the exercise of the power of eminent domain.80 Tax
measures are but "enforced contributions exacted on pain of penal sanctions"81 and "clearly imposed for a public
purpose."82 In recent years, the power to tax has indeed become a most effective tool to realize social justice, public
welfare, and the equitable distribution of wealth.83

While it is a declared commitment under Section 1 of RA 7432, social justice "cannot be invoked to trample on the rights
of property owners who under our Constitution and laws are also entitled to protection. The social justice consecrated in
our [C]onstitution [is] not intended to take away rights from a person and give them to another who is not entitled
thereto."84 For this reason, a just compensation for income that is taken away from respondent becomes necessary. It is in
the tax credit that our legislators find support to realize social justice, and no administrative body can alter that fact.

To put it differently, a private establishment that merely breaks even85 -- without the discounts yet -- will surely start to
incur losses because of such discounts. The same effect is expected if its mark-up is less than 20 percent, and if all its
sales come from retail purchases by senior citizens. Aside from the observation we have already raised earlier, it will also
be grossly unfair to an establishment if the discounts will be treated merely as deductions from either its gross income or
its gross sales. Operating at a loss through no fault of its own, it will realize that the tax credit limitation under RR 2-94 is
inutile, if not improper. Worse, profit-generating businesses will be put in a better position if they avail themselves of tax
credits denied those that are losing, because no taxes are due from the latter.

Grant of  Tax Credit

Intended by the Legislature

Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens are assisted by the community as a whole and to
establish a program beneficial to them.86 These objectives are consonant with the constitutional policy of making "health x
x x services available to all the people at affordable cost"87 and of giving "priority for the needs of the x x x
elderly."88 Sections 2.i and 4 of RR 2-94, however, contradict these constitutional policies and statutory objectives.

Furthermore, Congress has allowed all private establishments a simple tax credit, not a deduction. In fact, no cash outlay
is required from the government for the availment or use of such credit. The deliberations on February 5, 1992 of the
Bicameral Conference Committee Meeting on Social Justice, which finalized RA 7432, disclose the true intent of our
legislators to treat the sales discounts as a tax credit, rather than as a deduction from gross income. We quote from those
deliberations as follows:

"THE CHAIRMAN (Rep. Unico). By the way, before that ano, about deductions from taxable income. I think we
incorporated there a provision na - on the responsibility of the private hospitals and drugstores, hindi ba?

SEN. ANGARA. Oo.

THE CHAIRMAN. (Rep. Unico), So, I think we have to put in also a provision here about the deductions from taxable
income of that private hospitals, di ba ganon 'yan?

MS. ADVENTO. Kaya lang po sir, and mga discounts po nila affecting government and public institutions, so, puwede na
po nating hindi isama yung mga less deductions ng taxable income.

THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private hospitals. Yung isiningit natin?

MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did not use the microphone).

SEN. ANGARA. Hindi pa, hindi pa.

THE CHAIRMAN. (Rep. Unico) Ah, 'di pa ba naisama natin?

SEN. ANGARA. Oo. You want to insert that?

THE CHAIRMAN (Rep. Unico). Yung ang proposal ni Senator Shahani, e.

SEN. ANGARA. In the case of private hospitals they got the grant of 15% discount, provided that, the private hospitals
can claim the expense as a tax credit.

REP. AQUINO. Yah could be allowed as deductions in the perpetrations of (inaudible) income.

SEN. ANGARA. I-tax credit na lang natin para walang cash-out ano?

REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng establishments na covered.

THE CHAIRMAN. (Rep. Unico). Sa kuwan lang yon, as private hospitals lang.

REP. AQUINO. Ano ba yung establishments na covered?

SEN. ANGARA. Restaurant lodging houses, recreation centers.

REP. AQUINO. All establishments covered siguro?

SEN. ANGARA. From all establishments. Alisin na natin 'Yung kuwan kung ganon. Can we go back to Section 4 ha?

REP. AQUINO. Oho.

SEN. ANGARA. Letter A. To capture that thought, we'll say the grant of 20% discount from all establishments et cetera, et
cetera, provided that said establishments - provided that private establishments may claim the cost as a tax credit. Ganon
ba 'yon?

REP. AQUINO. Yah.

SEN. ANGARA. Dahil kung government, they don't need to claim it.

THE CHAIRMAN. (Rep. Unico). Tax credit.

SEN. ANGARA. As a tax credit [rather] than a kuwan - deduction, Okay.

REP. AQUINO Okay.

SEN. ANGARA. Sige Okay. Di subject to style na lang sa Letter A".89

Special Law

Over General Law

Sixth and last, RA 7432 is a special law that should prevail over the Tax Code -- a general law. "x x x [T]he rule is that on
a specific matter the special law shall prevail over the general law, which shall
be resorted to only to supply deficiencies in the former."90 In addition, "[w]here there are two statutes, the earlier special
and the later general -- the terms of the general broad enough to include the matter provided for in the special -- the fact
that one is special and the other is general creates a presumption that the special is to be considered as remaining an
exception to the general,91 one as a general law of the land, the other as the law of a particular case."92 "It is a canon of
statutory construction that a later statute, general in its terms and not expressly repealing a prior special statute, will
ordinarily not affect the special provisions of such earlier statute."93

RA 7432 is an earlier law not expressly repealed by, and therefore remains an exception to, the Tax Code -- a later law.
When the former states that a tax credit may be claimed, then the requirement of prior tax payments under certain
provisions of the latter, as discussed above, cannot be made to apply. Neither can the instances of or references to a tax
deduction under the Tax Code94 be made to restrict RA 7432. No provision of any revenue regulation can supplant or
modify the acts of Congress.

WHEREFORE, the Petition is hereby DENIED. The assailed Decision and Resolution of the Court of Appeals AFFIRMED.
No pronouncement as to costs.

SO ORDERED.

G.R. No. L-66838 December 2, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF TAX APPEALS, respondents.
 

RESOLUTION

FELICIANO, J.:

For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30 June 1975, private respondent Procter and
Gamble Philippine Manufacturing Corporation ("P&G-Phil.") declared dividends payable to its parent company and sole stockholder,
Procter and Gamble Co., Inc. (USA) ("P&G-USA"), amounting to P24,164,946.30, from which dividends the amount of P8,457,731.21
representing the thirty-five percent (35%) withholding tax at source was deducted.

On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of Internal Revenue a claim for refund or tax credit
in the amount of P4,832,989.26 claiming, among other things, that pursuant to Section 24 (b) (1) of the National Internal Revenue Code
("NITC"), 1 as amended by Presidential Decree No. 369, the applicable rate of withholding tax on the dividends remitted was only fifteen
percent (15%) (and not thirty-five percent [35%]) of the dividends.

There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July 1977, filed a petition for review with public
respondent Court of Tax Appeals ("CTA") docketed as CTA Case No. 2883. On 31 January 1984, the CTA rendered a decision
ordering petitioner Commissioner to refund or grant the tax credit in the amount of P4,832,989.00.

On appeal by the Commissioner, the Court through its Second Division reversed the decision of the CTA and held that:

(a) P&G-USA, and not private respondent P&G-Phil., was the proper party to claim the refund or tax credit here involved;

(b) there is nothing in Section 902 or other provisions of the US Tax Code that allows a credit against the US tax due from P&G-USA of
taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%) which represents the difference between the
regular tax of thirty-five percent (35%) on corporations and the tax of fifteen percent (15%) on dividends; and

(c) private respondent P&G-Phil. failed to meet certain conditions necessary in order that "the dividends received by its non-resident
parent company in the US (P&G-USA) may be subject to the preferential tax rate of 15% instead of 35%."

These holdings were questioned in P&G-Phil.'s Motion for Re-consideration and we will deal with them seriatim in this Resolution
resolving that Motion.

1. There are certain preliminary aspects of the question of the capacity of P&G-Phil. to bring the present claim for refund or tax credit,
which need to be examined. This question was raised for the first time on appeal, i.e., in the proceedings before this Court on the
Petition for Review filed by the Commissioner of Internal Revenue. The question was not raised by the Commissioner on the
administrative level, and neither was it raised by him before the CTA.

We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat an otherwise valid claim for refund by raising
this question of alleged incapacity for the first time on appeal before this Court. This is clearly a matter of procedure. Petitioner does not
pretend that P&G-Phil., should it succeed in the claim for refund, is likely to run away, as it were, with the refund instead of transmitting
such refund or tax credit to its parent and sole stockholder. It is commonplace that in the absence of explicit statutory provisions to the
contrary, the government must follow the same rules of procedure which bind private parties. It is, for instance, clear that the
government is held to compliance with the provisions of Circular No. 1-88 of this Court in exactly the same way that private litigants are
held to such compliance, save only in respect of the matter of filing fees from which the Republic of the Philippines is exempt by the
Rules of Court.

More importantly, there arises here a question of fairness should the BIR, unlike any other litigant, be allowed to raise for the first time
on appeal questions which had not been litigated either in the lower court or on the administrative level. For, if petitioner had at the
earliest possible opportunity, i.e., at the administrative level, demanded that P&G-Phil. produce an express authorization from its parent
corporation to bring the claim for refund, then P&G-Phil. would have been able forthwith to secure and produce such authorization
before filing the action in the instant case. The action here was commenced just before expiration of the two (2)-year prescriptive
period.

2. The question of the capacity of P&G-Phil. to bring the claim for refund has substantive dimensions as well which, as will be seen
below, also ultimately relate to fairness.

Under Section 306 of the NIRC, a claim for refund or tax credit filed with the Commissioner of Internal Revenue is essential for
maintenance of a suit for recovery of taxes allegedly erroneously or illegally assessed or collected:

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

Section 309 (3) of the NIRC, in turn, provides:

Sec. 309. Authority of Commissioner to Take Compromises and to Refund Taxes.—The Commissioner may:

x x x           x x x          x x x
(3) credit or refund taxes erroneously or illegally received, . . . No credit or refund of taxes or penalties shall be allowed unless the
taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty.
(As amended by P.D. No. 69) (Emphasis supplied)

Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&G-Phil. a "taxpayer" under Section 309 (3) of the
NIRC? The term "taxpayer" is defined in our NIRC as referring to "any person subject to tax imposed by the Title [on Tax on
Income]." 2 It thus becomes important to note that under Section 53 (c) of the NIRC, the withholding agent who is "required to deduct
and withhold any tax" is made "  personally liable for such tax" and indeed is indemnified against any claims and demands which the
stockholder might wish to make in questioning the amount of payments effected by the withholding agent in accordance with the
provisions of the NIRC. The withholding agent, P&G-Phil., is directly and independently liable 3 for the correct amount of the tax that
should be withheld from the dividend remittances. The withholding agent is, moreover, subject to and liable for deficiency assessments,
surcharges and penalties should the amount of the tax withheld be finally found to be less than the amount that should have been
withheld under law.

A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer." 4 The terms liable for tax"
and "subject to tax" both connote legal obligation or duty to pay a tax. It is very difficult, indeed conceptually impossible, to consider a
person who is statutorily made "liable for tax" as not "subject to tax." By any reasonable standard, such a person should be regarded as
a party in interest, or as a person having sufficient legal interest, to bring a suit for refund of taxes he believes were illegally collected
from him.

In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 5 this Court pointed out that a withholding agent is in fact
the agent both of the government and of the taxpayer, and that the withholding agent is not an ordinary government agent:

The law sets no condition for the personal liability of the withholding agent to attach. The reason is to compel the withholding agent to
withhold the tax under all circumstances. In effect, the responsibility for the collection of the tax as well as the payment thereof is
concentrated upon the person over whom the Government has jurisdiction. Thus, the withholding agent is constituted the agent of both
the Government and the taxpayer. With respect to the collection and/or withholding of the tax, he is the Government's agent. In regard
to the filing of the necessary income tax return and the payment of the tax to the Government, he is the agent of the taxpayer. The
withholding agent, therefore, is no ordinary government agent especially because under Section 53 (c) he is held personally liable for
the tax he is duty bound to withhold; whereas the Commissioner and his deputies are not made liable by law. 6 (Emphasis supplied)

If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of the dividends with respect to
the filing of the necessary income tax return and with respect to actual payment of the tax to the government, such authority may
reasonably be held to include the authority to file a claim for refund and to bring an action for recovery of such claim. This implied
authority is especially warranted where, is in the instant case, the withholding agent is the wholly owned subsidiary of the parent-
stockholder and therefore, at all times, under the effective control of such parent-stockholder. In the circumstances of this case, it
seems particularly unreal to deny the implied authority of P&G-Phil. to claim a refund and to commence an action for such refund.

We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show some written or telexed confirmation
by P&G-USA of the subsidiary's authority to claim the refund or tax credit and to remit the proceeds of the refund., or to apply the tax
credit to some Philippine tax obligation of, P&G-USA, before actual payment of the refund or issuance of a tax credit certificate. What
appears to be vitiated by basic unfairness is petitioner's position that, although P&G-Phil. is directly and personally liable to the
Government for the taxes and any deficiency assessments to be collected, the Government is not legally liable for a refund simply
because it did not demand a written confirmation of P&G-Phil.'s implied authority from the very beginning. A sovereign government
should act honorably and fairly at all times, even vis-a-vis taxpayers.

We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a "taxpayer" within the meaning of
Section 309, NIRC, and as impliedly authorized to file the claim for refund and the suit to recover such claim.

II

1. We turn to the principal substantive question before us: the applicability to the dividend remittances by P&G-Phil. to P&G-USA of the
fifteen percent (15%) tax rate provided for in the following portion of Section 24 (b) (1) of the NIRC:

(b) Tax on foreign corporations.—

(1) Non-resident corporation. — A foreign corporation not engaged in trade and business in the Philippines, . . ., shall pay a tax equal to
35% of the gross income receipt during its taxable year from all sources within the Philippines, as . . . dividends . . . Provided, still
further, that on dividends received from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of the dividends,
which shall be collected and paid as provided in Section 53 (d) of this Code, subject to the condition that the country in which the non-
resident foreign corporation, is domiciled shall allow a credit against the tax due from the non-resident foreign corporation, taxes
deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on
corporations and the tax (15%) on dividends as provided in this Section . . .

The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine
corporation, goes down to fifteen percent (15%) if the country of domicile of the foreign stockholder corporation "shall allow" such
foreign corporation a tax credit for "taxes deemed paid in the Philippines," applicable against the tax payable to the domiciliary country
by the foreign stockholder corporation. In other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is
applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes deemed paid in the Philippines" applicable against the US taxes
of P&G-USA. The NIRC specifies that such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount
equivalent to twenty (20) percentage points which represents the difference between the regular thirty-five percent (35%) dividend tax
rate and the preferred fifteen percent (15%) dividend tax rate.

It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed paid" tax credit for the dividend
tax (20 percentage points) waived by the Philippines in making applicable the preferred divided tax rate of fifteen percent (15%). In
other words, our NIRC does not require that the US tax law deem the parent-corporation to have paid the twenty (20) percentage points
of dividend tax waived by the Philippines. The NIRC only requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an
amount equivalent to the twenty (20) percentage points waived by the Philippines.

2. The question arises: Did the US law comply with the above requirement? The relevant provisions of the US Intemal Revenue Code
("Tax Code") are the following:

Sec. 901 — Taxes of foreign countries and possessions of United States.

(a) Allowance of credit. — If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to
the applicable limitation of section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the
case of a corporation, the taxes deemed to have been paid under sections 902 and 960. Such choice for any taxable year may be
made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by
this chapter for such taxable year. The credit shall not be allowed against the tax imposed by section 531 (relating to the tax on
accumulated earnings), against the additional tax imposed for the taxable year under section 1333 (relating to war loss recoveries) or
under section 1351 (relating to recoveries of foreign expropriation losses), or against the personal holding company tax imposed by
section 541.

(b) Amount allowed. — Subject to the applicable limitation of section 904, the following amounts shall be allowed as the credit under
subsection (a):

(a) Citizens and domestic corporations. — In the case of a citizen of the United States and of a domestic corporation, the amount of
any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of
the United States; and

x x x           x x x          x x x

Sec. 902. — Credit for corporate stockholders in foreign corporation.

(A) Treatment of Taxes Paid by Foreign Corporation. — For purposes of this subject, a domestic corporation which owns at least 10
percent of the voting stock of a foreign corporation from which it  receives dividends in any taxable year shall —

x x x           x x x          x x x

(2) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in subsection (c) (1) (b)] of a
year for which such foreign corporation is a less developed country corporation, be deemed to have paid the same proportion of any
income, war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any
possession of the United States on or with respect to such accumulated profits, which the amount of such dividends bears to the
amount of such accumulated profits.

x x x           x x x          x x x

(c) Applicable Rules

(1) Accumulated profits defined. — For purposes of this section, the term "accumulated profits" means with respect to any foreign
corporation,

(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income computed without reduction by the amount
of the income, war profits, and excess profits taxes imposed on or with respect to such profits or income by any foreign country. . . .;
and

(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in excess of the income, war profits, and
excess profits taxes imposed on or with respect to such profits or income.

The Secretary or his delegate shall have full power to determine from the accumulated profits of what year or years such dividends
were paid, treating dividends paid in the first 20 days of any year as having been paid from the accumulated profits of the preceding
year or years (unless to his satisfaction shows otherwise), and in other respects treating dividends as having been paid from the most
recently accumulated gains, profits, or earning. . . . (Emphasis supplied)

Close examination of the above quoted provisions of the US Tax Code 7 shows the following:

a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for the amount of the dividend tax actually paid (i.e., withheld) from the
dividend remittances to P&G-USA;

b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid' tax credit 8  for a proportionate part of the corporate income tax actually paid to the Philippines
by P&G-Phil.
The parent-corporation P&G-USA is "deemed to have paid" a portion of the  Philippine corporate income tax  although that tax was
actually paid by its Philippine subsidiary, P&G-Phil., not by P&G-USA. This "deemed paid" concept merely reflects economic reality,
since the Philippine corporate income tax was in fact paid and deducted from revenues earned in the Philippines, thus reducing the
amount remittable as dividends to P&G-USA. In other words, US tax law treats the Philippine corporate income tax as if it came out of
the pocket, as it were, of P&G-USA as a part of the economic cost of carrying on business operations in the Philippines through the
medium of P&G-Phil. and here earning profits.  What is,  under US law, deemed paid by P&G- USA are  not "phantom taxes" but
instead Philippine corporate income taxes actually paid here by P&G-Phil.,  which are very real indeed.

It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and (ii) the tax credit for the Philippine
corporate income tax actually paid by P&G Phil. but "deemed paid" by P&G-USA, are tax credits available or applicable against the US
corporate income tax of P&G-USA. These tax credits are allowed because of the US congressional desire to avoid or reduce double
taxation of the same income stream. 9

In order to determine whether US tax law complies with the requirements for applicability of the reduced or preferential fifteen percent
(15%) dividend tax rate under Section 24 (b) (1), NIRC, it is necessary:

a. to determine the amount of the 20 percentage points dividend tax waived by the Philippine government under Section 24 (b) (1),
NIRC, and which hence goes to P&G-USA;

b. to determine the amount of the "deemed paid" tax credit which US tax law must allow to P&G-USA; and

c. to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at least equal to the amount of the dividend tax
waived by the Philippine Government.

Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically determined in the following
manner:

P100.00 — Pretax net corporate income earned by P&G-Phil.

x 35% — Regular Philippine corporate income tax rate
———
P35.00 — Paid to the BIR by P&G-Phil. as Philippine
corporate income tax.

P100.00
-35.00
———
P65.00 — Available for remittance as dividends to P&G-USA

P65.00 — Dividends remittable to P&G-USA

x 35% — Regular Philippine dividend tax rate under Section 24
——— (b) (1), NIRC
P22.75 — Regular dividend tax

P65.00 — Dividends remittable to P&G-USA

x 15% — Reduced dividend tax rate under Section 24 (b) (1), NIRC
———
P9.75 — Reduced dividend tax

P22.75 — Regular dividend tax under Section 24 (b) (1), NIRC

-9.75 — Reduced dividend tax under Section 24 (b) (1), NIRC
———
P13.00 — Amount of dividend tax waived by Philippine
===== government under Section 24 (b) (1), NIRC.

Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil. Amount (a) is also
the minimum amount of the "deemed paid" tax credit that US tax law shall allow if P&G-USA is to qualify for the reduced or preferential
dividend tax rate under Section 24 (b) (1), NIRC.

Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under Section 902, Tax Code, may be
computed arithmetically as follows:

P65.00 — Dividends remittable to P&G-USA

- 9.75 — Dividend tax withheld at the reduced (15%) rate
———
P55.25 — Dividends actually remitted to P&G-USA

P35.00 — Philippine corporate income tax paid by P&G-Phil.

to the BIR
Dividends actually
remitted by P&G-Phil.
to P&G-USA P55.25
——————— = ——— x P35.00 = P29.75 10
Amount of accumulated P65.00 ======
profits earned by
P&G-Phil. in excess
of income tax

Thus,  for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&G-Phil. to its US parent P&G-USA,
a tax credit of P29.75 is allowed by Section 902 US Tax Code for Philippine corporate income tax "deemed paid" by the parent but
actually paid by the wholly-owned subsidiary.

Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine government), Section 902, US Tax
Code, specifically and clearly complies with the requirements of Section 24 (b) (1), NIRC.

3. It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax Code is identical with the reading of the
BIR of Sections 901 and 902 of the US Tax Code is identical with the reading of the BIR of Sections 901 and 902 as shown by
administrative rulings issued by the BIR.

The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting Commissioner of Intemal Revenue Efren I.
Plana, later Associate Justice of this Court, the relevant portion of which stated:

However, after a restudy of the decision in the American Chicle Company case and the provisions of Section 901 and 902 of the U.S.
Internal Revenue Code, we find merit in your contention that our computation of the credit which the U.S. tax law allows in such cases
is erroneous as the amount of tax "deemed paid" to the Philippine government for purposes of credit against the U.S. tax by the
recipient of dividends includes a portion of the amount of income tax paid by the corporation declaring the dividend in addition to the tax
withheld from the dividend remitted. In other words, the U.S. government will allow a credit to the U.S. corporation or recipient of the
dividend, in addition to the amount of tax actually withheld, a portion of the income tax paid by the corporation declaring the dividend.
Thus, if a Philippine corporation wholly owned by a U.S. corporation has a net income of P100,000, it will pay P25,000 Philippine
income tax thereon in accordance with Section 24(a) of the Tax Code. The net income, after income tax, which is P75,000, will then be
declared as dividend to the U.S. corporation at 15% tax, or P11,250, will be withheld therefrom. Under the aforementioned sections of
the U.S. Internal Revenue Code, U.S. corporation receiving the dividend can utilize as credit against its U.S. tax payable on said
dividends the amount of P30,000 composed of:

(1) The tax "deemed paid" or indirectly paid on the dividend arrived at as follows:

P75,000 x P25,000 = P18,750

———
100,000 **

(2) The amount of 15% of

P75,000 withheld = 11,250
———
P30,000

The amount of P18,750 deemed paid and to be credited against the U.S. tax on the dividends received by the U.S. corporation from a
Philippine subsidiary  is clearly more than 20% requirement of Presidential Decree No. 369 as 20% of P75,000.00 the dividends to be
remitted under the above example, amounts to P15,000.00 only.

In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is hereby amended in the sense that the dividends to be
remitted by your client to its parent company shall be subject to the withholding tax at the rate of 15% only.

This ruling shall have force and effect only for as long as the present pertinent provisions of the U.S. Federal Tax Code, which are the
bases of the ruling, are not revoked, amended and modified, the effect of which will reduce the percentage of tax deemed paid and
creditable against the U.S. tax on dividends remitted by a foreign corporation to a U.S. corporation. (Emphasis supplied)

The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic Foods Corporation and BIR Ruling dated 20
October 1987 addressed to Castillo, Laman, Tan and Associates. In other words, the 1976 Ruling of Hon. Efren I. Plana was reiterated
by the BIR even as the case at bar was pending before the CTA and this Court.

4. We should not overlook the fact that the concept of "deemed paid" tax credit, which is embodied in Section 902, US Tax Code,
is exactly the same "deemed paid" tax credit found in our NIRC and which Philippine tax law allows to Philippine corporations which
have operations abroad (say, in the United States) and which, therefore, pay income taxes to the US government.

Section 30 (c) (3) and (8), NIRC, provides:

(d) Sec. 30. Deductions from Gross Income.—In computing net income, there shall be allowed as deductions — . . .

(c) Taxes. — . . .

x x x           x x x          x x x
(3) Credits against tax for taxes of foreign countries. — If the taxpayer signifies in his return his desire to have the benefits of this
paragraphs, the tax imposed by this Title shall be credited with . . .

(a) Citizen and Domestic Corporation. — In the case of a citizen of the Philippines and of domestic corporation, the amount of net
income, war profits or excess profits, taxes paid or accrued during the taxable year to any foreign country. (Emphasis supplied)

Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine corporation for taxes actually paid by it to the
US government—e.g., for taxes collected by the US government on dividend remittances to the Philippine corporation. This Section of
the NIRC is the equivalent of Section 901 of the US Tax Code.

Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides as follows:

(8) Taxes of foreign subsidiary. — For the purposes of this subsection a domestic corporation which owns a majority of the voting stock
of a foreign corporation from which it receives dividends in any taxable year shall be deemed to have paid the same proportion of any
income, war-profits, or excess-profits taxes paid by such foreign corporation to any foreign country, upon or with respect to the
accumulated profits of such foreign corporation from which such dividends were paid, which the amount of such dividends bears to the
amount of such accumulated profits: Provided, That the amount of tax deemed to have been paid under this subsection shall in no case
exceed the same proportion of the tax against which credit is taken which the amount of such dividends bears to the amount of the
entire net income of the domestic corporation in which such dividends are included. The term "accumulated profits" when used in this
subsection reference to a foreign corporation, means the amount of its gains, profits, or income in excess of the income, war-profits,
and excess-profits taxes imposed upon or with respect to such profits or income; and the Commissioner of Internal Revenue shall have
full power to determine from the accumulated profits of what year or years such dividends were paid; treating dividends paid in the first
sixty days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shown
otherwise), and in other respects treating dividends as having been paid from the most recently accumulated gains, profits, or earnings.
In the case of a foreign corporation, the income, war-profits, and excess-profits taxes of which are determined on the basis of an
accounting period of less than one year, the word "year" as used in this subsection shall be construed to mean such accounting period.
(Emphasis supplied)

Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a Philippine parent corporation for taxes "deemed
paid" by it, that is, e.g., for taxes paid to the US by the US subsidiary of a Philippine-parent corporation. The Philippine parent or
corporate stockholder is "deemed" under our NIRC to have paid a proportionate part of the US corporate income tax paid by its US
subsidiary, although such US tax was actually paid by the subsidiary and not by the Philippine parent.

Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US law to P&G-USA, is the same
"deemed paid" tax credit that Philippine law allows to a Philippine corporation with a wholly- or majority-owned subsidiary in (for
instance) the US. The "deemed paid" tax credit allowed in Section 902, US Tax Code, is no more a credit for "phantom taxes" than is
the "deemed paid" tax credit granted in Section 30 (c) (8), NIRC.

III

1. The Second Division of the Court, in holding that the applicable dividend tax rate in the instant case was the regular thirty-five
percent (35%) rate rather than the reduced rate of fifteen percent (15%), held that P&G-Phil. had failed to prove that its parent, P&G-
USA, had in fact been given by the US tax authorities a "deemed paid" tax credit in the amount required by Section 24 (b) (1), NIRC.

We believe, in the first place, that we must distinguish between the legal question before this Court from questions of administrative
implementation arising after the legal question has been answered. The basic legal issue is of course, this: which is the applicable
dividend tax rate in the instant case: the regular thirty-five percent (35%) rate or the reduced fifteen percent (15%) rate? The question of
whether or not P&G-USA is in fact given by the US tax authorities a "deemed paid" tax credit in the required amount, relates to the
administrative implementation of the applicable reduced tax rate.

In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit shall have actually been
granted before the applicable dividend tax rate goes down from thirty-five percent (35%) to fifteen percent (15%). As noted several
times earlier, Section 24 (b) (1), NIRC, merely requires, in the case at bar, that the USA "shall allow a credit against the
tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ." There is neither statutory provision nor revenue
regulation issued by the Secretary of Finance requiring the actual grant of the "deemed paid" tax credit by the US Internal Revenue
Service to P&G-USA before the preferential fifteen percent (15%) dividend rate becomes applicable. Section 24 (b) (1), NIRC, does not
create a tax exemption nor does it provide a tax credit; it is a provision which specifies when a particular (reduced) tax rate is legally
applicable.

In the third place, the position originally taken by the Second Division results in a severe practical problem of administrative circularity.
The Second Division in effect held that the reduced dividend tax rate is not applicable until the US tax credit for "deemed paid" taxes is
actually given in the required minimum amount by the US Internal Revenue Service to P&G-USA. But, the US "deemed paid" tax
credit cannot be given by the US tax authorities unless dividends have actually been remitted to the US, which means that the
Philippine dividend tax, at the rate here applicable, was actually imposed and collected. 11 It is this practical or operating circularity that
is in fact avoided by our BIR when it issues rulings that the tax laws of particular foreign jurisdictions (e.g., Republic of
Vanuatu 12 Hongkong, 13 Denmark, 14 etc.) comply with the requirements set out in Section 24 (b) (1), NIRC, for applicability of the
fifteen percent (15%) tax rate. Once such a ruling is rendered, the Philippine subsidiary begins to withhold at the reduced dividend tax
rate.

A requirement relating to administrative implementation is not properly imposed as a condition for the  applicability, as a matter of
law, of a particular tax rate. Upon the other hand, upon the determination or recognition of the applicability of the reduced tax rate, there
is nothing to prevent the BIR from issuing implementing regulations that would require P&G Phil., or any Philippine corporation similarly
situated, to certify to the BIR the amount of the "deemed paid" tax credit actually subsequently granted by the US tax authorities to
P&G-USA or a US parent corporation for the taxable year involved. Since the US tax laws can and do change, such implementing
regulations could also provide that failure of P&G-Phil. to submit such certification within a certain period of time, would result in the
imposition of a deficiency assessment for the twenty (20) percentage points differential. The task of this Court is to settle which tax rate
is applicable, considering the state of US law at a given time. We should leave details relating to administrative implementation where
they properly belong — with the BIR.

2. An interpretation of a tax statute that produces a revenue flow for the government is not, for that reason alone, necessarily the
correct reading of the statute. There are many tax statutes or provisions which are designed, not to trigger off an instant surge of
revenues, but rather to achieve longer-term and broader-gauge fiscal and economic objectives. The task of our Court is to give effect to
the legislative design and objectives as they are written into the statute even if, as in the case at bar, some revenues have to be
foregone in that process.

The economic objectives sought to be achieved by the Philippine Government by reducing the thirty-five percent (35%) dividend rate to
fifteen percent (15%) are set out in the preambular clauses of P.D. No. 369 which amended Section 24 (b) (1), NIRC, into its present
form:

WHEREAS, it is imperative to adopt measures responsive to the requirements of a developing economy foremost of which is

the  financing of economic development programs;

WHEREAS, nonresident foreign corporations with investments in the Philippines are taxed on their earnings from dividends at the rate
of 35%;

WHEREAS,  in order to encourage more capital investment for large projects an appropriate tax need be imposed on dividends
received by non-resident foreign corporations in the same manner as the tax imposed on interest on foreign loans;

x x x           x x x          x x x

(Emphasis supplied)

More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign equity investment in the Philippines by reducing the
tax cost of earning profits here and thereby increasing the net dividends remittable to the investor. The foreign investor, however, would
not benefit from the reduction of the Philippine dividend tax rate unless its home country gives it some relief from double taxation (i.e.,
second-tier taxation) (the home country would simply have more "post-R.P. tax" income to subject to its own taxing power) by allowing
the investor additional tax credits which would be applicable against the tax payable to such home country. Accordingly, Section 24 (b)
(1), NIRC, requires the home or domiciliary country to give the investor corporation a "deemed paid" tax credit at least equal in amount
to the twenty (20) percentage points of dividend tax foregone by the Philippines, in the assumption that a positive incentive effect would
thereby be felt by the investor.

The net effect upon the foreign investor may be shown arithmetically in the following manner:

P65.00 — Dividends remittable to P&G-USA (please

see page 392 above
- 9.75 — Reduced R.P. dividend tax withheld by P&G-Phil.
———
P55.25 — Dividends actually remitted to P&G-USA

P55.25
x 46% — Maximum US corporate income tax rate
———
P25.415—US corporate tax payable by P&G-USA
without tax credits

P25.415
- 9.75 — US tax credit for RP dividend tax withheld by P&G-Phil.
at 15% (Section 901, US Tax Code)
———
P15.66 — US corporate income tax payable after Section 901
——— tax credit.

P55.25
- 15.66
———
P39.59 — Amount received by P&G-USA net of R.P. and U.S.
===== taxes without "deemed paid" tax credit.

P25.415
- 29.75 — "Deemed paid" tax credit under Section 902 US
——— Tax Code (please see page 18 above)

- 0 - — US corporate income tax payable on dividends

====== remitted by P&G-Phil. to P&G-USA after
Section 902 tax credit.

P55.25 — Amount received by P&G-USA net of RP and US

====== taxes after Section 902 tax credit.
It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code, could offset the US corporate income tax
payable on the dividends remitted by P&G-Phil. The result, in fine, could be that P&G-USA would after US tax credits, still wind up with
P55.25, the full amount of the dividends remitted to P&G-USA net of Philippine taxes. In the calculation of the Philippine Government,
this should encourage additional investment or re-investment in the Philippines by P&G-USA.

3. It remains only to note that under the Philippines-United States Convention "With Respect to Taxes on Income," 15 the
Philippines, by a treaty commitment, reduced the regular rate of dividend tax to a maximum of twenty percent (20%) of the gross
amount of dividends paid to US parent corporations:

Art 11. — Dividends

x x x           x x x          x x x

(2) The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a
resident of the other Contracting State shall not exceed —

(a) 25 percent of the gross amount of the dividend; or

(b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the paying corporation's
taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10
percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation.

x x x           x x x          x x x

(Emphasis supplied)

The Tax Convention, at the same time, established a treaty obligation on the part of the United States that it "shall allow" to a US parent
corporation receiving dividends from its Philippine subsidiary "a [tax] credit for the appropriate amount of taxes paid or accrued to the
Philippines by the Philippine [subsidiary] —. 16 This is, of course, precisely the "deemed paid" tax credit provided for in Section 902, US
Tax Code, discussed above. Clearly, there is here on the part of the Philippines a deliberate undertaking to reduce the regular dividend
tax rate of twenty percent (20%) is a maximum rate, there is still a differential or additional reduction of five (5) percentage points which
compliance of US law (Section 902) with the requirements of Section 24 (b) (1), NIRC, makes available in respect of dividends from a
Philippine subsidiary.

We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax credit which it seeks.

WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's Motion for Reconsideration dated 11 May
1988, to SET ASIDE the Decision of the and Division of the Court promulgated on 15 April 1988, and in lieu thereof, to REINSTATE
and AFFIRM the Decision of the Court of Tax Appeals in CTA Case No. 2883 dated 31 January 1984 and to DENY the Petition for
Review for lack of merit. No pronouncement as to costs.
G.R. No. 148191               November 25, 2003

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
SOLIDBANK CORPORATION, respondent.

DECISION

PANGANIBAN, J.:

Under the Tax Code, the earnings of banks from "passive" income are subject to a twenty percent final withholding tax (20% FWT).
This tax is withheld at source and is thus not actually and physically received by the banks, because it is paid directly to the government
by the entities from which the banks derived the income. Apart from the 20% FWT, banks are also subject to a five percent gross
receipts tax (5% GRT) which is imposed by the Tax Code on their gross receipts, including the "passive" income.

Since the 20% FWT is constructively received by the banks and forms part of their gross receipts or earnings, it follows that it is subject
to the 5% GRT. After all, the amount withheld is paid to the government on their behalf, in satisfaction of their withholding taxes. That
they do not actually receive the amount does not alter the fact that it is remitted for their benefit in satisfaction of their tax obligations.

Stated otherwise, the fact is that if there were no withholding tax system in place in this country, this 20 percent portion of the "passive"
income of banks would actually be paid to the banks and then remitted by them to the government in payment of their income tax. The
institution of the withholding tax system does not alter the fact that the 20 percent portion of their "passive" income constitutes part of
their actual earnings, except that it is paid directly to the government on their behalf in satisfaction of the 20 percent final income tax
due on their "passive" incomes.

The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to annul the July 18, 2000 Decision 2 and the May 8,
2001 Resolution3 of the Court of Appeals4 (CA) in CA-GR SP No. 54599. The decretal portion of the assailed Decision reads as follows:

"WHEREFORE, we AFFIRM in toto the assailed decision and resolution of the Court of Tax Appeals."5

The challenged Resolution denied petitioner’s Motion for Reconsideration.

The Facts

Quoting petitioner, the CA6 summarized the facts of this case as follows:

"For the calendar year 1995, [respondent] seasonably filed its Quarterly Percentage Tax Returns reflecting gross receipts (pertaining to
5% [Gross Receipts Tax] rate) in the total amount of ₱1,474,691,693.44 with corresponding gross receipts tax payments in the sum of
₱73,734,584.60, broken down as follows:

Period Covered Gross Receipts Gross Receipts Tax

January to March 1994 ₱ 188,406,061.95 ₱ 9,420,303.10

April to June 1994 370,913,832.70 18,545,691.63

July to September 1994 481,501,838.98 24,075,091.95

October to December 1994 433,869,959.81 21,693,497.98

Total ₱ 1,474,691,693.44 ₱ 73,734,584.60

"[Respondent] alleges that the total gross receipts in the amount of ₱1,474,691,693.44 included the sum of ₱350,807,875.15
representing gross receipts from passive income which was already subjected to 20% final withholding tax.

"On January 30, 1996, [the Court of Tax Appeals] rendered a decision in CTA Case No. 4720 entitled Asian Bank Corporation vs.
Commissioner of Internal Revenue[,] wherein it was held that the 20% final withholding tax on [a] bank’s interest income should not
form part of its taxable gross receipts for purposes of computing the gross receipts tax.

"On June 19, 1997, on the strength of the aforementioned decision, [respondent] filed with the Bureau of Internal Revenue [BIR] a
letter-request for the refund or issuance of [a] tax credit certificate in the aggregate amount of ₱3,508,078.75, representing allegedly
overpaid gross receipts tax for the year 1995, computed as follows:

Gross Receipts Subjected to the Final Tax

Derived from Passive [Income] ₱ 350,807,875.15

Multiply by Final Tax rate 20%

20% Final Tax Withheld at Source ₱ 70,161,575.03

Multiply by [Gross Receipts Tax] rate 5%

Overpaid [Gross Receipts Tax] ₱ 3,508,078.75

"Without waiting for an action from the [petitioner], [respondent] on the same day filed [a] petition for review [with the Court of Tax
Appeals] in order to toll the running of the two-year prescriptive period to judicially claim for the refund of [any] overpaid internal revenue
tax[,] pursuant to Section 230 [now 229] of the Tax Code [also ‘National Internal Revenue Code’] x x x.

x x x           x x x          x x x

"After trial on the merits, the [Court of Tax Appeals], on August 6, 1999, rendered its decision ordering x x x petitioner to refund in favor
of x x x respondent the reduced amount of ₱1,555,749.65 as overpaid [gross receipts tax] for the year 1995. The legal issue x x x was
resolved by the [Court of Tax Appeals], with Hon. Amancio Q. Saga dissenting, on the strength of its earlier pronouncement in x x x
Asian Bank Corporation vs. Commissioner of Internal Revenue x x x, wherein it was held that the 20% [final withholding tax] on [a]
bank’s interest income should not form part of its taxable gross receipts for purposes of computing the [gross receipts tax]."7

Ruling of the CA

The CA held that the 20% FWT on a bank’s interest income did not form part of the taxable gross receipts in computing the 5% GRT,
because the FWT was not actually received by the bank but was directly remitted to the government. The appellate court curtly said
that while the Tax Code "does not specifically state any exemption, x x x the statute must receive a sensible construction such as will
give effect to the legislative intention, and so as to avoid an unjust or absurd conclusion."8

Hence, this appeal.9

Issue

Petitioner raises this lone issue for our consideration:

"Whether or not the 20% final withholding tax on [a] bank’s interest income forms part of the taxable gross receipts in computing the 5%
gross receipts tax."10

The Court’s Ruling

The Petition is meritorious.

Sole Issue:

Whether the 20% FWT Forms Part

of the Taxable Gross Receipts

Petitioner claims that although the 20% FWT on respondent’s interest income was not actually received by respondent because it was
remitted directly to the government, the fact that the amount redounded to the bank’s benefit makes it part of the taxable gross receipts
in computing the 5% GRT. Respondent, on the other hand, maintains that the CA correctly ruled otherwise.

We agree with petitioner. In fact, the same issue has been raised recently in China Banking Corporation v. CA,11 where this Court held
that the amount of interest income withheld in payment of the 20% FWT forms part of gross receipts in computing for the GRT on
banks.

The FWT and the GRT:

Two Different Taxes

The 5% GRT is imposed by Section 11912 of the Tax Code,13 which provides:

"SEC. 119. Tax on banks and non-bank financial intermediaries. – There shall be collected a tax on gross receipts derived from
sources within the Philippines by all banks and non-bank financial intermediaries in accordance with the following schedule:

"(a) On interest, commissions and discounts from lending activities as well as income from financial leasing, on the basis of remaining
maturities of instruments from which such receipts are derived.

Short-term maturity not in excess of two (2) years……………………5%

Medium-term maturity – over two (2) years

but not exceeding four (4) years………………………………….…...3%

Long-term maturity:

(i) Over four (4) years but not exceeding

seven (7) years……………………………………………1%

(ii) Over seven (7) years………………………………….….0%

"(b) On dividends……………………………….……..0%

"(c) On royalties, rentals of property, real or personal, profits from exchange and all other items treated as gross income under Section
2814 of this Code………....................................................................5%

Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru pretermination, then the maturity
period shall be reckoned to end as of the date of pretermination for purposes of classifying the transaction as short, medium or long
term and the correct rate of tax shall be applied accordingly.

"Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on persons performing similar
banking activities."

The 5% GRT15 is included under "Title V. Other Percentage Taxes" of the Tax Code and is not subject to withholding. The banks and
non-bank financial intermediaries liable therefor shall, under Section 125(a)(1), 16 file quarterly returns on the amount of gross receipts
and pay the taxes due thereon within twenty (20)17 days after the end of each taxable quarter.

The 20% FWT,18 on the other hand, falls under Section 24(e)(1) 19 of "Title II. Tax on Income." It is a tax on passive income, deducted
and withheld at source by the payor-corporation and/or person as withholding agent pursuant to Section 50,20 and paid in the same
manner and subject to the same conditions as provided for in Section 51.21

A perusal of these provisions clearly shows that two types of taxes are involved in the present controversy: (1) the GRT, which is a
percentage tax; and (2) the FWT, which is an income tax. As a bank, petitioner is covered by both taxes.

A percentage tax is a national tax measured by a certain percentage of the gross selling price or gross value in money of goods sold,
bartered or imported; or of the gross receipts or earnings derived by any person engaged in the sale of services. 22 It is not subject to
withholding.
An income tax, on the other hand, is a national tax imposed on the net or the gross income realized in a taxable year.23 It is subject to
withholding.

In a withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed; the payor, a separate entity, acts as no
more than an agent of the government for the collection of the tax in order to ensure its payment. Obviously, this amount that is used to
settle the tax liability is deemed sourced from the proceeds constitutive of the tax base.24 These proceeds are either actual or
constructive. Both parties herein agree that there is no actual receipt by the bank of the amount withheld. What needs to be determined
is if there is constructive receipt thereof. Since the payee -- not the payor -- is the real taxpayer, the rule on constructive receipt can be
easily rationalized, if not made clearly manifest.25

Constructive Receipt
Versus Actual Receipt

Applying Section 7 of Revenue Regulations (RR) No. 17-84,26 petitioner contends that there is constructive receipt of the interest on
deposits and yield on deposit substitutes.27 Respondent, however, claims that even if there is, it is Section 4(e) of RR 12-80 28 that
nevertheless governs the situation.

Section 7 of RR 17-84 states:

"SEC. 7. Nature and Treatment of Interest on Deposits and Yield on Deposit Substitutes. –

‘(a) The interest earned on Philippine Currency bank deposits and yield from deposit substitutes subjected to the withholding taxes in
accordance with these regulations need not be included in the gross income in computing the depositor’s/investor’s income tax liability
in accordance with the provision of Section 29(b),29 (c)30 and (d) of the National Internal Revenue Code, as amended.

‘(b) Only interest paid or accrued on bank deposits, or yield from deposit substitutes declared for purposes of imposing the withholding
taxes in accordance with these regulations shall be allowed as interest expense deductible for purposes of computing taxable net
income of the payor.

‘(c) If the recipient of the above-mentioned items of income are financial institutions, the same shall be included as part of the tax base
upon which the gross receipt[s] tax is imposed.’"

Section 4(e) of RR 12-80, on the other hand, states that the tax rates to be imposed on the gross receipts of banks, non-bank financial
intermediaries, financing companies, and other non-bank financial intermediaries not performing quasi-banking activities shall be based
on all items of income actually received. This provision reads:

"SEC. 4. x x x x x x x x x

"(e) Gross receipts tax on banks, non-bank financial intermediaries, financing companies, and other non-bank financial intermediaries
not performing quasi-banking activities. – The rates of tax to be imposed on the gross receipts of such financial institutions shall be
based on all items of income actually received. Mere accrual shall not be considered, but once payment is received on such accrual or
in cases of prepayment, then the amount actually received shall be included in the tax base of such financial institutions, as provided
hereunder x x x."

Respondent argues that the above-quoted provision is plain and clear: since there is no actual receipt, the FWT is not to be included in
the tax base for computing the GRT. There is supposedly no pecuniary benefit or advantage accruing to the bank from the FWT,
because the income is subjected to a tax burden immediately upon receipt through the withholding process. Moreover, the earlier RR
12-80 covered matters not falling under the later RR 17-84.31

We are not persuaded.

By analogy, we apply to the receipt of income the rules on actual and constructive possession provided in Articles 531 and 532 of our
Civil Code.

Under Article 531:32

"Possession is acquired by the material occupation of a thing or the exercise of a right, or by the fact that it is subject to the action of
our will, or by the proper acts and legal formalities established for acquiring such right."

Article 532 states:

"Possession may be acquired by the same person who is to enjoy it, by his legal representative, by his agent, or by any person without
any power whatever; but in the last case, the possession shall not be considered as acquired until the person in whose name the act of
possession was executed has ratified the same, without prejudice to the juridical consequences of negotiorum gestio in a proper
case."33

The last means of acquiring possession under Article 531 refers to juridical acts -- the acquisition of possession by sufficient title – to
which the law gives the force of acts of possession. 34 Respondent argues that only items of income actually received should be included
in its gross receipts. It claims that since the amount had already been withheld at source, it did not have actual receipt thereof.

We clarify. Article 531 of the Civil Code clearly provides that the acquisition of the right of possession is through the proper acts and
legal formalities established therefor. The withholding process is one such act. There may not be actual receipt of the income withheld;
however, as provided for in Article 532, possession by any person without any power whatsoever shall be considered as acquired when
ratified by the person in whose name the act of possession is executed.
In our withholding tax system, possession is acquired by the payor as the withholding agent of the government, because the taxpayer
ratifies the very act of possession for the government. There is thus constructive receipt. The processes of bookkeeping and accounting
for interest on deposits and yield on deposit substitutes that are subjected to FWT are indeed -- for legal purposes -- tantamount to
delivery, receipt or remittance.35 Besides, respondent itself admits that its income is subjected to a tax burden immediately upon
"receipt," although it claims that it derives no pecuniary benefit or advantage through the withholding process. There being constructive
receipt of such income -- part of which is withheld -- RR 17-84 applies, and that income is included as part of the tax base upon which
the GRT is imposed.

RR 12-80 Superseded by RR 17-84

We now come to the effect of the revenue regulations on interest income constructively received.

In general, rules and regulations issued by administrative or executive officers pursuant to the procedure or authority conferred by law
upon the administrative agency have the force and effect, or partake of the nature, of a statute. 36 The reason is that statutes express the
policies, purposes, objectives, remedies and sanctions intended by the legislature in general terms. The details and manner of carrying
them out are oftentimes left to the administrative agency entrusted with their enforcement.

In the present case, it is the finance secretary who promulgates the revenue regulations, upon recommendation of the BIR
commissioner. These regulations are the consequences of a delegated power to issue legal provisions that have the effect of law.37

A revenue regulation is binding on the courts as long as the procedure fixed for its promulgation is followed. Even if the courts may not
be in agreement with its stated policy or innate wisdom, it is nonetheless valid, provided that its scope is within the statutory authority or
standard granted by the legislature.38 Specifically, the regulation must (1) be germane to the object and purpose of the law;39 (2) not
contradict, but conform to, the standards the law prescribes;40 and (3) be issued for the sole purpose of carrying into effect the general
provisions of our tax laws.41

In the present case, there is no question about the regularity in the performance of official duty. What needs to be determined is
whether RR 12-80 has been repealed by RR 17-84.

A repeal may be express or implied. It is express when there is a declaration in a regulation -- usually in its repealing clause -- that
another regulation, identified by its number or title, is repealed. All others are implied repeals. 42 An example of the latter is a general
provision that predicates the intended repeal on a substantial conflict between the existing and the prior regulations.43

As stated in Section 11 of RR 17-84, all regulations, rules, orders or portions thereof that are inconsistent with the provisions of the said
RR are thereby repealed. This declaration proceeds on the premise that RR 17-84 clearly reveals such an intention on the part of the
Department of Finance. Otherwise, later RRs are to be construed as a continuation of, and not a substitute for, earlier RRs; and will
continue to speak, so far as the subject matter is the same, from the time of the first promulgation.44

There are two well-settled categories of implied repeals: (1) in case the provisions are in irreconcilable conflict, the later regulation, to
the extent of the conflict, constitutes an implied repeal of an earlier one; and (2) if the later regulation covers the whole subject of an
earlier one and is clearly intended as a substitute, it will similarly operate as a repeal of the earlier one. 45 There is no implied repeal of
an earlier RR by the mere fact that its subject matter is related to a later RR, which may simply be a cumulation or continuation of the
earlier one.46

Where a part of an earlier regulation embracing the same subject as a later one may not be enforced without nullifying the pertinent
provision of the latter, the earlier regulation is deemed impliedly amended or modified to the extent of the repugnancy. 47 The unaffected
provisions or portions of the earlier regulation remain in force, while its omitted portions are deemed repealed. 48 An exception therein
that is amended by its subsequent elimination shall now cease to be so and instead be included within the scope of the general rule.49

Section 4(e) of the earlier RR 12-80 provides that only items of income actually received shall be included in the tax base for computing
the GRT, but Section 7(c) of the later RR 17-84 makes no such distinction and provides that all interests earned shall be included. The
exception having been eliminated, the clear intent is that the later RR 17-84 includes the exception within the scope of the general rule.

Repeals by implication are not favored and will not be indulged, unless it is manifest that the administrative agency intended them. As a
regulation is presumed to have been made with deliberation and full knowledge of all existing rules on the subject, it may reasonably be
concluded that its promulgation was not intended to interfere with or abrogate any earlier rule relating to the same subject, unless it is
either repugnant to or fully inclusive of the subject matter of an earlier one, or unless the reason for the earlier one is "beyond
peradventure removed."50 Every effort must be exerted to make all regulations stand -- and a later rule will not operate as a repeal of an
earlier one, if by any reasonable construction, the two can be reconciled.51

RR 12-80 imposes the GRT only on all items of income actually received, as opposed to their mere accrual, while RR 17-84 includes all
interest income in computing the GRT. RR 12-80 is superseded by the later rule, because Section 4(e) thereof is not restated in RR 17-
84. Clearly therefore, as petitioner correctly states, this particular provision was impliedly repealed when the later regulations took
effect.52

Reconciling the Two Regulations

Granting that the two regulations can be reconciled, respondent’s reliance on Section 4(e) of RR 12-80 is misplaced and deceptive. The
"accrual" referred to therein should not be equated with the determination of the amount to be used as tax base in computing the GRT.
Such accrual merely refers to an accounting method that recognizes income as earned although not received, and expenses as
incurred although not yet paid.

Accrual should not be confused with the concept of constructive possession or receipt as earlier discussed. Petitioner correctly points
out that income that is merely accrued -- earned, but not yet received -- does not form part of the taxable gross receipts; income that
has been received, albeit constructively, does.53
The word "actually," used confusingly in Section 4(e), will be clearer if removed entirely. Besides, if actually is that important, accrual
should have been eliminated for being a mere surplusage. The inclusion of accrual stresses the fact that Section 4(e) does not
distinguish between actual and constructive receipt. It merely focuses on the method of accounting known as the accrual system.

Under this system, income is accrued or earned in the year in which the taxpayer’s right thereto becomes fixed and definite, even
though it may not be actually received until a later year; while a deduction for a liability is to be accrued or incurred and taken when the
liability becomes fixed and certain, even though it may not be actually paid until later.54

Under any system of accounting, no duty or liability to pay an income tax upon a transaction arises until the taxable year in which the
event constituting the condition precedent occurs.55 The liability to pay a tax may thus arise at a certain time and the tax paid within
another given time.56

In reconciling these two regulations, the earlier one includes in the tax base for GRT all income, whether actually or constructively
received, while the later one includes specifically interest income. In computing the income tax liability, the only exception cited in the
later regulations is the exclusion from gross income of interest income, which is already subjected to withholding. This exception,
however, refers to a different tax altogether. To extend mischievously such exception to the GRT will certainly lead to results not
contemplated by the legislators and the administrative body promulgating the regulations.

Manila Jockey Club

Inapplicable

In Commissioner of Internal Revenue v. Manila Jockey Club, 57 we held that the term "gross receipts" shall not include money which,
although delivered, has been especially earmarked by law or regulation for some person other than the taxpayer.58

To begin, we have to nuance the definition of gross receipts 59 to determine what it is exactly. In this regard, we note that US cases have
persuasive effect in our jurisdiction, because Philippine income tax law is patterned after its US counterpart.60

"‘[G]ross receipts’ with respect to any period means the sum of: (a) The total amount received or accrued during such period from the
sale, exchange, or other disposition of x x x other property of a kind which would properly be included in the inventory of the taxpayer if
on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of its
trade or business, and (b) The gross income, attributable to a trade or business, regularly carried on by the taxpayer, received or
accrued during such period x x x."61

"x x x [B]y gross earnings from operations x x x was intended all operations xxx including incidental, subordinate, and subsidiary
operations, as well as principal operations."62

"When we speak of the ‘gross earnings’ of a person or corporation, we mean the entire earnings or receipts of such person or
corporation from the business or operations to which we refer."63

From these cases, "gross receipts"64 refer to the total, as opposed to the net, income. 65 These are therefore the total receipts before any
deduction66 for the expenses of management.67 Webster’s New International Dictionary, in fact, defines gross as "whole or entire."

Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in many jurisdictions.68 Tax thereon is
generally held to be within the power of a state to impose; or constitutional, unless it interferes with interstate commerce or violates the
requirement as to uniformity of taxation.69

Moreover, we have emphasized that the BIR has consistently ruled that "gross receipts" does not admit of any deduction. 70 Following
the principle of legislative approval by reenactment,71 this interpretation has been adopted by the legislature throughout the various
reenactments of then Section 119 of the Tax Code.72

Given that a tax is imposed upon total receipts and not upon net earnings,73 shall the income withheld be included in the tax base upon
which such tax is imposed? In other words, shall interest income constructively received still be included in the tax base for computing
the GRT?

We rule in the affirmative.

Manila Jockey Club does not apply to this case. Earmarking is not the same as withholding. Amounts earmarked do not form part of
gross receipts, because, although delivered or received, these are by law or regulation reserved for some person other than the
taxpayer. On the contrary, amounts withheld form part of gross receipts, because these are in constructive possession and not subject
to any reservation, the withholding agent being merely a conduit in the collection process.

The Manila Jockey Club had to deliver to the Board on Races, horse owners and jockeys amounts that never became the property of
the race track.74 Unlike these amounts, the interest income that had been withheld for the government became property of the financial
institutions upon constructive possession thereof. Possession was indeed acquired, since it was ratified by the financial institutions in
whose name the act of possession had been executed. The money indeed belonged to the taxpayers; merely holding it in trust was not
enough.75

The government subsequently becomes the owner of the money when the financial institutions pay the FWT to extinguish their
obligation to the government. As this Court has held before, this is the consideration for the transfer of ownership of the FWT from
these institutions to the government.76 It is ownership that determines whether interest income forms part of taxable gross
receipts.77 Being originally owned by these financial institutions as part of their interest income, the FWT should form part of their
taxable gross receipts.

Besides, these amounts withheld are in payment of an income tax liability, which is different from a percentage tax liability.
Commissioner of Internal Revenue v. Tours Specialists, Inc. aptly held thus:78
"x x x [G]ross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not
belong to them and do not redound to the taxpayer’s benefit; and it is not necessary that there must be a law or regulation which would
exempt such monies and receipts within the meaning of gross receipts under the Tax Code."79

In the construction and interpretation of tax statutes and of statutes in general, the primary consideration is to ascertain and give effect
to the intention of the legislature.80 We ought to impute to the lawmaking body the intent to obey the constitutional mandate, as long as
its enactments fairly admit of such construction.81 In fact, "x x x no tax can be levied without express authority of law, but the statutes
are to receive a reasonable construction with a view to carrying out their purpose and intent."82

Looking again into Sections 24(e)(1) and 119 of the Tax Code, we find that the first imposes an income tax; the second, a percentage
tax. The legislature clearly intended two different taxes. The FWT is a tax on passive income, while the GRT is on business.83 The
withholding of one is not equivalent to the payment of the other.

Non-Exemption of FWT from GRT:

Neither Unjust nor Absurd

Taxing the people and their property is essential to the very existence of government. Certainly, one of the highest attributes of
sovereignty is the power of taxation,84 which may legitimately be exercised on the objects to which it is applicable to the utmost extent
as the government may choose.85 Being an incident of sovereignty, such power is coextensive with that to which it is an incident.86 The
interest on deposits and yield on deposit substitutes of financial institutions, on the one hand, and their business as such, on the other,
are the two objects over which the State has chosen to extend its sovereign power. Those not so chosen are, upon the soundest
principles, exempt from taxation.87

While courts will not enlarge by construction the government’s power of taxation,88 neither will they place upon tax laws so loose a
construction as to permit evasions, merely on the basis of fanciful and insubstantial distinctions.89 When the legislature imposes a tax on
income and another on business, the imposition must be respected. The Tax Code should be so construed, if need be, as to avoid
empty declarations or possibilities of crafty tax evasion schemes. We have consistently ruled thus:

"x x x [I]t is upon taxation that the [g]overnment chiefly relies to obtain the means to carry on its operations, and it is of the utmost
importance that the modes adopted to enforce the collection of the taxes levied should be summary and interfered with as little as
possible. x x x."90

"Any delay in the proceedings of the officers, upon whom the duty is devolved of collecting the taxes, may derange the operations of
government, and thereby cause serious detriment to the public."91

"No government could exist if all litigants were permitted to delay the collection of its taxes."92

A taxing act will be construed, and the intent and meaning of the legislature ascertained, from its language. 93 Its clarity and implied
intent must exist to uphold the taxes as against a taxpayer in whose favor doubts will be resolved. 94 No such doubts exist with respect to
the Tax Code, because the income and percentage taxes we have cited earlier have been imposed in clear and express language for
that purpose.95

This Court has steadfastly adhered to the doctrine that its first and fundamental duty is the application of the law according to its
express terms -- construction and interpretation being called for only when such literal application is impossible or inadequate without
them.96 In Quijano v. Development Bank of the Philippines,97 we stressed as follows:

"No process of interpretation or construction need be resorted to where a provision of law peremptorily calls for application." 98

A literal application of any part of a statute is to be rejected if it will operate unjustly, lead to absurd results, or contradict the evident
meaning of the statute taken as a whole.99 Unlike the CA, we find that the literal application of the aforesaid sections of the Tax Code
and its implementing regulations does not operate unjustly or contradict the evident meaning of the statute taken as a whole. Neither
does it lead to absurd results. Indeed, our courts are not to give words meanings that would lead to absurd or unreasonable
consequences.100 We have repeatedly held thus:

"x x x [S]tatutes should receive a sensible construction, such as will give effect to the legislative intention and so as to avoid an unjust
or an absurd conclusion."101

"While it is true that the contemporaneous construction placed upon a statute by executive officers whose duty is to enforce it should be
given great weight by the courts, still if such construction is so erroneous, x x x the same must be declared as null and void."102

It does not even matter that the CTA, like in China Banking Corporation, 103 relied erroneously on Manila Jockey Club. Under our tax
system, the CTA acts as a highly specialized body specifically created for the purpose of reviewing tax cases.104 Because of its
recognized expertise, its findings of fact will ordinarily not be reviewed, absent any showing of gross error or abuse on its part. 105 Such
findings are binding on the Court and, absent strong reasons for us to delve into facts, only questions of law are open for
determination.106

Respondent claims that it is entitled to a refund on the basis of excess GRT payments. We disagree.

Tax refunds are in the nature of tax exemptions. 107 Such exemptions are strictly construed against the taxpayer, being highly
disfavored108 and almost said "to be odious to the law." Hence, those who claim to be exempt from the payment of a particular tax must
do so under clear and unmistakable terms found in the statute. They must be able to point to some positive provision, not merely a
vague implication,109 of the law creating that right.110
The right of taxation will not be surrendered, except in words too plain to be mistaken.1âwphi1 The reason is that the State cannot strip
itself of this highest attribute of sovereignty -- its most essential power of taxation -- by vague or ambiguous language. Since tax refunds
are in the nature of tax exemptions, these are deemed to be "in derogation of sovereign authority and to be construed strictissimi juris
against the person or entity claiming the exemption."111

No less than our 1987 Constitution provides for the mechanism for granting tax exemptions. 112 They certainly cannot be granted by
implication or mere administrative regulation. Thus, when an exemption is claimed, it must indubitably be shown to exist, for every
presumption is against it,113 and a well-founded doubt is fatal to the claim.114 In the instant case, respondent has not been able to
satisfactorily show that its FWT on interest income is exempt from the GRT. Like China Banking Corporation, its argument creates a tax
exemption where none exists.115

No exemptions are normally allowed when a GRT is imposed. It is precisely designed to maintain simplicity in the tax collection effort of
the government and to assure its steady source of revenue even during an economic slump.116

No Double Taxation

We have repeatedly said that the two taxes, subject of this litigation, are different from each other. The basis of their imposition may be
the same, but their natures are different, thus leading us to a final point. Is there double taxation?

The Court finds none.

Double taxation means taxing the same property twice when it should be taxed only once; that is, "x x x taxing the same person twice
by the same jurisdiction for the same thing."117 It is obnoxious when the taxpayer is taxed twice, when it should be but once.118 Otherwise
described as "direct duplicate taxation,"119 the two taxes must be imposed on the same subject matter, for the same purpose, by the
same taxing authority, within the same jurisdiction, during the same taxing period; and they must be of the same kind or character.120

First, the taxes herein are imposed on two different subject matters. The subject matter of the FWT is the passive income generated in
the form of interest on deposits and yield on deposit substitutes, while the subject matter of the GRT is the privilege of engaging in the
business of banking.

A tax based on receipts is a tax on business rather than on the property; hence, it is an excise 121 rather than a property tax.122 It is not an
income tax, unlike the FWT. In fact, we have already held that one can be taxed for engaging in business and further taxed differently
for the income derived therefrom.123 Akin to our ruling in Velilla v. Posadas,124 these two taxes are entirely distinct and are assessed
under different provisions.

Second, although both taxes are national in scope because they are imposed by the same taxing authority -- the national government
under the Tax Code -- and operate within the same Philippine jurisdiction for the same purpose of raising revenues, the taxing periods
they affect are different. The FWT is deducted and withheld as soon as the income is earned, and is paid after every calendar quarter in
which it is earned. On the other hand, the GRT is neither deducted nor withheld, but is paid only after every taxable quarter in which it is
earned.

Third, these two taxes are of different kinds or characters. The FWT is an income tax subject to withholding, while the GRT is a
percentage tax not subject to withholding.

In short, there is no double taxation, because there is no taxing twice, by the same taxing authority, within the same jurisdiction, for the
same purpose, in different taxing periods, some of the property in the territory.125 Subjecting interest income to a 20% FWT and
including it in the computation of the 5% GRT is clearly not double taxation.

WHEREFORE, the Petition is GRANTED. The assailed Decision and Resolution of the Court of Appeals are hereby REVERSED and
SET ASIDE. No costs.

SO ORDERED.
G.R. No. 180651               July 30, 2014

NURSERY CARE CORPORATION; SHOEMART, INC.; STAR APPLIANCE CENTER, INC.; H&B, INC.; SUPPLIES STATION, INC.;
and HARDWARE WORKSHOP, INC., Petitioners,
vs.
ANTHONY ACEVEDO, in his capacity as THE TREASURER OF MANILA; and THE CITY OF MANILA, Respondents.

DECISION

BERSAMIN, J.:

The issue here concerns double taxation. There is double taxation when the same taxpayer is taxed twice when he should be taxed
only once for the same purpose by the same taxing authority within the same jurisdiction during the same taxing period, and the taxes
are of the same kind or character. Double taxation is obnoxious.

The Case

Under review are the resolution promulgated in CA-G.R. SP No. 72191 on June 18, 2007, 1 whereby the Court of Appeals (CA) denied
petitioners' appeal for lack of jurisdiction; and the resolution promulgated on November 14, 2007,2 whereby the CA denied their motion
for reconsideration for its lack of merit.

Antecedents

The City of Manila assessed and collected taxes from the individual petitioners pursuant to Section 15 (Tax on Wholesalers,
Distributors, or Dealers) and Section 17 (Tax on Retailers) of the Revenue Code of Manila.3 At the same time, the City of Manila
imposed additional taxes upon the petitioners pursuant to Section 21 ofthe Revenue Code of Manila,4 as amended, as a condition for
the renewal of their respective business licenses for the year 1999. Section 21 of the Revenue Code of Manila stated:

Section 21. Tax on Business Subject to the Excise, Value-Added or Percentage Taxes under the NIRC - On any of the following
businesses and articles of commerce subject to the excise, value-added or percentage taxes under the National Internal Revenue
Code, hereinafter referred to as NIRC, as amended, a tax of FIFTY PERCENT (50%) OF ONE PERCENT (1%) per annum on the
gross sales or receipts of the preceding calendar year is hereby imposed:

A) On person who sells goods and services in the course of trade or businesses; x x x PROVIDED, that all registered businesses in the
City of Manila already paying the aforementioned tax shall be exempted from payment thereof.

To comply with the City of Manila’s assessmentof taxes under Section 21, supra, the petitioners paid under protest the following
amounts corresponding to the first quarter of 1999,5 to wit:

(a) Nursery Care Corporation ₱595,190.25

(b) Shoemart Incorporated ₱3,283,520.14

(c) Star Appliance Center ₱236,084.03

(d) H & B, Inc. ₱1,271,118.74

(e) Supplies Station, Inc. ₱239,501.25

(f) Hardware Work Shop, Inc. ₱609,953.24

By letter dated March 1, 1999, the petitioners formally requested the Office of the City Treasurer for the tax credit or refund of the local
business taxes paid under protest.6 However, then City Treasurer Anthony Acevedo (Acevedo) denied the request through his letter of
March 10, 1999.7

On April 8, 1999, the petitioners, through their representative, Cecilia R. Patricio, sought the reconsideration of the denial of their
request.8 Still, the City Treasurer did not reconsider.9 In the meanwhile, Liberty Toledo succeeded Acevedo as the City Treasurer of
Manila.10

On April 29, 1999, the petitioners filed their respective petitions for certiorariin the Regional Trial Court (RTC) in Manila. The petitions,
docketed as Civil Cases Nos. 99-93668 to 99-93673,11 were initially raffled to different branches, but were soon consolidated in Branch
34.12 After the presiding judge of Branch 34 voluntarily inhibited himself, the consolidated cases were transferred to Branch 23, 13 but
were again re-raffled to Branch 19 upon the designation of Branch 23 as a special drugs court.14

The parties agreed on and jointly submitted the following issues for the consideration and resolution of the RTC, namely:

(a) Whether or not the collection of taxes under Section 21 of Ordinance No. 7794, as amended, constitutes double taxation.

(b) Whether or not the failure of the petitioners to avail of the statutorily provided remedy for their tax protest on the ground of
unconstitutionality, illegality and oppressiveness under Section 187 of the Local Government Code renders the present action
dismissible for non-exhaustion of administrative remedy.15

Decision of the RTC

On April 26, 2002, the RTC rendered its decision, holding thusly:

The Court perceives of no instance of the constitutionally proscribed double taxation, in the strict, narrow or obnoxious sense, imposed
upon the petitioners under Section 15 and 17, on the one hand, and under Section 21, on the other, of the questioned Ordinance. The
tax imposed under Section 15 and 17, as against that imposed under Section 21, are levied against different tax objects or subject
matter. The tax under Section 15 is imposed upon wholesalers, distributors or dealers, while that under Section 17 is imposedupon
retailers. In short, taxes imposed under Section 15 and 17 is a tax on the business of wholesalers, distributors, dealers and retailers. On
the other hand, the tax imposed upon herein petitioners under Section 21 is not a tax against the business of the petitioners (as
wholesalers, distributors, dealers or retailers)but is rather a tax against consumers or end-users of the articles sold by petitioners. This
is plain from a reading of the modifying paragraph of Section 21 which says:

"The tax shall be payable by the person paying for the services rendered and shall be paid to the person rendering the services who is
required to collect and pay the tax within twenty (20) days after the end of each quarter." (Underscoring supplied)

In effect, the petitioners only act as the collection or withholding agent of the City while the ones actually paying the tax are the
consumers or end-users of the articles being sold by petitioners. The taxes imposed under Sec. 21 represent additional amounts added
by the business establishment to the basic prices of its goods and services which are paid by the end-users to the businesses. It is
actually not taxes on the business of petitioners but on the consumers. Hence, there is no double taxation in the narrow, strict or
obnoxious sense,involved in the imposition of taxes by the City of Manila under Sections 15, 17 and 21 of the questioned Ordinance.
This in effect resolves infavor of the constitutionality of the assailed sections of Ordinance No. 7807 of the City of Manila.

Petitioners, likewise, pray the Court to direct respondents to cease and desist from implementing Section 21 of the questioned
Ordinance. That the Court cannot do, without doing away with the mandatory provisions of Section 187 of the Local Government Code
which distinctly commands that an appeal questioning the constitutionality or legality of a tax ordinance shall not have the effectof
suspending the effectivity of the ordinance and the accrual and payment of the tax, fee or charge levied therein. This is so because an
ordinance carries with it the presumption of validity.

xxx

With the foregoing findings, petitioners’ prayer for the refund of the amounts paid by them under protest must, likewise, fail.

Wherefore, the petitions are dismissed. Without pronouncement as to costs.

SO ORDERED.16

The petitioners appealed to the CA.17

Ruling of the CA

On June 18, 2007, the CA deniedthe petitioners’ appeal, ruling as follows:

The six (6) cases were consolidated on a common question of fact and law, that is, whether the act ofthe City Treasurer of Manila of
assessing and collecting business taxes under Section 21of Ordinance 7807, on top of other business taxes alsoassessed and
collected under the previous sections of the same ordinance is a violation of the provisions of Section 143 of the Local Government
Code.

Clearly, the disposition of the present appeal in these consolidated cases does not necessitate the calibration of the whole evidence as
there is no question or doubt as to the truth or the falsehood of the facts obtaining herein, as both parties agree thereon. The present
case involves a question of law that would not lend itself to an examination or evaluation by this Court of the probative value of the
evidence presented.

Thus the Court is constrained todismiss the instant petition for lack of jurisdiction under Section 2,Rule 50 of the 1997 Rules on Civil
Procedure which states:
"Sec. 2. Dismissal of improper appeal to the Court of Appeals. – An appeal under Rule 41 taken from the Regional Trial Court to the
Court of Appeals raising only questions of law shall be dismissed, issues purely of law not being reviewable by said court. similarly, an
appeal by notice of appeal instead of by petition for review from the appellate judgment of a Regional Trial Court shall be dismissed.

An appeal erroneously taken tothe Court of Appeals shall not be transferred to the appropriate court but shall be dismissed outright.

WHEREFORE, the foregoing considered, the appeal is DISMISSED.

SO ORDERED.18

The petitioners moved for reconsideration, but the CA denied their motion through the resolution promulgated on November 14, 2007.19

Issues

The petitioners now appeal, raising the following grounds, to wit:

A.

THE COURT OF APPEALS, IN DISMISSING THE APPEAL OF THE PETITIONERS AND DENYING THEIR MOTION FOR
RECONSIDERATION, ERRED INRULING THAT THE ISSUE INVOLVED IS A PURELY LEGAL QUESTION.

B.

THE COURT OF APPEALS ERRED IN NOT REVERSING THE DECISION OF BRANCH 19 OF THE REGIONAL TRIAL COURT OF
MANILA DATED 26 APRIL 2002 DENYING PETITIONERS’ PRAYER FOR REFUND OF THE AMOUNTS PAID BY THEM UNDER
PROTEST AND DISMISSING THE PETITION FOR CERTIORARI FILED BY THE PETITIONERS.

C.

THE COURT OF APPEALS ERRED IN NOT RULING THAT THE ACT OF THE CITY TREASURER OF MANILA IN IMPOSING,
ASSESSING AND COLLECTING THE ADDITIONAL BUSINESS TAX UNDER SECTION 21 OFORDINANCE NO. 7794, AS
AMENDED BY ORDINANCE NO. 7807, ALSO KNOWN AS THE REVENUE CODE OF THE CITY OFMANILA, IS CONSTITUTIVE OF
DOUBLE TAXATION AND VIOLATIVE OF THE LOCAL GOVERNMENT CODE OF 1991.20

The main issues for resolution are, therefore, (1) whether or not the CA properly denied due course to the appeal for raising pure
questions of law; and (2) whether or not the petitioners were entitled to the tax credit or tax refund for the taxes paid under Section 21,
supra.

Ruling

The appeal is meritorious.

1.

The CA did not err in dismissing the appeal;

but the rules should be liberally applied
for the sake of justice and equity

The Rules of Courtprovides three modes of appeal from the decisions and final orders of the RTC, namely: (1) ordinary appeal or
appeal by writ of error under Rule 41, where the decisionsand final orders were rendered in civil or criminal actions by the RTC in the
exercise of original jurisdiction; (2) petition for review under Rule 42, where the decisions and final orders were rendered by the RTC in
the exerciseof appellate jurisdiction; and (3) petition for review on certiorarito the Supreme Court under Rule 45. 21 The first mode of
appeal is taken to the CA on questions of fact, or mixed questions of fact and law. The second mode of appeal is brought to the CA on
questions of fact, of law, or mixed questions of fact and law. 22 The third mode of appeal is elevated to the Supreme Court only on
questions of law.23

The distinction between a question oflaw and a question of fact is well established. On the one hand, a question of law ariseswhen
there is doubt as to what the law is on a certain state of facts; on the other, there is a question of fact when the doubt arises asto the
truth or falsity of the alleged facts.24 According to Leoncio v. De Vera:25

x x x For a question to beone of law, the same must not involve an examination of the probative value ofthe evidence presented by the
litigants or any of them. The resolution of the issue must restsolely on what the law provides on the given set of circumstances. Once it
is clear that the issue invites a review of the evidence presented, the question posed is one of fact. Thus, the test of whether a question
isone of law or offact is not the appellation given to such question by the party raising the same; rather, it is whether the appellate court
can determine the issue raised without reviewing or evaluating the evidence, in which case, it is a question oflaw; otherwise it is a
question of fact.26

The nature of the issues to be raised on appeal can be gleaned from the appellant’s notice of appeal filed in the trial court, and from the
appellant’s brief submitted to the appellate court.27 In this case, the petitioners filed a notice of appeal in which they contended that the
April 26, 2002 decision and the order of July 17, 2002 issued by the RTC denying their consolidated motion for reconsideration were
contrary to the facts and law obtaining in the consolidated cases. 28 In their consolidated memorandum filed in the CA, they essentially
assailed the RTC’s ruling that the taxes imposed on and collected from the petitioners under Section 21 of the Revenue Code of Manila
constituted double taxation in the strict, narrow or obnoxious sense. Considered together, therefore, the notice of appeal and
consolidated memorandum evidently did notraise issues that required the reevaluation of evidence or the relevance of surrounding
circumstances.
The CA rightly concluded that the petitioners thereby raised only a question of law. The dismissal of their appeal was proper, strictly
speaking, because Section 2, Rule 50 of the Rules of Court provides that an appeal from the RTC to the CA raising only questions of
law shall be dismissed;

and that an appeal erroneously taken to the CA shall be outrightly dismissed.29

2.

Collection of taxes pursuant to Section 21 of the

Revenue Code of Manila constituted double taxation

The foregoing notwithstanding, the Court, given the circumstances obtaining herein and in light of jurisprudence promulgated
subsequent to the filing of the petition, deems it fitting and proper to adopt a liberal approach in order to render a justand speedy
disposition of the substantive issue at hand. Hence, we resolve, bearing inmind the following pronouncement in Go v. Chaves:30

Our rules of procedure are designed to facilitate the orderly disposition of cases and permit the prompt disposition of unmeritorious
cases which clog the court dockets and do little more than waste the courts’ time. These technical and procedural rules, however, are
intended to ensure, rather than suppress, substantial justice. A deviation from their rigid enforcement may thus be allowed, as
petitioners should be given the fullest opportunity to establish the merits of their case, rather than lose their property on mere
technicalities. We held in Ong Lim Sing, Jr. v. FEB Leasing and Finance Corporation that:

Courts have the prerogative to relax procedural rules of even the most mandatory character, mindful of the duty to reconcile both the
need to speedily put an end to litigation and the parties' right to due process.In numerous cases, this Court has allowed liberal
construction of the rules when to do so would serve the demands of substantial justice and equity.

The petitioners point out that although Section 21 of the Revenue Code of Manila was not itself unconstitutional or invalid, its
enforcement against the petitioners constituted double taxation because the local business taxes under Section 15 and Section 17 of
the Revenue Code of Manila were already being paid by them.31 They contend that the proviso in Section 21 exempted all registered
businesses in the City of Manila from paying the tax imposed under Section 21; 32 and that the exemption was more in accord with
Section 143 of the Local Government Code,33 the law that vested in the municipal and city governments the power to impose business
taxes.

The respondents counter, however, that double taxation did not occur from the imposition and collection of the tax pursuant to Section
21 of the Revenue Code of Manila;34 that the taxes imposed pursuant to Section 21 were in the concept of indirect taxes upon the
consumers of the goods and services sold by a business establishment; 35 and that the petitioners did not exhaust their administrative
remedies by first appealing to the Secretary of Justice to challenge the constitutionalityor legality of the tax ordinance.36

In resolving the issue of double taxation involving Section 21 of the Revenue Code of Manila, the Court is mindful of the ruling in City of
Manila v. Coca-Cola Bottlers Philippines, Inc.,37 which has been reiterated in Swedish Match Philippines, Inc. v. The Treasurer of the
City of Manila.38 In the latter, the Court has held:

x x x [T]he issue of double taxation is not novel, as it has already been settled by this Court in The City of Manila v. Coca-Cola Bottlers
Philippines, Inc.,in this wise:

Petitioners obstinately ignore the exempting proviso in Section 21 of Tax Ordinance No. 7794, to their own detriment.1âwphi1 Said
exempting proviso was precisely included in said section so as to avoid double taxation.

Double taxation means taxingthe same property twice when it should be taxed only once; that is, "taxing the same person twice by the
same jurisdictionfor the same thing." It is obnoxious when the taxpayer is taxed twice, when it should be but once. Otherwise described
as "direct duplicate taxation," the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing
authority, within the same jurisdiction, during the same taxing period; and the taxes must be of the same kind or character.

Using the aforementioned test, the Court finds that there is indeed double taxation if respondent is subjected to the taxes under both
Sections 14 and 21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the same subject matter – the privilege of doing
business in the City of Manila; (2) for the same purpose – to make persons conducting business within the City of Manila contribute
tocity revenues; (3) by the same taxing authority – petitioner Cityof Manila; (4) within the same taxing jurisdiction – within the territorial
jurisdiction of the City of Manila; (5) for the same taxing periods – per calendar year; and (6) of the same kind or character – a local
business tax imposed on gross sales or receipts of the business.

The distinction petitioners attempt to make between the taxes under Sections 14 and 21 of Tax Ordinance No. 7794 is specious. The
Court revisits Section 143 of the LGC, the very source of the power of municipalities and cities to impose a local business tax, and to
which any local business tax imposed by petitioner City of Manila must conform. It is apparent from a perusal thereof that when a
municipality or city has already imposed a business tax on manufacturers, etc.of liquors, distilled spirits, wines, and any other article of
commerce, pursuant to Section 143(a) of the LGC, said municipality or city may no longer subject the same manufacturers, etc.to a
business tax under Section 143(h) of the same Code. Section 143(h) may be imposed only on businesses that are subject to excise
tax, VAT, or percentagetax under the NIRC, and that are "not otherwise specified in preceding paragraphs." In the same way,
businesses such as respondent’s, already subject to a local business tax under Section 14 of Tax Ordinance No. 7794 [which is based
on Section 143(a) of the LGC], can no longer be made liable for local business tax under Section 21 of the same Tax Ordinance [which
is based on Section 143(h) of the LGC].

Based on the foregoing reasons, petitioner should not have been subjected to taxes under Section 21 of the ManilaRevenue Code for
the fourth quarter of 2001, considering thatit had already been paying local business tax under Section 14 of the same ordinance.

xxxx
Accordingly, respondent’s assessment under both Sections 14 and 21 had no basis. Petitioner is indeed liable to pay business taxes to
the City of Manila; nevertheless, considering that the former has already paid these taxes under Section 14 of the Manila Revenue
Code, it is exempt from the same payments under Section 21 of the same code. Hence, payments made under Section 21 must be
refunded in favor of petitioner.

It is undisputed thatpetitioner paid business taxes based on Sections 14 and 21 for the fourth quarter of 2001 in the total amount of
₱470,932.21. Therefore, it is entitled to a refund of ₱164,552.04 corresponding to the payment under Section 21 of the Manila Revenue
Code.

On the basis of the rulings in Coca-Cola Bottlers Philippines, Inc. and Swedish Match Philippines, Inc., the Court now holds that all the
elements of double taxation concurred upon the Cityof Manila’s assessment on and collection from the petitioners of taxes for the first
quarter of 1999 pursuant to Section 21 of the Revenue Code of Manila.

Firstly, because Section 21 of the Revenue Code of Manila imposed the tax on a person who sold goods and services in the course of
trade or business based on a certain percentage ofhis gross sales or receipts in the preceding calendar year, while Section 15 and
Section 17 likewise imposed the tax on a person who sold goods and services in the course of trade or business but only identified
such person with particularity, namely, the wholesaler, distributor or dealer (Section 15), and the retailer (Section 17), all the taxes –
being imposed on the privilege of doing business in the City of Manila in order to make the taxpayers contributeto the city’s revenues –
were imposed on the same subject matter and for the same purpose.

Secondly, the taxes were imposed by the same taxing authority (the City of Manila) and within the same jurisdiction in the same taxing
period (i.e., per calendar year).

Thirdly, the taxes were all in the nature of local business taxes.

We note that although Coca-Cola Bottlers Philippines, Inc. and Swedish Match Philippines, Inc. involved Section 21 vis-à-vis Section 14
(Tax on Manufacturers, Assemblers and Other Processors)39 of the Revenue Code of Manila, the legal principlesenunciated therein
should similarly apply because Section 15 (Tax on Wholesalers, Distributors, or Dealers)and Section 17 (Tax on Retailers) of the
Revenue Code of Manila imposed the same nature of tax as that imposed under Section 14, i.e., local business tax, albeit on a different
subject matter or group of taxpayers.

In fine, the imposition of the tax under Section 21 of the Revenue Code of Manila constituted double taxation, and the taxes collected
pursuant thereto must be refunded.

WHEREFORE, the Court GRANTS the petition for review on certiorari; REVERSES and SETS ASIDE the resolutions promulgated on
June 18, 2007 and November 14, 2007 in CA-G.R. SP No. 72191; and DIRECTS the City of Manila to refund the payments made by
the petitioners of the taxes assessed and collected for the first quarter of 1999 pursuant to Section 21 of the Revenue Code of Manila.

No pronouncement on costs of suit.

SO ORDERED.
G.R. Nos. 193383-84, January 14, 2015 ]

CBK POWER COMPANY LIMITED, PETITIONER, VS. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

[G.R. NOS. 193407-08]

COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. CBK POWER COMPANY LIMITED, RESPONDENT.

DECISION

PERLAS-BERNABE, J.:

Assailed in these consolidated petitions for review on certiorari[1] are the Decision[2] dated March 29, 2010 and the Resolution[3] dated
August 16, 2010 of the Court of Tax Appeals (CTA) En Banc in C.T.A. E.B. Nos. 469 and 494, which affirmed the Decision[4] dated
August 28, 2008, the Amended Decision[5] dated February 12, 2009, and the Resolution[6] dated May 7, 2009 of the CTA First Division
in CTA Case Nos. 6699, 6884, and 7166 granting CBK Power Company Limited (CBK Power) a refund of its excess final withholding
tax for the taxable years 2001 to 2003.

The Facts

CBK Power is a limited partnership duly organized and existing under the laws of the Philippines, and primarily engaged in the
development and operation of the Caliraya, Botocan, and Kalayaan hydroelectric power generating plants in Laguna (CBK Project). It is
registered with the Board of Investments (BOI) as engaged in a preferred pioneer area of investment under the Omnibus Investment
Code of 1987.[7]

To finance the CBK Project, CBK Power obtained in August 2000 a syndicated loan from several foreign banks,[8]  i.e., BNP Paribas,
Dai-ichi Kangyo Bank, Limited, Industrial Bank of Japan, Limited, and Societe General (original lenders),  acting through an Inter-
Creditor Agent, Dai-ichi Kangyo Bank, a Japanese bank that subsequently merged with the Industrial Bank of Japan, Limited (Industrial
Bank of Japan) and the Fuji Bank, Limited (Fuji Bank), with the merged entity being named as Mizuho Corporate Bank (Mizuho Bank).
One of the merged banks, Fuji Bank, had a branch in the Philippines, which became a branch of Mizuho Bank as a result of the merger.
The Industrial Bank of Japan and Mizuho Bank are residents of Japan for purposes of income taxation, and recognized as such under
the relevant provisions of the income tax treaties between the Philippines and Japan.[9]

Certain portions of the loan were subsequently assigned by the original lenders to various other banks, including Fortis Bank
(Nederland) N.V. (Fortis-Netherlands) and Raiffesen Zentral Bank Osterreich AG (Raiffesen Bank). Fortis-Netherlands, in turn,
assigned its portion of the loan to Fortis Bank S.A./N.V. (Fortis-Belgium), a resident of Belgium. Fortis-Netherlands and Raiffesen Bank,
on the other hand, are residents of Netherlands and Austria, respectively.[10]

In February 2001, CBK Power borrowed money from Industrial Bank of Japan, Fortis-Netherlands, Raiffesen Bank, Fortis-Belgium, and
Mizuho Bank for which it remitted interest payments from May 2001 to May 2003.[11]  It allegedly withheld final taxes from said payments
based on the following rates, and paid the same to the Revenue District Office No. 55 of the Bureau of Internal Revenue (BIR): (a)
fifteen percent (15%) for Fortis-Belgium, Fortis-Netherlands, and Raiffesen Bank; and (b) twenty percent (20%) for Industrial Bank of
Japan and Mizuho Bank.[12]

However, according to CBK Power, under the relevant tax treaties between the Philippines and the respective countries in which
each of the banks is a resident, the interest income derived by the aforementioned banks are subject only to a preferential tax rate of
10%, viz.:[13]

BANK COUNTRY OF PREFERENTIAL RATE

  RESIDENCE UNDER THE RELEVANT TAX TREATY

Fortis Bank S.A./N.V. Belgium 10% (Article 11[1], RP-Belgium Tax Treaty)

Industrial Bank of Japan Japan 10% (Article 11[3], RP-Japan Tax Treaty)

Raiffesen Zentral Bank Osterreich AG Austria 10% (Article 11[3], RP-Austria Tax Treaty)

Mizuho Corporate Bank Japan 10% (Article 11[3], RP-Japan Tax Treaty)

Accordingly, on April 14, 2003, CBK Power filed a claim for refund of its excess final withholding taxes allegedly erroneously withheld
and collected for the years 2001 and 2002 with the BIR Revenue Region No. 9.  The claim for refund of excess final withholding taxes
in 2003 was subsequently filed on March 4, 2005.[14]

The Commissioner of Internal Revenue’s (Commissioner) inaction on said claims prompted CBK Power to file petitions for review
before the CTA, viz.:[15]

(1) CTA Case No. 6699 was filed by CBK Power on June 6, 2003 seeking the refund of excess final withholding tax in the total amount
of P6,393,267.20 covering the year 2001 with respect to interest income derived by [Fortis-Belgium], Industrial Bank of Japan, and
[Raiffesen Bank]. An Answer was filed by the Commissioner on July 25, 2003.

(2) CTA Case No. 6884 was filed by CBK Power on March 5, 2004 seeking for the refund of the amount of P8,136,174.31 covering
[the] year 2002 with respect to interest income derived by [Fortis-Belgium], Industrial Bank of Japan, [Mizuho Bank], and [Raiffesen
Bank]. The Commissioner filed his Answer on May 7, 2004.

xxxx

(3) CTA Case No. 7166 was filed by CBK [Power] on March 9, 2005 seeking for the refund of [the amount of] P1,143,517.21 covering
[the] year 2003 with respect to interest income derived by [Fortis-Belgium], and [Raiffesen Bank]. The Commissioner filed his Answer
on May 9, 2005. (Emphases supplied)

CTA Case Nos. 6699 and 6884 were consolidated first on June 18, 2004.  Subsequently, however, all three cases – CTA Case Nos.
6699, 6884, and 7166 – were consolidated in a Resolution dated August 3, 2005.[16]

The CTA First Division Rulings

In a Decision[17] dated August 28, 2008, the CTA First Division granted the petitions and ordered the refund of the amount
of P15,672,958.42 upon a finding that the relevant tax treaties were applicable to the case.[18] It cited DA-ITAD Ruling No. 099-
03[19] dated July 16, 2003, issued by the BIR, confirming CBK Power’s claim that the interest payments it made to Industrial Bank of
Japan and Raiffesen Bank were subject to a final withholding tax rate of only 10% of the gross amount of interest, pursuant to Article
11 of the Republic of the Philippines (RP)-Austria and RP-Japan tax treaties. However, in DA-ITAD Ruling No. 126-03[20] dated August
18, 2003, also issued by the BIR, interest payments to Fortis-Belgium were likewise subjected to the same rate pursuant to the Protocol
Amending the RP-Belgium Tax Treaty, the provisions of which apply on income derived or which accrued beginning January 1, 2000.
With respect to interest payments made to Fortis-Netherlands before it assigned its portion of the loan to Fortis-Belgium, the CTA First
Division likewise granted the preferential rate.[21]

The CTA First Division categorically declared in the August 28, 2008 Decision that the required International Tax Affairs Division (ITAD)
ruling was not a condition sine qua non for the entitlement of the tax relief sought by CBK Power,[22] however, upon motion for
reconsideration[23] filed by the Commissioner, the CTA First Division amended its earlier decision by reducing the amount of the refund
from P15,672,958.42 to P14,835,720.39 on the ground that CBK Power failed to obtain an ITAD ruling with respect to its transactions
with Fortis-Netherlands.[24] In its Amended Decision[25] dated February 12, 2009, the CTA First Division adopted[26] the ruling in the case
of Mirant (Philippines) Operations Corporation (formerly:  Southern Energy Asia-Pacific Operations [Phils.], Inc.) v. Commissioner of
Internal Revenue (Mirant),[27]  cited by the Commissioner in his motion for reconsideration, where the Court categorically pronounced in
its Resolution dated February 18, 2008 that an ITAD ruling must be obtained prior to availing a preferential tax rate.

CBK Power moved for the reconsideration[28] of the Amended Decision dated February 12, 2009, arguing in the main that
the Mirant case, which was resolved in a minute resolution, did not establish a legal precedent. The motion was denied, however, in a
Resolution[29] dated May 7, 2009 for lack of merit.

Undaunted, CBK Power elevated the matter to the CTA En Banc on petition for review,[30] docketed as C.T.A E.B. No. 494. The
Commissioner likewise filed his own petition for review,[31] which was docketed as C.T.A. E.B. No. 469. Said petitions were
subsequently consolidated.[32]

CBK Power raised the lone issue of whether or not an ITAD ruling is required before it can avail of the preferential tax rate. On the other
hand, the Commissioner claimed that CBK Power failed to exhaust administrative remedies when it filed its petitions before the CTA
First Division, and that said petitions were not filed within the two-year prescriptive period for initiating judicial claims for refund.[33]

The CTA En Banc Ruling

In a Decision[34] dated March 29, 2010, the CTA En Banc affirmed the ruling of the CTA First Division that a prior application with the
ITAD is indeed required by Revenue Memorandum Order (RMO) 1-2000,[35] which administrative issuance has the force and effect of
law and is just as binding as a tax treaty. The CTA En Banc declared the Mirant case as without any binding effect on CBK Power,
having been resolved by this Court merely through minute resolutions, and relied instead on the mandatory wording of RMO 1-2000, as
follows:[36]

III. Policies:

xxxx

2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form No. 0901 (Application for Relief
from Double Taxation) with ITAD at least 15 days before the transaction i.e. payment of dividends,
royalties, etc., accompanied by supporting documents justifying the relief. x x x.
The CTA En Banc further held that CBK Power’s petitions for review were filed within the two-year prescriptive period provided under
Section 229[37] of the National Internal Revenue Code of 1997[38] (NIRC), and that it was proper for CBK Power to have filed said
petitions without awaiting the final resolution of its administrative claims for refund before the BIR; otherwise, it would have completely
lost its right to seek judicial recourse if the two-year prescriptive period lapsed with no judicial claim filed.

CBK Power’s motion for partial reconsideration and the Commissioner’s motion for reconsideration of the foregoing Decision were
both denied in a Resolution[39] dated August 16, 2010 for lack of merit; hence, the present consolidated petitions.

The Issues Before the Court

In G.R. Nos. 193383-84, CBK Power submits the sole legal issue of whether the BIR may add a requirement – prior application for an
ITAD ruling – that is not found in the income tax treaties signed by the Philippines before a taxpayer can avail of preferential tax rates
under said treaties.[40]

On the other hand, in G.R. Nos. 193407-08, the Commissioner maintains that CBK Power is not entitled to a refund in the amount of
P1,143,517.21 for the period covering taxable year 2003 as it allegedly failed to exhaust administrative remedies before seeking judicial
redress.[41]

The Court’s Ruling

The Court resolves the foregoing in seriatim.

A. G.R. Nos. 193383-84

The Philippine Constitution provides for adherence to the general principles of international law as part of the law of the land. The time-
honored international principle of pacta sunt servanda demands the performance in good faith of treaty obligations on the part of the
states that enter into the agreement. In this jurisdiction, treaties have the force and effect of law.[42]

The issue of whether the failure to strictly comply with RMO No. 1-2000 will deprive persons or corporations of the benefit of a tax treaty
was squarely addressed in the recent case of Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue[43] (Deutsche
Bank), where the Court emphasized that the obligation to comply with a tax treaty must take precedence over the objective of
RMO No. 1-2000, viz.:

We recognize the clear intention of the BIR in implementing RMO No. 1-2000, but the CTA’s outright denial of a tax treaty relief for
failure to strictly comply with the prescribed period is not in harmony with the objectives of the contracting state to ensure that the
benefits granted under tax treaties are enjoyed by duly entitled persons or corporations.

Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty relief as required by RMO No. 1-
2000 should not operate to divest entitlement to the relief as it would constitute a violation of the duty required by good faith in
complying with a tax treaty. The denial of the availment of tax relief for the failure of a taxpayer to apply within the prescribed period
under the administrative issuance would impair the value of the tax treaty. At most, the application for a tax treaty relief from the BIR
should merely operate to confirm the entitlement of the taxpayer to the relief.

The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000. Logically,
noncompliance with tax treaties has negative implications on international relations, and unduly discourages foreign investors. While
the consequences sought to be prevented by RMO No. 1-2000 involve an administrative procedure, these may be remedied through
other system management processes, e.g., the imposition of a fine or penalty. But we cannot totally deprive those who are entitled
to the benefit of a treaty for failure to strictly comply with an administrative issuance requiring prior application for tax treaty
relief.[44] (Emphases and underscoring supplied)

The objective of RMO No. 1-2000 in requiring the application for treaty relief with the ITAD before a party’s availment of the preferential
rate under a tax treaty is to avert the consequences of any erroneous interpretation and/or application of treaty provisions, such as
claims for refund/credit for overpayment of taxes, or deficiency tax liabilities for underpayment.[45] However, as pointed out in Deutsche
Bank,  the underlying principle of prior application with the BIR becomes moot in refund cases – as in the present case – where the
very basis of the claim is erroneous or there is excessive payment arising from the non-availment of a tax treaty relief at the first
instance. Just as Deutsche Bank was not faulted by the Court for not complying with RMO No. 1-2000 prior to the transaction,[46] so
should CBK Power. In parallel, CBK Power could not have applied for a tax treaty relief 15 days prior to its payment of the final
withholding tax on the interest paid to its lenders precisely because it erroneously paid said tax on the basis of the regular rate as
prescribed by the NIRC, and not on the preferential tax rate provided under the different treaties. As stressed by the Court, the prior
application requirement under RMO No. 1-2000 then becomes illogical.[47]

Not only is the requirement illogical, but it is also an imposition that is not found at all in the applicable tax treaties. In  Deutsche
Bank, the Court categorically held that the BIR should not impose additional requirements that would negate the availment of the reliefs
provided for under international agreements, especially since said tax treaties do not provide for any prerequisite at all for the availment
of the benefits under said agreements.[48]

It bears reiterating that the application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the
taxpayer to the relief.[49] Since CBK Power had requested for confirmation from the ITAD on June 8, 2001 and October 28,
2002[50] before it filed on April 14, 2003 its administrative claim for refund of its excess final withholding taxes, the same should
be deemed substantial compliance with RMO No. 1-2000, as in Deutsche Bank. To rule otherwise would defeat the purpose of
Section 229 of the NIRC in providing the taxpayer a remedy for erroneously paid tax solely on the ground of failure to make prior
application for tax treaty relief.[51] As the Court exhorted in Republic v. GST Philippines, Inc.,[52] while the taxpayer has an obligation to
honestly pay the right taxes, the government has a corollary duty to implement tax laws in good faith; to discharge its duty to collect
what is due to it; and to justly return what has been erroneously and excessively given to it.[53]

In view of the foregoing, the Court holds that the CTA En Banc committed reversible error in affirming the reduction of the amount of
refund to CBK Power from P15,672,958.42 to P14,835,720.39 to exclude its transactions with Fortis-Netherlands for which no ITAD
ruling was obtained.[54] CBK Power’s petition in G.R. Nos. 193383-84 is therefore granted.

The opposite conclusion is, however, reached with respect to the Commissioner’s petition in G.R. Nos. 193407-08.

B. G.R. Nos. 193407-08

The Commissioner laments[55] that he was deprived of the opportunity to act on  the administrative claim for refund of excess final
withholding taxes covering taxable year 2003 which CBK Power filed on March 4, 2005, a Friday, then the following Wednesday, March
9, 2005, the latter hastily elevated the case on petition for review before the CTA.  He argues[56] that the failure on the part of CBK
Power to give him a reasonable time to act on said claim is violative of the doctrines of exhaustion of administrative remedies and of
primary jurisdiction.

For its part, CBK Power maintains[57] that it would be prejudicial to wait for the Commissioner’s ruling before it files its judicial claim
since it only has 2 years from the payment of the tax within which to file both its administrative and judicial claims.

The Court rules for CBK Power.

Sections 204 and 229 of the NIRC pertain to the refund of erroneously or illegally collected taxes. Section 204 applies to
administrative claims for refund, while Section 229 to judicial claims for refund. In both instances, the taxpayer’s claim must be filed
within two (2) years from the date of payment of the tax or penalty. However, Section 229 of the NIRC further states the condition that a
judicial claim for refund may not be maintained until a claim for refund or credit has been duly filed with the Commissioner. These
provisions respectively read:

SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. – The Commissioner may -

xxxx

(C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue
stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change unused stamps that have
been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed
unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or
penalty: Provided, however, That a return filed showing an overpayment shall be considered as a written claim for credit or refund.

xxxx

SEC. 229. 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, of any sum alleged to have been excessively or in any manner wrongfully collected
without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit
has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum
has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty
regardless of any supervening cause that may arise after payment: x x x. (Emphases and underscoring supplied)

Indubitably, CBK Power’s administrative and judicial claims for refund of its excess final withholding taxes covering taxable year 2003
were filed within the two-year prescriptive period, as shown by the table below:[58]

WHEN FINAL WHEN LAST DAY OF WHEN WHEN PETITION

INCOME REMITTANCE THE 2-YEAR   ADMINISTRATIVE   FOR REVIEW
TAXES WERE   RETURN   PRESCRIPTIVE   CLAIM WAS FILED   WAS FILED
WITHHELD FILED   PERIOD

February 2003 03/10/03 03/10/05 March 4, 2005 03/09/05

May 2003 06/10/03 06/10/05 March 4, 2005 03/09/05

With respect to the remittance filed on March 10, 2003, the Court agrees with the ratiocination of the CTA En Banc in debunking the
alleged failure to exhaust administrative remedies. Had CBK Power awaited the action of the Commissioner on its claim for refund prior
to taking court action knowing fully well that the prescriptive period was about to end, it would have lost not only its right to seek judicial
recourse but its right to recover the final withholding taxes it erroneously paid to the government thereby suffering irreparable damage.
[59]
Also, while it may be argued that, for the remittance filed on June 10, 2003 that was to prescribe on June 10, 2005, CBK Power could
have waited for, at the most, three (3) months from the filing of the administrative claim on March 4, 2005 until the last day of the two-
year prescriptive period ending June 10, 2005, that is, if only to give the BIR at the administrative level an opportunity to act on said
claim, the Court cannot, on that basis alone, deny a legitimate claim that was, for all intents and purposes, timely filed in accordance
with Section 229 of the NIRC. There was no violation of Section 229 since the law, as worded, only requires that an administrative claim
be priorly filed.

In the foregoing instances, attention must be drawn to the Court’s ruling in P.J. Kiener Co., Ltd. v. David[60] (Kiener), wherein it was held
that in no wise does the law, i.e., Section 306 of the old Tax Code (now, Section 229 of the NIRC), imply that the Collector of Internal
Revenue first act upon the taxpayer’s claim, and that the taxpayer shall not go to court before he is notified of the Collector’s action. In
Kiener, the Court went on to say that the claim with the Collector of Internal Revenue was intended primarily as a notice of warning that
unless the tax or penalty alleged to have been collected erroneously or illegally is refunded, court action will follow, viz.:

The controversy centers on the construction of the aforementioned section of the Tax Code which reads:

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

The preceding provisions seem at first blush conflicting. It will be noticed that, whereas the first sentence requires a claim to be filed
with the Collector of Internal Revenue before any suit is commenced, the last makes imperative the bringing of such suit within two
years from the date of collection. But the conflict is only apparent and the two provisions easily yield to reconciliation, which it is the
office of statutory construction to effectuate, where possible, to give effect to the entire enactment.

To this end, and bearing in mind that the Legislature is presumed to have understood the language it used and to have acted with full
idea of what it wanted to accomplish, it is fair and reasonable to say without doing violence to the context or either of the two provisions,
that by the first is meant simply that the Collector of Internal Revenue shall be given an opportunity to consider his mistake, if mistake
has been committed, before he is sued, but not, as the appellant contends that pending consideration of the claim, the period of two
years provided in the last clause shall be deemed interrupted. Nowhere and in no wise does the law imply that the Collector of
Internal Revenue must act upon the claim, or that the taxpayer shall not go to court before he is notified of the Collector’s
action. x x x. We understand the filing of the claim with the Collector of Internal Revenue to be intended primarily as a notice
of warning that unless the tax or penalty alleged to have been collected erroneously or illegally is refunded, court action will
follow. x x x.[61] (Emphases supplied)

That being said, the foregoing refund claims of CBK Power should all be granted, and, the petition of the Commissioner in G.R. Nos.
193407-08 be denied for lack of merit.

WHEREFORE, the petition in G.R. Nos. 193383-84 is GRANTED.  The Decision dated March 29, 2010 and the Resolution dated
August 16, 2010 of the Court of Tax Appeals (CTA) En Banc in C.T.A. E.B. Nos. 469 and 494 are hereby REVERSED and SET
ASIDE and a new one entered REINSTATING the Decision of the CTA First Division dated August 28, 2008 ordering the refund in
favor of CBK Power Company Limited the amount of P15,672,958.42 representing its excess final withholding taxes for the taxable
years 2001 to 2003. On the other hand, the petition in G.R. Nos. 193407-08 is DENIED for lack of merit.

SO ORDERED.

G.R. No. 165109               December 14, 2009

MANUEL N. MAMBA, RAYMUND P. GUZMAN and LEONIDES N. FAUSTO, Petitioners,

vs.
EDGAR R. LARA, JENERWIN C. BACUYAG, WILSON O. PUYAWAN, ALDEGUNDO Q. CAYOSA, JR., NORMAN A. AGATEP,
ESTRELLA P. FERNANDEZ, VILMER V. VILORIA, BAYLON A. CALAGUI, CECILIA MAEVE T. LAYOS, PREFERRED VENTURES
CORP., ASSET BUILDERS CORP., RIZAL COMMERCIAL BANKING CORPORATION, MALAYAN INSURANCE CO., and LAND
BANK OF THE PHILIPPINES, Respondents.

DECISION

DEL CASTILLO, J.:

The decision to entertain a taxpayer’s suit is discretionary upon the Court. It can choose to strictly apply the rule or take a liberal stance
depending on the controversy involved. Advocates for a strict application of the rule believe that leniency would open floodgates to
numerous suits, which could hamper the government from performing its job. Such possibility, however, is not only remote but also
negligible compared to what is at stake - "the lifeblood of the State". For this reason, when the issue hinges on the illegal disbursement
of public funds, a liberal approach should be preferred as it is more in keeping with truth and justice.

This Petition for Review on Certiorari with prayer for a Temporary Restraining Order/Writ of Preliminary Injunction, under Rule 45 of the
Rules of Court, seeks to set aside the April 27, 2004 Order 1 of the Regional Trial Court (RTC), Branch 5, Tuguegarao City, dismissing
the Petition for Annulment of Contracts and Injunction with prayer for the issuance of a Temporary Restraining Order/Writ of Preliminary
Injunction, 2 docketed as Civil Case No. 6283. Likewise assailed in this Petition is the August 20, 2004 Resolution 3 of RTC, Branch 1,
Tuguegarao City denying the Motion for Reconsideration of the dismissal.

Factual Antecedents

On November 5, 2001, the Sangguniang Panlalawigan of Cagayan passed Resolution No. 2001-272 4 authorizing Governor Edgar R.
Lara (Gov. Lara) to engage the services of and appoint Preferred Ventures Corporation as financial advisor or consultant for the
issuance and flotation of bonds to fund the priority projects of the governor without cost and commitment.

On November 19, 2001, the Sangguniang Panlalawigan, through Resolution No. 290-2001, 5 ratified the Memorandum of Agreement
(MOA) 6 entered into by Gov. Lara and Preferred Ventures Corporation. The MOA provided that the provincial government of Cagayan
shall pay Preferred Ventures Corporation a one-time fee of 3% of the amount of bonds floated.

On February 15, 2002, the Sangguniang Panlalawigan approved Resolution No. 2002-061-A 7 authorizing Gov. Lara to negotiate, sign
and execute contracts or agreements pertinent to the flotation of the bonds of the provincial government in an amount not to exceed
₱500 million for the construction and improvement of priority projects to be approved by the Sangguniang Panlalawigan.

On May 20, 2002, the majority of the members of the Sangguniang Panlalawigan of Cagayan approved Ordinance No. 19-
2002, 8 authorizing the bond flotation of the provincial government in an amount not to exceed ₱500 million to fund the construction and
development of the new Cagayan Town Center. The Resolution likewise granted authority to Gov. Lara to negotiate, sign and execute
contracts and agreements necessary and related to the bond flotation subject to the approval and ratification by the Sangguniang
Panlalawigan.

On October 20, 2003, the Sangguniang Panlalawigan approved Resolution No. 350-2003 9 ratifying the Cagayan Provincial Bond
Agreements entered into by the provincial government, represented by Gov. Lara, to wit:

a. Trust Indenture with the Rizal Commercial Banking Corporation (RCBC) – Trust and Investment Division and Malayan Insurance
Company, Inc. (MICO).

b. Deed of Assignment by way of security with the RCBC and the Land Bank of the Philippines (LBP).

c. Transfer and Paying Agency Agreement with the RCBC – Trust and Investment Division.

d. Guarantee Agreement with the RCBC – Trust and Investment Division and MICO.

e. Underwriting Agreement with RCBC Capital Corporation.

On even date, the Sangguniang Panlalawigan also approved Resolution No. 351-2003, 10 ratifying the Agreement for the Planning,
Design, Construction, and Site Development of the New Cagayan Town Center 11 entered into by the provincial government,
represented by Gov. Lara and Asset Builders Corporation, represented by its President, Mr. Rogelio P. Centeno.

On May 20, 2003, Gov. Lara issued the Notice of Award to Asset Builders Corporation, giving to the latter the planning, design,
construction and site development of the town center project for a fee of ₱213,795,732.39. 12

Proceedings before the Regional Trial Court

On December 12, 2003, petitioners Manuel N. Mamba, Raymund P. Guzman and Leonides N. Fausto filed a Petition for Annulment of
Contracts and Injunction with prayer for a Temporary Restraining Order/Writ of Preliminary Injunction 13 against Edgar R. Lara,
Jenerwin C. Bacuyag, Wilson O. Puyawan, Aldegundo Q. Cayosa, Jr., Norman A. Agatep, Estrella P. Fernandez, Vilmer V. Viloria,
Baylon A. Calagui, Cecilia Maeve T. Layos, Preferred Ventures Corporation, Asset Builders Corporation, RCBC, MICO and
LBP.1avvphi1

At the time of the filing of the petition, Manuel N. Mamba was the Representative of the 3rd Congressional District of the province of
Cagayan 14 while Raymund P. Guzman and Leonides N. Fausto were members of the Sangguniang Panlalawigan of Cagayan. 15

Edgar R. Lara was sued in his capacity as governor of Cagayan, 16 while Jenerwin C. Bacuyag, Wilson O. Puyawan, Aldegundo Q.
Cayosa, Jr., Norman A. Agatep, Estrella P. Fernandez, Vilmer V. Viloria, Baylon A. Calagui and Cecilia Maeve T. Layos were sued as
members of the Sangguniang Panlalawigan of Cagayan. 17 Respondents Preferred Ventures Corporation, Asset Builders Corporation,
RCBC, MICO and LBP were all impleaded as indispensable or necessary parties.

Respondent Preferred Ventures Corporation is the financial advisor of the province of Cagayan regarding the bond flotation undertaken
by the province. 18 Respondent Asset Builders Corporation was awarded the right to plan, design, construct and develop the proposed
town center. 19 Respondent RCBC, through its Trust and Investment Division, is the trustee of the seven-year bond flotation undertaken
by the province for the construction of the town center, 20 while respondent MICO is the guarantor. 21 Lastly, respondent LBP is the
official depositary bank of the province. 22

In response to the petition, public respondents filed an Answer with Motion to Dismiss, 23  raising the following defenses: a) petitioners
are not the proper parties or they lack locus standi in court; b) the action is barred by the rule on state immunity from suit and c) the
issues raised are not justiciable questions but purely political.
For its part, respondent Preferred Ventures Corporation filed a Motion to Dismiss 24 on the following grounds: a) petitioners have no
cause of action for injunction; b) failure to join an indispensable party; c) lack of personality to sue and d) lack of locus standi.
Respondent MICO likewise filed a Motion to Dismiss 25 raising the grounds of lack of cause of action and legal standing. Respondent
RCBC similarly argued in its Motion to Dismiss 26 that: a) petitioners are not the real parties-in-interest or have no legal standing to
institute the petition; b) petitioners have no cause of action as the flotation of the bonds are within the right and power of both
respondent RCBC and the province of Cagayan and c) the viability of the construction of a town center is not a justiciable question but
a political question.

Respondent Asset Builders Corporation, on the other hand, filed an Answer 27 interposing special and affirmative defenses of lack of
legal standing and cause of action. Respondent LBP also filed an Answer 28 alleging in the main that petitioners have no cause of action
against it as it is not an indispensable party or a necessary party to the case.

Two days after the filing of respondents’ respective memoranda on the issues raised during the hearing of the special and/or affirmative
defenses, petitioners filed a Motion to Admit Amended Petition 29 attaching thereto the amended petition. 30 Public respondents opposed
the motion for the following reasons: 1) the motion was belatedly filed; 2) the Amended Petition is not sufficient in form and in
substance; 3) the motion is patently dilatory and 4) the Amended Petition was filed to cure the defect in the original petition. 31

Petitioners also filed a Consolidated Opposition to the Motion to Dismiss 32 followed by supplemental pleadings 33 in support of their
prayer for a writ of preliminary injunction.

On April 27, 2004, the RTC issued the assailed Order denying the Motion to Admit Amended Petition and dismissing the petition for
lack of cause of action. It ruled that:

The language of Secs. 2 & 3 of Rule 10 of the 1997 Rules of Civil Procedure dealing on the filing of an amended pleading is quite clear.
As such, the Court rules that the motion was belatedly filed. The granting of leave to file amended pleadings is a matter peculiarly within
the sound discretion of the trial court. But the rule allowing amendments to pleadings is subject to the general but inflexible limitation
that the cause of action or defense shall not be substantially changed or the theory of the case altered to the prejudice of the other
party (Avecilla vs. Yatcvo, 103 Phil. 666).

On the assumption that the controversy presents justiciable issues which this Court may take cognizance of, petitioners in the present
case who presumably presented legitimate interests in the controversy are not parties to the questioned contract. Contracts produce
effect as between the parties who execute them. Only a party to the contract can maintain an action to enforce the obligations arising
under said contract (Young vs. CA, 169 SCRA 213). Since a contract is binding only upon the parties thereto, a third person cannot ask
for its rescission if it is in fraud of his rights. One who is not a party to a contract has no rights under such contract and even if the
contrary may be voidable, its nullity can be asserted only by one who is a party thereto; a third person would have absolutely no
personality to ask for the annulment (Wolfson vs. Estate of Martinez, 20 Phil. 340; Ibañez vs. Hongkong & Shanghai Bank, 22 Phil. 572;
Ayson vs. CA, G.R. Nos. L-6501 & 6599, May 21, 1955).

It was, however, held that a person who is not a party obliged principally or subsidiarily in a contract may exercise an action for nullity of
the contract if he is prejudiced in his rights with respect to one of the contracting parties and can show the detriment which would
positively result to him from the contract in which he had no intervention (Bañez vs. CA, 59 SCRA 15; Anyong Hsan vs. CA, 59 SCRA
110, 112-113; Leodovica vs. CA, 65 SCRA 154-155). In the case at bar, petitioners failed to show that they were prejudiced in their
rights [or that a] detriment x x x would positively result to them. Hence, they lack locus standi in court.

xxxx

To the mind of the Court, procedural matters in the present controversy may be dispensed with, stressing that the instant case is a
political question, a question which the court cannot, in any manner, take judicial cognizance. Courts will not interfere with purely
political questions because of the principle of separation of powers (Tañada vs. Cuenco, 103 Phil. 1051). Political questions are those
questions which, under the Constitution, are to be decided by the people in their sovereign capacity or in regard to which full
discretionary authority has been delegated to the legislative or [to the] executive branch of the government (Nuclear Free Phils.
Coalition vs. NPC, 141 SCRA 307 (1986); Torres vs. Gonzales, 152 SCRA 272; Citizen’s Alliance for Consumer Protection vs. Energy
Regulatory Board, G.R. No. 78888-90, June 23, 1988).

The citation made by the provincial government[, to] which this Court is inclined to agree, is that the matter falls under the discretion of
another department, hence the decision reached is in the category of a political question and consequently may not be the subject of
judicial jurisdiction (Cruz in Political Law, 1998 Ed., page 81) is correct.

It is [a] well-recognized principle that purely administrative and discretionary functions may not be interfered with by the courts (Adm.
Law Test & Cases, 2001 Ed., De Leon, De Leon, Jr.).

The case therefore calls for the doctrine of ripeness for judicial review. This determines the point at which courts may review
administrative action. The basic principle of ripeness is that the judicial machinery should be conserved for problems which are real and
present or imminent and should not be squandered on problems which are future, imaginary or remote. This case is not ripe for judicial
determination since there is no imminently x x x substantial injury to the petitioners.

In other words, the putting up of the New Cagayan Town Center by the province over the land fully owned by it and the concomitant
contracts entered into by the same is within the bounds of its corporate power, an undertaking which falls within the ambit of its
discretion and therefore a purely political issue which is beyond the province of the court x x x. [Consequently, the court cannot,] in any
manner, take judicial cognizance over it. The act of the provincial government was in pursuance of the mandate of the Local
Government Code of 1991.

xxxx

Indeed, adjudication of the procedural issues presented for resolution by the present action would be a futile exercise in exegesis.
What defeats the plea of the petitioners for the issuance of a writ of preliminary injunction is the fact that their averments are merely
speculative and founded on conjectures. An injunction is not intended to protect contingent or future rights nor is it a remedy to enforce
an abstract right (Cerebo vs. Dictado, 160 SCRA 759; Ulang vs. CA, 225 SCRA 637). An injunction, whether preliminary or final, will not
issue to protect a right not in in esse and which may never arise, or to restrain an act which does not give rise to a cause of action. The
complainant’s right on title, moreover, must be clear and unquestioned [since] equity, as a rule, will not take cognizance of suits to
establish title and will not lend its preventive aid by injunction where the complainant’s title or right is doubtful or disputed. The
possibility of irreparable damage, without proof of violation of an actual existing right, is no ground for injunction being a mere damnum,
absque injuria (Talisay-Silay Milling Company, Inc. vs. CFI of Negros Occidental, et. al. 42 SCRA 577, 582).

xxxx

For lack of cause of action, the case should be dismissed.

The facts and allegations [necessarily] suggest also that this court may dismiss the case for want of jurisdiction.

The rule has to be so because it can motu propio dismiss it as its only jurisdiction is to dismiss it if it has no jurisdiction. This is in line
with the ruling in Andaya vs. Abadia, 46 SCAD 1036, G.R. No. 104033, Dec. 27, 1993 where the court may dismiss a complaint even
without a motion to dismiss or answer.

Upon the foregoing considerations, the case is hereby dismissed without costs.

SO ORDERED. 34

Petitioners filed a Motion for Reconsideration 35 to which respondents filed their respective Oppositions. 36 Petitioners then filed a Motion
to Inhibit, which the court granted. Accordingly, the case was re-raffled to Branch 1 of the RTC of Tuguegarao City. 37

On August 20, 2004, Branch 1 of the RTC of Tuguegarao City issued a Resolution denying petitioners’ plea for reconsideration. The
court found the motion to be a mere scrap of paper as the notice of hearing was addressed only to the Clerk of Court in violation of
Section 5, Rule 15 of the Rules of Court. As to the merits, the court sustained the findings of Branch 5 that petitioners lack legal
standing to sue and that the issue involved is political.

Issues

Hence, the present recourse where petitioners argue that:

A. The lower court decided a question of substance in a way not in accord with law and with the applicable decision of the Supreme
Court, and

B. The lower court has so far departed from the accepted and usual course of judicial proceedings as to call for an exercise of the
power of supervision in that:

I. It denied locus standi to petitioners;

II. [It] determined that the matter of contract entered into by the provincial government is in the nature of a political question;

III. [It] denied the admission of Amended Petition; and

IV. [It] found a defect of substance in the petitioners’ Motion for Reconsideration. 38

Our Ruling

The petition is partially meritorious.

Petitioners have legal standing to sue as taxpayers

A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that the public money is being deflected
to any improper purpose, or that there is wastage of public funds through the enforcement of an invalid or unconstitutional law. 39 A
person suing as a taxpayer, however, must show that the act complained of directly involves the illegal disbursement of public funds
derived from taxation. 40 He must also prove that he has sufficient interest in preventing the illegal expenditure of money raised by
taxation and that he will sustain a direct injury because of the enforcement of the questioned statute or contract. 41 In other words, for a
taxpayer’s suit to prosper, two requisites must be met: (1) public funds derived from taxation are disbursed by a political subdivision or
instrumentality and in doing so, a law is violated or some irregularity is committed and (2) the petitioner is directly affected by the
alleged act. 42

In light of the foregoing, it is apparent that contrary to the view of the RTC,

a taxpayer need not be a party to the contract to challenge its validity. 43 As long as taxes are involved, people have a right to question
contracts entered into by the government.

In this case, although the construction of the town center would be primarily sourced from the proceeds of the bonds, which
respondents insist are not taxpayer’s money, a government support in the amount of ₱187 million would still be spent for paying the
interest of the bonds. 44 In fact, a Deed of Assignment 45 was executed by the governor in favor of respondent RCBC over the Internal
Revenue Allotment (IRA) and other revenues of the provincial government as payment and/or security for the obligations of the
provincial government under the Trust Indenture Agreement dated September 17, 2003. Records also show that on March 4, 2004, the
governor requested the Sangguniang Panlalawigan to appropriate an amount of ₱25 million for the interest of the bond. 46 Clearly, the
first requisite has been met.
As to the second requisite, the court, in recent cases, has relaxed the stringent "direct injury test" bearing in mind that locus standi is a
procedural technicality. 47 By invoking "transcendental importance", "paramount public interest", or "far-reaching implications", ordinary
citizens and taxpayers were allowed to sue even if they failed to show direct injury. 48 In cases where serious legal issues were raised
or where public expenditures of millions of pesos were involved, the court did not hesitate to give standing to taxpayers. 49

We find no reason to deviate from the jurisprudential trend.

To begin with, the amount involved in this case is substantial. Under the various agreements entered into by the governor, which were
ratified by the Sangguniang Panlalawigan, the provincial government of Cagayan would incur the following costs: 50

Compensation to Preferred Ventures - ₱ 6,150,000.00

(3% of P205M) 51 Resolution No. 290-2001

Management and Underwriting Fees - 3,075,000.00

(1.5% of P205M) 52

Documentary Tax - 1,537,500.00

(0.75% of P205M) 53

Guarantee Fee 54 - 7,350,000.00

Construction and Design of town center 55 - 213,795,732.39

Total Cost - ₱231,908,232.39

What is more, the provincial government would be shelling out a total amount of ₱187 million for the period of seven years by way of
subsidy for the interest of the bonds. Without a doubt, the resolution of the present petition is of paramount importance to the people of
Cagayan who at the end of the day would bear the brunt of these agreements.

Another point to consider is that local government units now possess more powers, authority and resources at their disposal, 56 which in
the hands of unscrupulous officials may be abused and misused to the detriment of the public. To protect the interest of the people and
to prevent taxes from being squandered or wasted under the guise of government projects, a liberal approach must therefore be
adopted in determining locus standi in public suits.

In view of the foregoing, we are convinced that petitioners have sufficient standing to file the present suit. Accordingly, they should be
given the opportunity to present their case before the RTC.

Having resolved the core issue, we shall now proceed to the remaining issues.

The controversy involved is justiciable

A political question is a question of policy, which is to be decided by the people in their sovereign capacity or by the legislative or the
executive branch of the government to which full discretionary authority has been delegated. 57

In filing the instant case before the RTC, petitioners seek to restrain public respondents from implementing the bond flotation and to
declare null and void all contracts related to the bond flotation and construction of the town center. In the petition before the RTC, they
alleged grave abuse of discretion and clear violations of law by public respondents. They put in issue the overpriced construction of the
town center; the grossly disadvantageous bond flotation; the irrevocable assignment of the provincial government’s annual regular
income, including the IRA, to respondent RCBC to cover and secure the payment of the bonds floated; and the lack of consultation and
discussion with the community regarding the proposed project, as well as a proper and legitimate bidding for the construction of the
town center.

Obviously, the issues raised in the petition do not refer to the wisdom but to the legality of the acts complained of. Thus, we find the
instant controversy within the ambit of judicial review. Besides, even if the issues were political in nature, it would still come within our
powers of review under the expanded jurisdiction conferred upon us by Section 1, Article VIII of the Constitution, which includes the
authority to determine whether grave abuse of discretion amounting to excess or lack of jurisdiction has been committed by any branch
or instrumentality of the government. 58

The Motion to Admit Amended Petition was properly denied

However, as to the denial of petitioners’ Motion to Admit Amended Petition, we find no reason to reverse the same. The inclusion of the
province of Cagayan as a petitioner would not only change the theory of the case but would also result in an absurd situation. The
provincial government, if included as a petitioner, would in effect be suing itself considering that public respondents are being sued in
their official capacity.

In any case, there is no need to amend the petition because petitioners, as we have said, have legal standing to sue as taxpayers.

Section 5, Rule 15 of the Rules of Court was substantially complied with

This brings us to the fourth and final issue.

A perusal of the Motion for Reconsideration filed by petitioners would show that the notice of hearing was addressed only to the Clerk of
Court in violation of Section 5, Rule 15 of the Rules of Court, which requires the notice of hearing to be addressed to all parties
concerned. This defect, however, did not make the motion a mere scrap of paper. The rule is not a ritual to be followed blindly. 59 The
purpose of a notice of hearing is simply to afford the adverse parties a chance to be heard before a motion is resolved by the court. 60 In
this case, respondents were furnished copies of the motion, and consequently, notified of the scheduled hearing. Counsel for public
respondents in fact moved for the postponement of the hearing, which the court granted. 61 Moreover, respondents were afforded
procedural due process as they were given sufficient time to file their respective comments or oppositions to the motion. From the
foregoing, it is clear that the rule requiring notice to all parties was substantially complied with. 62 In effect, the defect in the Motion for
Reconsideration was cured.

We cannot overemphasize that procedural rules are mere tools to aid the courts in the speedy, just and inexpensive resolution of
cases. 63 Procedural defects or lapses, if negligible, should be excused in the higher interest of justice as technicalities should not
override the merits of the case. Dismissal of cases due to technicalities should also be avoided to afford the parties the opportunity to
present their case. Courts must be reminded that the swift unclogging of the dockets although a laudable objective must not be done at
the expense of substantial justice. 64

WHEREFORE, the instant Petition is PARTIALLY GRANTED. The April 27, 2004 Order of Branch 5 and the August 20, 2004
Resolution of Branch 1 of the Regional Trial Court of Tuguegarao City are hereby REVERSED and SET ASIDE insofar as the dismissal
of the petition is concerned. Accordingly, the case is hereby REMANDED to the court a quo for further proceedings.

SO ORDERED.

G.R. No. 191667               April 17, 2013

LAND BANK OF THE PHILIPPINES, Petitioner,

vs.
EDUARDO M. CACAYURAN, Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this Petition for Review on Certiorari 1 is the March 26, 2010 Decision2 of the Court of Appeals (CA) in CA-G.R. CV. No.
89732 which affirmed with modification the April 10, 2007 Decision 3 of the Regional Trial Court (RTC) of Agoo, La Union, Branch 31,
declaring inter alia the nullity of the loan agreements entered into by petitioner Land Bank of the Philippines (Land Bank) and the
Municipality of Agoo, La Union (Municipality).

The Facts

From 2005 to 2006, the Municipality’s Sangguniang Bayan (SB) passed certain resolutions to implement a multi-phased plan
(Redevelopment Plan) to redevelop the Agoo Public Plaza (Agoo Plaza) where the Imelda Garden and Jose Rizal Monument were
situated.

To finance phase 1 of the said plan, the SB initially passed Resolution No. 68-2005 4 on April 19, 2005, authorizing then Mayor Eufranio
Eriguel (Mayor Eriguel) to obtain a loan from Land Bank and incidental thereto, mortgage a 2,323.75 square meter lot situated at the
southeastern portion of the Agoo Plaza (Plaza Lot) as collateral. To serve as additional security, it further authorized the assignment of
a portion of its internal revenue allotment (IRA) and the monthly income from the proposed project in favor of Land Bank. 5 The
foregoing terms were confirmed, approved and ratified on October 4, 2005 through Resolution No. 139-2005. 6 Consequently, on
November 21, 2005, Land Bank extended a ₱4,000,000.00 loan in favor of the Municipality (First Loan),7 the proceeds of which were
used to construct ten (10) kiosks at the northern and southern portions of the Imelda Garden. After completion, these kiosks were
rented out.8

On March 7, 2006, the SB passed Resolution No. 58-2006, 9 approving the construction of a commercial center on the Plaza Lot as part
of phase II of the Redevelopment Plan. To finance the project, Mayor Eriguel was again authorized to obtain a loan from Land Bank,
posting as well the same securities as that of the First Loan. All previous representations and warranties of Mayor Eriguel related to the
negotiation and obtention of the new loan 10 were ratified on September 5, 2006 through Resolution No. 128-2006. 11 In consequence,
Land Bank granted a second loan in favor of the Municipality on October 20, 2006 in the principal amount of ₱28,000,000.00 (Second
Loan).12

Unlike phase 1 of the Redevelopment Plan, the construction of the commercial center at the Agoo Plaza was vehemently objected to by
some residents of the Municipality. Led by respondent Eduardo Cacayuran (Cacayuran), these residents claimed that the conversion of
the Agoo Plaza into a commercial center, as funded by the proceeds from the First and Second Loans (Subject Loans), were "highly
irregular, violative of the law, and detrimental to public interests, and will result to wanton desecration of the said historical and public
park."13 The foregoing was embodied in a Manifesto,14 launched through a signature campaign conducted by the residents and
Cacayuran.

In addition, Cacayuran wrote a letter15 dated December 8, 2006 addressed to Mayor Eriguel, Vice Mayor Antonio Eslao (Vice Mayor
Eslao), and the members of the SB namely, Violeta Laroya-Balbin, Jaime Boado, Jr., Rogelio De Vera, James Dy, Crisogono
Colubong, Ricardo Fronda, Josephus Komiya, Erwina Eriguel, Felizardo Villanueva, and Gerard Mamuyac (Implicated Officers),
expressing the growing public clamor against the conversion of the Agoo Plaza into a commercial center. He then requested the
foregoing officers to furnish him certified copies of various documents related to the aforementioned conversion including, among
others, the resolutions approving the Redevelopment Plan as well as the loan agreements for the sake of public information and
transparency.

Unable to get any response, Cacayuran, invoking his right as a taxpayer, filed a Complaint 16 against the Implicated Officers and Land
Bank, assailing, among others, the validity of the Subject Loans on the ground that the Plaza Lot used as collateral thereof is property
of public dominion and therefore, beyond the commerce of man.17

Upon denial of the Motion to Dismiss dated December 27, 2006,18 the Implicated Officers and Land Bank filed their respective Answers.

For its part, Land Bank claimed that it is not privy to the Implicated Officers’ acts of destroying the Agoo Plaza. It further asserted that
Cacayuran did not have a cause of action against it since he was not privy to any of the Subject Loans.19

During the pendency of the proceedings, the construction of the commercial center was completed and the said structure later became
known as the Agoo’s People Center (APC).

On May 8, 2007, the SB passed Municipal Ordinance No. 02-2007,20 declaring the area where the APC stood as patrimonial property of
the Municipality.

The Ruling of the RTC

In its Decision dated April 10, 2007,21 the RTC ruled in favor of Cacayuran, declaring the nullity of the Subject Loans. 22 It found that the
resolutions approving the said loans were passed in a highly irregular manner and thus, ultra vires; as such, the Municipality is not
bound by the same.23 Moreover, it found that the Plaza Lot is proscribed from collateralization given its nature as property for public
use.24

Aggrieved, Land Bank filed its Notice of Appeal on April 23, 2007. 25 On the other hand, the Implicated Officers’ appeal was deemed
abandoned and dismissed for their failure to file an appellants’ brief despite due notice.26 In this regard, only Land Bank’s appeal was
given due course by the CA.

Ruling of the CA

In its Decision dated March 26, 2010,27 the CA affirmed with modification the RTC’s ruling, excluding Vice Mayor Eslao from any
personal liability arising from the Subject Loans.28

It held, among others, that: (1) Cacayuran had locus standi to file his complaint, considering that (a) he was born, raised and a bona
fide resident of the Municipality; and (b) the issue at hand involved public interest of transcendental importance;29 (2) Resolution Nos.
68-2005, 139-2005, 58-2006, 128-2006 and all other related resolutions (Subject Resolutions) were invalidly passed due to the SB’s
non-compliance with certain sections of Republic Act No. 7160, otherwise known as the "Local Government Code of 1991" (LGC); (3)
the Plaza Lot, which served as collateral for the Subject Loans, is property of public dominion and thus, cannot be appropriated either
by the State or by private persons;30 and (4) the Subject Loans are ultra vires because they were transacted without proper authority
and their collateralization constituted improper disbursement of public funds.

Dissatisfied, Land Bank filed the instant petition.

Issues Before the Court

The following issues have been raised for the Court’s resolution: (1) whether Cacayuran has standing to sue; (2) whether the Subject
Resolutions were validly passed; and (3) whether the Subject Loans are ultra vires.

The Court’s Ruling

The petition lacks merit.

A. Cacayuran’s standing to sue

Land Bank claims that Cacayuran did not have any standing to contest the construction of the APC as it was funded through the
proceeds coming from the Subject Loans and not from public funds. Besides, Cacayuran was not even a party to any of the Subject
Loans and is thus, precluded from questioning the same.

The argument is untenable.

It is hornbook principle that a taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that public
money is being deflected to any improper purpose, or that there is wastage of public funds through the enforcement of an invalid or
unconstitutional law. A person suing as a taxpayer, however, must show that the act complained of directly involves the illegal
disbursement of public funds derived from taxation. In other words, for a taxpayer’s suit to prosper, two requisites must be met namely,
(1) public funds derived from taxation are disbursed by a political subdivision or instrumentality and in doing so, a law is violated or
some irregularity is committed; and (2) the petitioner is directly affected by the alleged act.31

Records reveal that the foregoing requisites are present in the instant case.

First, although the construction of the APC would be primarily sourced from the proceeds of the Subject Loans, which Land Bank insists
are not taxpayer’s money, there is no denying that public funds derived from taxation are bound to be expended as the Municipality
assigned a portion of its IRA as a security for the foregoing loans. Needless to state, the Municipality’s IRA, which serves as the local
government unit’s just share in the national taxes, 32 is in the nature of public funds derived from taxation. The Court believes, however,
that although these funds may be posted as a security, its collateralization should only be deemed effective during the incumbency of
the public officers who approved the same, else those who succeed them be effectively deprived of its use.

In any event, it is observed that the proceeds from the Subject Loans had already been converted into public funds by the Municipality’s
receipt thereof. Funds coming from private sources become impressed with the characteristics of public funds when they are under
official custody.33

Accordingly, the first requisite has been clearly met.

Second, as a resident-taxpayer of the Municipality, Cacayuran is directly affected by the conversion of the Agoo Plaza which was
funded by the proceeds of the Subject Loans. It is well-settled that public plazas are properties for public use34 and therefore, belongs to
the public dominion.35 As such, it can be used by anybody and no one can exercise over it the rights of a private owner. 36 In this light,
Cacayuran had a direct interest in ensuring that the Agoo Plaza would not be exploited for commercial purposes through the APC’s
construction. Moreover, Cacayuran need not be privy to the Subject Loans in order to proffer his objections thereto. In Mamba v. Lara, it
has been held that a taxpayer need not be a party to the contract to challenge its validity; as long as taxes are involved, people have a
right to question contracts entered into by the government.37

Therefore, as the above-stated requisites obtain in this case, Cacayuran has standing to file the instant suit.

B. Validity of the Subject Resolutions

Land Bank avers that the Subject Resolutions provided ample authority for Mayor Eriguel to contract the Subject Loans. It posits that
Section 444(b)(1)(vi) of the LGC merely requires that the municipal mayor be authorized by the SB concerned and that such
authorization need not be embodied in an ordinance.38

A careful perusal of Section 444(b)(1)(vi) of the LGC shows that while the authorization of the municipal mayor need not be in the form
of an ordinance, the obligation which the said local executive is authorized to enter into must be made pursuant to a law or ordinance,
viz:

Sec. 444. The Chief Executive: Powers, Duties, Functions and Compensation. -

xxxx

(b) For efficient, effective and economical governance the purpose of which is the general welfare of the municipality and its inhabitants
pursuant to Section 16 of this Code, the municipal mayor shall:

xxxx

(vi) Upon authorization by the sangguniang bayan, represent the municipality in all its business transactions and sign on its behalf all
bonds, contracts, and obligations, and such other documents made pursuant to law or ordinance; (Emphasis and underscoring
supplied)

In the present case, while Mayor Eriguel’s authorization to contract the Subject Loans was not contained – as it need not be contained
– in the form of an ordinance, the said loans and even the Redevelopment Plan itself were not approved pursuant to any law or
ordinance but through mere resolutions. The distinction between ordinances and resolutions is well-perceived. While ordinances are
laws and possess a general and permanent character, resolutions are merely declarations of the sentiment or opinion of a lawmaking
body on a specific matter and are temporary in nature. 39 As opposed to ordinances, "no rights can be conferred by and be inferred from
a resolution."40 In this accord, it cannot be denied that the SB violated Section 444(b)(1)(vi) of the LGC altogether.

Noticeably, the passage of the Subject Resolutions was also tainted with other irregularities, such as (1) the SB’s failure to submit the
Subject Resolutions to the Sangguniang Panlalawigan of La Union for its review contrary to Section 56 of the LGC;41 and (2) the lack of
publication and posting in contravention of Section 59 of the LGC.42

In fine, Land Bank cannot rely on the Subject Resolutions as basis to validate the Subject Loans.

C. Ultra vires nature of the Subject

Loans

Neither can Land Bank claim that the Subject Loans do not constitute ultra vires acts of the officers who approved the same.

Generally, an ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its
organization and therefore beyond the powers conferred upon it by law.43 There are two (2) types of ultra vires acts. As held in
Middletown Policemen's Benevolent Association v. Township of Middletown:44

There is a distinction between an act utterly beyond the jurisdiction of a municipal corporation and the irregular exercise of a basic
power under the legislative grant in matters not in themselves jurisdictional. The former are ultra vires in the primary sense and void;
the latter, ultra vires only in a secondary sense which does not preclude ratification or the application of the doctrine of estoppel in the
interest of equity and essential justice. (Emphasis and underscoring supplied)

In other words, an act which is outside of the municipality’s jurisdiction is considered as a void ultra vires act, while an act attended only
by an irregularity but remains within the municipality’s power is considered as an ultra vires act subject to ratification and/or validation.
To the former belongs municipal contracts which (a) are entered into beyond the express, implied or inherent powers of the local
government unit; and (b) do not comply with the substantive requirements of law e.g., when expenditure of public funds is to be made,
there must be an actual appropriation and certificate of availability of funds; while to the latter belongs those which (a) are entered into
by the improper department, board, officer of agent; and (b)do not comply with the formal requirements of a written contract e.g., the
Statute of Frauds.45

Applying these principles to the case at bar, it is clear that the Subject Loans belong to the first class of ultra vires acts deemed as void.

Records disclose that the said loans were executed by the Municipality for the purpose of funding the conversion of the Agoo Plaza into
a commercial center pursuant to the Redevelopment Plan. However, the conversion of the said plaza is beyond the Municipality’s
jurisdiction considering the property’s nature as one for public use and thereby, forming part of the public dominion. Accordingly, it
cannot be the object of appropriation either by the State or by private persons.46 Nor can it be the subject of lease or any other
contractual undertaking.47 In Villanueva v. Castañeda, Jr.,48 citing Espiritu v. Municipal Council of Pozorrubio,49 the Court pronounced
that:

x x x Town plazas are properties of public dominion, to be devoted to public use and to be made available to the public in general. They
are outside the commerce of man and cannot be disposed of or even leased by the municipality to private parties.1âwphi1

In this relation, Article 1409(1) of the Civil Code provides that a contract whose purpose is contrary to law, morals, good customs, public
order or public policy is considered void50 and as such, creates no rights or obligations or any juridical relations. 51 Consequently, given
the unlawful purpose behind the Subject Loans which is to fund the commercialization of the Agoo Plaza pursuant to the
Redevelopment Plan, they are considered as ultra vires in the primary sense thus, rendering them void and in effect, non-binding on
the Municipality.

At this juncture, it is equally observed that the land on which the Agoo Plaza is situated cannot be converted into patrimonial property –
as the SB tried to when it passed Municipal Ordinance No. 02-2007 52 – absent any express grant by the national government. 53 As
public land used for public use, the foregoing lot rightfully belongs to and is subject to the administration and control of the Republic of
the Philippines.54 Hence, without the said grant, the Municipality has no right to claim it as patrimonial property.

Nevertheless, while the Subject Loans cannot bind the Municipality for being ultra vires, the officers who authorized the passage of the
Subject Resolutions are personally liable. Case law states that public officials can be held personally accountable for acts claimed to
have been performed in connection with official duties where they have acted ultra vires,55 as in this case.

WHEREFORE, the petition is DENIED. Accordingly, the March 26, 2010 Decision of the Court of Appeals in CA-G.R. CV. No. 89732 is
hereby AFFIRMED.

SO ORDERED.
G.R. No. 147188             September 14, 2004

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administrators Lorna Kapunan and Mario Luza
Bautista, respondents.

DECISION

DAVIDE, JR., C.J.:

This Court is called upon to determine in this case whether the tax planning scheme adopted by a corporation constitutes tax evasion
that would justify an assessment of deficiency income tax.

The petitioner seeks the reversal of the Decision1 of the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 affirming the 3
January 2000 Decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5328, 3 which held that the respondent Estate of Benigno
P. Toda, Jr. is not liable for the deficiency income tax of Cibeles Insurance Corporation (CIC) in the amount of ₱79,099,999.22 for the
year 1989, and ordered the cancellation and setting aside of the assessment issued by Commissioner of Internal Revenue Liwayway
Vinzons-Chato on 9 January 1995.

The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal Revenue for deficiency income tax
arising from an alleged simulated sale of a 16-storey commercial building known as Cibeles Building, situated on two parcels of land on
Ayala Avenue, Makati City.

On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and outstanding capital stock, to
sell the Cibeles Building and the two parcels of land on which the building stands for an amount of not less than ₱90 million.4

On 30 August 1989, Toda purportedly sold the property for ₱100 million to Rafael A. Altonaga, who, in turn, sold the same property on
the same day to Royal Match Inc. (RMI) for ₱200 million. These two transactions were evidenced by Deeds of Absolute Sale notarized
on the same day by the same notary public.5

For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of ₱10 million.6

On 16 April 1990, CIC filed its corporate annual income tax return 7 for the year 1989, declaring, among other things, its gain from the
sale of real property in the amount of ₱75,728.021. After crediting withholding taxes of ₱254,497.00, it paid ₱26,341,2078 for its net
taxable income of ₱75,987,725.

On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for ₱12.5 million, as evidenced by a Deed of Sale of
Shares of Stocks.9 Three and a half years later, or on 16 January 1994, Toda died.

On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice10 and demand letter to the CIC for deficiency
income tax for the year 1989 in the amount of ₱79,099,999.22.

The new CIC asked for a reconsideration, asserting that the assessment should be directed against the old CIC, and not against the
new CIC, which is owned by an entirely different set of stockholders; moreover, Toda had undertaken to hold the buyer of his
stockholdings and the CIC free from all tax liabilities for the fiscal years 1987-1989.11
On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators Lorna Kapunan and Mario Luza
Bautista, received a Notice of Assessment12 dated 9 January 1995 from the Commissioner of Internal Revenue for deficiency income
tax for the year 1989 in the amount of ₱79,099,999.22, computed as follows:

Income Tax – 1989

Net Income per return   ₱75,987,725.00  

Add: Additional gain on sale of real property taxable under ordinary 100,000,000.00
corporate income but were substituted with individual capital
gains(₱200M – 100M)

Total Net Taxable Income per investigation ₱175,987,725.00

Tax Due thereof at 35% ₱ 61,595,703.75

Less: Payment already made

1. Per return ₱26,595,704.00

2. Thru Capital Gains Tax made

    by R.A. Altonaga 10,000,000.00 36,595,704.00 Balance of tax due

₱ 24,999,999.75

Add: 50% Surcharge 12,499,999.88

25% Surcharge 6,249,999.94

Total ₱ 43,749,999.57

Add: Interest 20% from

4/16/90-4/30/94 (.808) 35,349,999.65

TOTAL AMT. DUE & COLLECTIBLE

₱ 79,099,999.22
==============

The Estate thereafter filed a letter of protest.13

In the letter dated 19 October 1995,14 the Commissioner dismissed the protest, stating that a fraudulent scheme was deliberately
perpetuated by the CIC wholly owned and controlled by Toda by covering up the additional gain of ₱100 million, which resulted in the
change in the income structure of the proceeds of the sale of the two parcels of land and the building thereon to an individual capital
gains, thus evading the higher corporate income tax rate of 35%.

On 15 February 1996, the Estate filed a petition for review15 with the CTA alleging that the Commissioner erred in holding the Estate
liable for income tax deficiency; that the inference of fraud of the sale of the properties is unreasonable and unsupported; and that the
right of the Commissioner to assess CIC had already prescribed.

In his Answer16 and Amended Answer,17 the Commissioner argued that the two transactions actually constituted a single sale of the
property by CIC to RMI, and that Altonaga was neither the buyer of the property from CIC nor the seller of the same property to RMI.
The additional gain of ₱100 million (the difference between the second simulated sale for ₱200 million and the first simulated sale for
₱100 million) realized by CIC was taxed at the rate of only 5% purportedly as capital gains tax of Altonaga, instead of at the rate of 35%
as corporate income tax of CIC. The income tax return filed by CIC for 1989 with intent to evade payment of the tax was thus false or
fraudulent. Since such falsity or fraud was discovered by the BIR only on 8 March 1991, the assessment issued on 9 January 1995 was
well within the prescriptive period prescribed by Section 223 (a) of the National Internal Revenue Code of 1986, which provides that tax
may be assessed within ten years from the discovery of the falsity or fraud. With the sale being tainted with fraud, the separate
corporate personality of CIC should be disregarded. Toda, being the registered owner of the 99.991% shares of stock of CIC and the
beneficial owner of the remaining 0.009% shares registered in the name of the individual directors of CIC, should be held liable for the
deficiency income tax, especially because the gains realized from the sale were withdrawn by him as cash advances or paid to him as
cash dividends. Since he is already dead, his estate shall answer for his liability.
In its decision18 of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC committed fraud to deprive the
government of the taxes due it. It ruled that even assuming that a pre-conceived scheme was adopted by CIC, the same constituted
mere tax avoidance, and not tax evasion. There being no proof of fraudulent transaction, the applicable period for the BIR to assess
CIC is that prescribed in Section 203 of the NIRC of 1986, which is three years after the last day prescribed by law for the filing of the
return. Thus, the government’s right to assess CIC prescribed on 15 April 1993. The assessment issued on 9 January 1995 was,
therefore, no longer valid. The CTA also ruled that the mere ownership by Toda of 99.991% of the capital stock of CIC was not in itself
sufficient ground for piercing the separate corporate personality of CIC. Hence, the CTA declared that the Estate is not liable for
deficiency income tax of ₱79,099,999.22 and, accordingly, cancelled and set aside the assessment issued by the Commissioner on 9
January 1995.

In its motion for reconsideration,19 the Commissioner insisted that the sale of the property owned by CIC was the result of the
connivance between Toda and Altonaga. She further alleged that the latter was a representative, dummy, and a close business
associate of the former, having held his office in a property owned by CIC and derived his salary from a foreign corporation (Aerobin,
Inc.) duly owned by Toda for representation services rendered. The CTA denied 20 the motion for reconsideration, prompting the
Commissioner to file a petition for review21 with the Court of Appeals.

In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the CTA, reasoning that the CTA, being
more advantageously situated and having the necessary expertise in matters of taxation, is "better situated to determine the
correctness, propriety, and legality of the income tax assessments assailed by the Toda Estate."22

Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition invoking the following grounds:

I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO FRAUD WITH INTENT TO EVADE THE
TAX ON THE SALE OF THE PROPERTIES OF CIBELES INSURANCE CORPORATION.

II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE PERSONALITY OF CIBELES
INSURANCE CORPORATION.

III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER TO ASSESS RESPONDENT FOR
DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD PRESCRIBED.

The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by CIC of the Cibeles property was in
connivance with its dummy Rafael Altonaga, who was financially incapable of purchasing it. She further points out that the documents
themselves prove the fact of fraud in that (1) the two sales were done simultaneously on the same date, 30 August 1989; (2) the Deed
of Absolute Sale between Altonaga and RMI was notarized ahead of the alleged sale between CIC and Altonaga, with the former
registered in the Notarial Register of Jocelyn H. Arreza Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc.
No. 92, Page 20, Book I, Series of 1989, of the same Notary Public; (3) as early as 4 May 1989, CIC received ₱40 million from RMI,
and not from Altonaga. The said amount was debited by RMI in its trial balance as of 30 June 1989 as investment in Cibeles Building.
The substantial portion of ₱40 million was withdrawn by Toda through the declaration of cash dividends to all its stockholders.

For its part, respondent Estate asserts that the Commissioner failed to present the income tax return of Altonaga to prove that the latter
is financially incapable of purchasing the Cibeles property.

To resolve the grounds raised by the Commissioner, the following questions are pertinent:

1. Is this a case of tax evasion or tax avoidance?

2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and

3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if any?

We shall discuss these questions in seriatim.

Is this a case of tax evasion or tax avoidance?

Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax
saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Tax
evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to
further or additional civil or criminal liabilities.23

Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the
taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is
described as being "evil," in "bad faith," "willfull," or "deliberate and not accidental"; and (3) a course of action or failure of action which
is unlawful.24

All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior to the purported sale of the
Cibeles property by CIC to Altonaga on 30 August 1989, CIC received ₱40 million from RMI,25 and not from Altonaga. That ₱40 million
was debited by RMI and reflected in its trial balance26 as "other inv. – Cibeles Bldg." Also, as of 31 July 1989, another ₱40 million was
debited and reflected in RMI’s trial balance as "other inv. – Cibeles Bldg." This would show that the real buyer of the properties was
RMI, and not the intermediary Altonaga.lavvphi1.net

The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one of the many trusted corporate
executives of Toda. This information was revealed by Mr. Boy Prieto, the assistant accountant of CIC and an old timer in the
company.27 But Mr. Prieto did not testify on this matter, hence, that information remains to be hearsay and is thus inadmissible in
evidence. It was not verified either, since the letter-request for investigation of Altonaga was unserved, 28 Altonaga having left for the
United States of America in January 1990. Nevertheless, that Altonaga was a mere conduit finds support in the admission of
respondent Estate that the sale to him was part of the tax planning scheme of CIC. That admission is borne by the records. In its
Memorandum, respondent Estate declared:

Petitioner, however, claims there was a "change of structure" of the proceeds of sale. Admitted one hundred percent. But isn’t this
precisely the definition of tax planning? Change the structure of the funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code
exists, allowing tax free transfers of property for stock, changing the structure of the property and the tax to be paid. As long as it is
done legally, changing the structure of a transaction to achieve a lower tax is not against the law. It is absolutely allowed.

Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic] cannot be faulted for wanting to reduce
the tax from 35% to 5%.29 [Underscoring supplied].

The scheme resorted to by CIC in making it appear that there were two sales of the subject properties,  i.e., from CIC to Altonaga, and
then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted with fraud.

Fraud in its general sense, "is deemed to comprise anything calculated to deceive, including all acts, omissions, and concealment
involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage to another, or by which an
undue and unconscionable advantage is taken of another."30

Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from
him to RMI would then subject the income to only 5% individual capital gains tax, and not the 35% corporate income tax. Altonaga’s
sole purpose of acquiring and transferring title of the subject properties on the same day was to create a tax shelter. Altonaga never
controlled the property and did not enjoy the normal benefits and burdens of ownership. The sale to him was merely a tax ploy, a sham,
and without business purpose and economic substance. Doubtless, the execution of the two sales was calculated to mislead the BIR
with the end in view of reducing the consequent income tax liability.lavvphi1.net

In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the mitigation of tax liabilities than for
legitimate business purposes constitutes one of tax evasion.31

Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated. 32 The incidence of taxation
depends upon the substance of a transaction. The tax consequences arising from gains from a sale of property are not finally to be
determined solely by the means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step from
the commencement of negotiations to the consummation of the sale is relevant. A sale by one person cannot be transformed for tax
purposes into a sale by another by using the latter as a conduit through which to pass title. To permit the true nature of the transaction
to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax
policies of Congress.33

To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct entity when it is proved that
the latter was merely a conduit is to sanction a circumvention of our tax laws. Hence, the sale to Altonaga should be disregarded for
income tax purposes.34 The two sale transactions should be treated as a single direct sale by CIC to RMI.

Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now 27 (A) of the Tax Reform Act
of 1997), which stated as follows:

Sec. 24. Rates of tax on corporations. – (a) Tax on domestic corporations.- A tax is hereby imposed upon the taxable net income
received during each taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, and
partnerships, no matter how created or organized but not including general professional partnerships, in accordance with the following:

Twenty-five percent upon the amount by which the taxable net income does not exceed one hundred thousand pesos; and

Thirty-five percent upon the amount by which the taxable net income exceeds one hundred thousand pesos.

CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual capital gains tax provided for in
Section 34 (h) of the NIRC of 1986 35 (now 6% under Section 24 (D) (1) of the Tax Reform Act of 1997) is inapplicable. Hence, the
assessment for the deficiency income tax issued by the BIR must be upheld.

Has the period of assessment prescribed?

No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:

Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case of a false or fraudulent return with
intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court after the collection of such tax may be
begun without assessment, at any time within ten years after the discovery of the falsity, fraud or omission: Provided, That in a fraud
assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action
for collection thereof… .

Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file a return, the period
within which to assess tax is ten years from discovery of the fraud, falsification or omission, as the case may be.

It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of the BIR on the tax consequence of
the two sale transactions.36 Thus, the BIR was amply informed of the transactions even prior to the execution of the necessary
documents to effect the transfer. Subsequently, the two sales were openly made with the execution of public documents and the
declaration of taxes for 1989. However, these circumstances do not negate the existence of fraud. As earlier discussed those two
transactions were tainted with fraud. And even assuming arguendo that there was no fraud, we find that the income tax return filed by
CIC for the year 1989 was false. It did not reflect the true or actual amount gained from the sale of the Cibeles property. Obviously,
such was done with intent to evade or reduce tax liability.

As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years from the discovery of the falsity.
The false return was filed on 15 April 1990, and the falsity thereof was claimed to have been discovered only on 8 March 1991. 37 The
assessment for the 1989 deficiency income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the correct assessment
for deficiency income tax was well within the prescriptive period.

Is respondent Estate liable for the 1989 deficiency income tax of Cibeles Insurance Corporation?

A corporation has a juridical personality distinct and separate from the persons owning or composing it. Thus, the owners or
stockholders of a corporation may not generally be made to answer for the liabilities of a corporation and vice versa. There are,
however, certain instances in which personal liability may arise. It has been held in a number of cases that personal liability of a
corporate director, trustee, or officer along, albeit not necessarily, with the corporation may validly attach when:

1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in directing its affairs, or (c) conflict of
interest, resulting in damages to the corporation, its stockholders, or other persons;

2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file with the corporate
secretary his written objection thereto;

3. He agrees to hold himself personally and solidarily liable with the corporation; or

4. He is made, by specific provision of law, to personally answer for his corporate action.38

It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and voluntarily held himself
personally liable for all the tax liabilities of CIC and the buyer for the years 1987, 1988, and 1989. Paragraph g of the Deed of Sale of
Shares of Stocks specifically provides:

g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or obligations, contingent or otherwise,
for taxes, sums of money or insurance claims other than those reported in its audited financial statement as of December 31, 1989,
attached hereto as "Annex B" and made a part hereof. The business of Cibeles has at all times been conducted in full compliance with
all applicable laws, rules and regulations. SELLER undertakes and agrees to hold the BUYER and Cibeles free from any and all
income tax liabilities of Cibeles for the fiscal years 1987, 1988 and 1989.39 [Underscoring Supplied].

When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from any all income tax liabilities of Cibeles for the
fiscal years 1987, 1988, and 1989," he thereby voluntarily held himself personally liable therefor. Respondent estate cannot, therefore,
deny liability for CIC’s deficiency income tax for the year 1989 by invoking the separate corporate personality of CIC, since its obligation
arose from Toda’s contractual undertaking, as contained in the Deed of Sale of Shares of Stock.

WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the Court of Appeals of 31 January 2001
in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and another one is hereby rendered ordering respondent Estate of Benigno
P. Toda Jr. to pay ₱79,099,999.22 as deficiency income tax of Cibeles Insurance Corporation for the year 1989, plus legal interest from
1 May 1994 until the amount is fully paid.

Costs against respondent.

SO ORDERED.
G.R. No. L-13203             January 28, 1961

YUTIVO SONS HARDWARE COMPANY, petitioner,

vs.
COURT OF TAX APPEALS and COLLECTOR OF INTERNAL REVENUE, respondents.

GUTIERREZ DAVID, J.:

This is a petition for review of a decision of the Court of Tax Appeals ordering petitioner to pay to respondent Collector of Internal
Revenue the sum of P1,266,176.73 as sales tax deficiency for the third quarter of 1947 to the fourth quarter of 1950; inclusive, plus
75% surcharge thereon, equivalent to P349,632.54, or a sum total of P2,215,809.27, plus costs of the suit.

From the stipulation of facts and the evidence adduced by both parties, it appears that petitioner Yutivo Sons Hardware Co. (hereafter
referred to as Yutivo) is a domestic corporation, organized under the laws of the Philippines, with principal office at 404 Dasmariñas St.,
Manila. Incorporated in 1916, it was engaged, prior to the last world war, in the importation and sale of hardware supplies and
equipment. After the liberation, it resumed its business and until June of 1946 bought a number of cars and trucks from General Motors
Overseas Corporation (hereafter referred to as GM for short), an American corporation licensed to do business in the Philippines. As
importer, GM paid sales tax prescribed by sections 184, 185 and 186 of the Tax Code on the basis of its selling price to Yutivo. Said tax
being collected only once on original sales, Yutivo paid no further sales tax on its sales to the public.

On June 13, 1946, the Southern Motors, Inc. (hereafter referred to as SM) was organized to engage in the business of selling cars,
trucks and spare parts. Its original authorized capital stock was P1,000,000 divided into 10,000 shares with a par value of P100 each.

At the time of its incorporation 2,500 shares worth P250,000 appear to have been subscribed into equal proportions by Yu Khe Thai, Yu
Khe Siong, Hu Kho Jin, Yu Eng Poh, and Washington Sycip. The first three named subscribers are brothers, being sons of Yu Tiong
Yee, one of Yutivo's founders. The latter two are respectively sons of Yu Tiong Sin and Albino Sycip, who are among the founders of
Yutivo.

After the incorporation of SM and until the withdrawal of GM from the Philippines in the middle of 1947, the cars and tracks purchased
by Yutivo from GM were sold by Yutivo to SM which, in turn, sold them to the public in the Visayas and Mindanao.

When GM decided to withdraw from the Philippines in the middle of 1947, the U.S. manufacturer of GM cars and trucks appointed
Yutivo as importer for the Visayas and Mindanao, and Yutivo continued its previous arrangement of selling exclusively to SM. In the
same way that GM used to pay sales taxes based on its sales to Yutivo, the latter, as importer, paid sales tax prescribed on the basis of
its selling price to SM, and since such sales tax, as already stated, is collected only once on original sales, SM paid no sales tax on its
sales to the public.

On November 7, 1950, after several months of investigation by revenue officers started in July, 1948, the Collector of Internal Revenue
made an assessment upon Yutivo and demanded from the latter P1,804,769.85 as deficiency sales tax plus surcharge covering the
period from the third quarter of 1947 to the fourth quarter of 1949; or from July 1, 1947 to December 31, 1949, claiming that the taxable
sales were the retail sales by SM to the public and not the sales at wholesale made by, Yutivo to the latter inasmuch as SM and Yutivo
were one and the same corporation, the former being the subsidiary of the latter.

The assessment was disputed by the petitioner, and a reinvestigation of the case having been made by the agents of the Bureau of
Internal Revenue, the respondent Collector in his letter dated November 15, 1952 countermanded his demand for sales tax deficiency
on the ground that "after several investigations conducted into the matter no sufficient evidence could be gathered to sustain the
assessment of this Office based on the theory that Southern Motors is a mere instrumentality or subsidiary of Yutivo." The withdrawal
was subject, however, to the general power of review by the now defunct Board of Tax Appeals. The Secretary of Finance to whom the
papers relative to the case were endorsed, apparently not agreeing with the withdrawal of the assessment, returned them to the
respondent Collector for reinvestigation.

After another investigation, the respondent Collector, in a letter to petitioner dated December 16, 1954, redetermined that the
aforementioned tax assessment was lawfully due the government and in addition assessed deficiency sales tax due from petitioner for
the four quarters of 1950; the respondents' last demand was in the total sum of P2,215,809.27 detailed as follows:
 Deficiency 75% Total Amount
Sales Tax Surcharge Due

Assessment (First) of November 7, 1950 for

deficiency sales Tax for the period from 3rd Qrtr P773,473.4
1947 to 4th Qrtr 1949 inclusive P1,031,296.60 5 P1,804,769.05

Additional Assessment for period from 1st to 4th

Qrtr 1950, inclusive 234,880.13 176,160.09 411,040.22

Total amount demanded per letter of December P949,632.5

16, 1954 P1,266,176.73 4 P2,215,809.27

This second assessment was contested by the petitioner Yutivo before the Court of Tax Appeals, alleging that there is no valid ground
to disregard the corporate personality of SM and to hold that it is an adjunct of petitioner Yutivo; (2) that assuming the separate
personality of SM may be disregarded, the sales tax already paid by Yutivo should first be deducted from the selling price of SM in
computing the sales tax due on each vehicle; and (3) that the surcharge has been erroneously imposed by respondent. Finding against
Yutivo and sustaining the respondent Collector's theory that there was no legitimate or bona fide  purpose in the organization of SM —
the apparent objective of its organization being to evade the payment of taxes — and that it was owned (or the majority of the stocks
thereof are owned) and controlled by Yutivo and is a mere subsidiary, branch, adjunct, conduit, instrumentality or alter ego of the latter,
the Court of Tax Appeals — with Judge Roman Umali not taking part — disregarded its separate corporate existence and on April 27,
1957, rendered the decision now complained of. Of the two Judges who signed the decision, one voted for the modification of the
computation of the sales tax as determined by the respondent Collector in his decision so as to give allowance for the reduction of the
tax already paid (resulting in the reduction of the assessment to P820,509.91 exclusive of surcharges), while the other voted for
affirmance. The dispositive part of the decision, however, affirmed the assessment made by the Collector. Reconsideration of this
decision having been denied, Yutivo brought the case to this Court thru the present petition for review.

It is an elementary and fundamental principle of corporation law that a corporation is an entity separate and distinct from its
stockholders and from other corporation petitions to which it may be connected. However, "when the notion of legal entity is used to
defeat public convenience, justify wrong, protect fraud, or defend crime," the law will regard the corporation as an association of
persons, or in the case of two corporations merge them into one. (Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 496, citing I Fletcher
Cyclopedia of Corporation, Perm Ed., pp. 135 136; United States vs. Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255 per
Sanborn, J.) Another rule is that, when the corporation is the "mere alter ego or business conduit of a person, it may be disregarded."
(Koppel [Phil.], Inc. vs. Yatco, supra.)

After going over the voluminous record of the present case, we are inclined to rule that the Court of Tax Appeals was not justified in
finding that SM was organized for no other purpose than to defraud the Government of its lawful revenues. In the first place, this
corporation was organized in June, 1946 when it could not have caused Yutivo any tax savings. From that date up to June 30, 1947, or
a period of more than one year, GM was the importer of the cars and trucks sold to Yutivo, which, in turn resold them to SM. During that
period, it is not disputed that GM as importer, was the one solely liable for sales taxes. Neither Yutivo or SM was subject to the sales
taxes on their sales of cars and trucks. The sales tax liability of Yutivo did not arise until July 1, 1947 when it became the importer and
simply continued its practice of selling to SM. The decision, therefore, of the Tax Court that SM was organized purposely as a tax
evasion device runs counter to the fact that there was no tax to evade.

Making the observation from a newspaper clipping (Exh. "T") that "as early as 1945 it was known that GM was preparing to leave the
Philippines and terminate its business of importing vehicles," the court below speculated that Yutivo anticipated the withdrawal of GM
from business in the Philippines in June, 1947. This observation, which was made only in the resolution on the motion for
reconsideration, however, finds no basis in the record. On the other hand, GM had been an importer of cars in the Philippines even
before the war and had but recently resumed its operation in the Philippines in 1946 under an ambitious plan to expand its operation by
establishing an assembly plant here, so that it could not have been expected to make so drastic a turnabout of not merely abandoning
the assembly plant project but also totally ceasing to do business as an importer. Moreover, the newspaper clipping, Exh. "T", was
published on March 24, 1947, and clipping, merely reported a rumored plan that GM would abandon the assembly plant project in the
Philippines. There was no mention of the cessation of business by GM which must not be confused with the abandonment of the
assembly plant project. Even as respect the assembly plant, the newspaper clipping was quite explicit in saying that the Acting
Manager refused to confirm that rumor as late as March 24, 1947, almost a year after SM was organized.

At this juncture, it should be stated that the intention to minimize taxes, when used in the context of fraud, must be proved to exist by
clear and convincing evidence amounting to more than mere preponderance, and cannot be justified by a mere speculation. This is
because fraud is never lightly to be presumed. (Vitelli & Sons vs. U.S 250 U.S. 355; Duffin vs. Lucas, 55 F (2d) 786; Budd vs. Commr.,
43 F (2d) 509; Maryland Casualty Co. vs. Palmette Coal Co., 40 F (2d) 374; Schoonfield Bros., Inc. vs. Commr., 38 BTA 943; Charles
Heiss vs. Commr 36 BTA 833; Kerbaugh vs. Commr 74 F (2d) 749; Maddas vs. Commr., 114 F. (2d) 548; Moore vs. Commr., 37 BTA
378; National City Bank of New York vs. Commr., 98 (2d) 93; Richard vs. Commr., 15 BTA 316; Rea Gane vs. Commr., 19 BTA 518).
(See also Balter, Fraud Under Federal Law, pp. 301-302, citing numerous authorities: Arroyo vs. Granada, et al., 18 Phil. 484.) Fraud is
never imputed and the courts never sustain findings of fraud upon circumstances which, at the most, create only suspicion. (Haygood
Lumber & Mining Co. vs. Commr., 178 F (2d) 769; Dalone vs. Commr., 100 F (2d) 507).

In the second place, SM was organized and it operated, under circumstance that belied any intention to evade sales taxes. "Tax
evasion" is a term that connotes fraud thru the use of pretenses and forbidden devices to lessen or defeat taxes. The transactions
between Yutivo and SM, however, have always been in the open, embodied in private and public documents, constantly subject to
inspection by the tax authorities. As a matter of fact, after Yutivo became the importer of GM cars and trucks for Visayas and Mindanao,
it merely continued the method of distribution that it had initiated long before GM withdrew from the Philippines.
On the other hand, if tax saving was the only justification for the organization of SM, such justification certainly ceased with the passage
of Republic Act No. 594 on February 16, 1951, governing payment of advance sales tax by the importer based on the landed cost of
the imported article, increased by mark-ups of 25%, 50%, and 100%, depending on whether the imported article is taxed under sections
186, 185 and 184, respectively, of the Tax Code. Under Republic Act No. 594, the amount at which the article is sold is immaterial to
the amount of the sales tax. And yet after the passage of that Act, SM continued to exist up to the present and operates as it did many
years past in the promotion and pursuit of the business purposes for which it was organized.

In the third place, sections 184 to 186 of the said Code provides that the sales tax shall be collected "once only on every original sale,
barter, exchange . . , to be paid by the manufacturer, producer or importer." The use of the word "original" and the express provision
that the tax was collectible "once only" evidently has made the provisions susceptible of different interpretations. In this connection, it
should be stated that a taxpayer has the legal right to decrease the amount of what otherwise would be his taxes or altogether avoid
them by means which the law permits. (U.S. vs. Isham 17 Wall. 496, 506; Gregory vs. Helvering 293 U.S. 465, 469; Commr. vs. Tower,
327 U.S. 280; Lawton vs. Commr 194 F (2d) 380). Any legal means by the taxpayer to reduce taxes are all right Benry vs. Commr. 25
T. Cl. 78). A man may, therefore, perform an act that he honestly believes to be sufficient to exempt him from taxes. He does not incur
fraud thereby even if the act is thereafter found to be insufficient. Thus in the case of Court Holding Co. vs. Commr. 2 T. Cl. 531, it was
held that though an incorrect position in law had been taken by the corporation there was no suppression of the facts, and a fraud
penalty was not justified.

The evidence for the Collector, in our opinion, falls short of the standard of clear and convincing proof of fraud. As a matter of fact, the
respondent Collector himself showed a great deal of doubt or hesitancy as to the existence of fraud. He even doubted the validity of his
first assessment dated November 7, 1959. It must be remembered that the fraud which respondent Collector imputed to Yutivo must be
related to its filing of sales tax returns of less taxes than were legally due. The allegation of fraud, however, cannot be sustained without
the showing that Yutivo, in filing said returns, did so fully knowing that the taxes called for therein called for therein were less than what
were legally due. Considering that respondent Collector himself with the aid of his legal staff, and after some two years of investigation
and duty of investigation and study concluded in 1952 that Yutivo's sales tax returns were correct — only to reverse himself after
another two years — it would seem harsh and unfair for him to say in 1954 that Yutivo fully knew in October 1947 that its sales tax
returns were inaccurate.

On this point, one other consideration would show that the intent to save taxes could not have existed in the minds of the organizers of
SM. The sales tax imposed, in theory and in practice, is passed on to the vendee, and is usually billed separately as such in the sales
invoice. As pointed out by petitioner Yutivo, had not SM handled the retail, the additional tax that would have been payable by it, could
have been easily passed off to the consumer, especially since the period covered by the assessment was a "seller's market" due to the
post-war scarcity up to late 1948, and the imposition of controls in the late 1949.

It is true that the arrastre charges constitute expenses of Yutivo and its non-inclusion in the selling price by Yutivo cost the Government
P4.00 per vehicle, but said non-inclusion was explained to have been due to an inadvertent accounting omission, and could hardly be
considered as proof of willful channelling and fraudulent evasion of sales tax. Mere understatement of tax in itself does not prove fraud.
(James Nicholson, 32 BTA 377, affirmed 90 F. (2) 978, cited in Merten's Sec. 55.11 p. 21) The amount involved, moreover, is extremely
small inducement for Yutivo to go thru all the trouble of organizing SM. Besides, the non-inclusion of these small arrastre charges in the
sales tax returns of Yutivo is clearly shown in the records of Yutivo, which is uncharacteristic of fraud (See Insular Lumber Co. vs.
Collector, G.R. No. L-719, April 28, 1956.)

We are, however, inclined to agree with the court below that SM was actually owned and controlled by petitioner as to make it a mere
subsidiary or branch of the latter created for the purpose of selling the vehicles at retail and maintaining stores for spare parts as well as
service repair shops. It is not disputed that the petitioner, which is engaged principally in hardware supplies and equipment, is
completely controlled by the Yutivo, Young or Yu family. The founders of the corporation are closely related to each other either by
blood or affinity, and most of its stockholders are members of the Yu (Yutivo or Young) family. It is, likewise, admitted that SM was
organized by the leading stockholders of Yutivo headed by Yu Khe Thai. At the time of its incorporation 2,500 shares worth
P250,000.00 appear to have been subscribed in five equal proportions by Yu Khe Thai, Yu Khe Siong, Yu Khe Jin, Yu Eng Poh and
Washington Sycip. The first three named subscribers are brothers, being the sons of Yu Tien Yee, one of Yutivo's founders. Yu Eng
Poh and Washington Sycip are respectively sons of Yu Tiong Sing and Alberto Sycip who are co-founders of Yutivo. According to the
Articles of Incorporation of the said subscriptions, the amount of P62,500 was paid by the aforenamed subscribers, but actually the said
sum was advanced by Yutivo. The additional subscriptions to the capital stock of SM and subsequent transfers thereof were paid by
Yutivo itself. The payments were made, however, without any transfer of funds from Yutivo to SM. Yutivo simply charged the accounts
of the subscribers for the amount allegedly advanced by Yutivo in payment of the shares. Whether a charge was to be made against
the accounts of the subscribers or said subscribers were to subscribe shares appears to constitute a unilateral act on the part of Yutivo,
there being no showing that the former initiated the subscription.

The transactions were made solely by and between SM and Yutivo. In effect, it was Yutivo who undertook the subscription of shares,
employing the persons named or "charged" with corresponding account as nominal stockholders. Of course, Yu Khe Thai, Yu Khe Jin,
Yu Khe Siong and Yu Eng Poh were manifestly aware of these subscriptions, but considering that they were the principal officers and
constituted the majority of the Board of Directors of both Yutivo and SM, their subscriptions could readily or easily be that of Yutivo's
Moreover, these persons were related to death other as brothers or first cousins. There was every reason for them to agree in order to
protect their common interest in Yutivo and SM.

The issued capital stock of SM was increased by additional subscriptions made by various person's but except Ng Sam Bak and David
Sycip, "payments" thereof were effected by merely debiting 'or charging the accounts of said stockholders and crediting the
corresponding amounts in favor of SM, without actually transferring cash from Yutivo. Again, in this instance, the "payments" were
Yutivo, by effected by the mere unilateral act of Yutivo a accounts of the virtue of its control over the individual persons charged, would
necessarily exercise preferential rights and control directly or indirectly, over the shares, it being the party which really undertook to pay
or underwrite payment thereof.
The shareholders in SM are mere nominal stockholders holding the shares for and in behalf of Yutivo, so even conceding that the
original subscribers were stockholders bona fide Yutivo was at all times in control of the majority of the stock of SM and that the latter
was a mere subsidiary of the former.

True, petitioner and other recorded stockholders transferred their shareholdings, but the transfers were made to their immediate
relatives, either to their respective spouses and children or sometimes brothers or sisters. Yutivo's shares in SM were transferred to
immediate relatives of persons who constituted its controlling stockholders, directors and officers. Despite these purported changes in
stock ownership in both corporations, the Board of Directors and officers of both corporations remained unchanged and Messrs. Yu
Khe Thai, Yu Khe Siong Hu Khe Jin and Yu Eng Poll (all of the Yu or Young family) continued to constitute the majority in both boards.
All these, as observed by the Court of Tax Appeals, merely serve to corroborate the fact that there was a common ownership and
interest in the two corporations.

SM is under the management and control of Yutivo by virtue of a management contract entered into between the two parties. In fact,
the controlling majority of the Board of Directors of Yutivo is also the controlling majority of the Board of Directors of SM. At the same
time the principal officers of both corporations are identical. In addition both corporations have a common comptroller in the person of
Simeon Sy, who is a brother-in-law of Yutivo's president, Yu Khe Thai. There is therefore no doubt that by virtue of such control, the
business, financial and management policies of both corporations could be directed towards common ends.

Another aspect relative to Yutivo's control over SM operations relates to its cash transactions. All cash assets of SM were handled by
Yutivo and all cash transactions of SM were actually maintained thru Yutivo. Any and all receipts of cash by SM including its branches
were transmitted or transferred immediately and directly to Yutivo in Manila upon receipt thereof. Likewise, all expenses, purchases or
other obligations incurred by SM are referred to Yutivo which in turn prepares the corresponding disbursement vouchers and payments
in relation there, the payment being made out of the cash deposits of SM with Yutivo, if any, or in the absence thereof which occurs
generally, a corresponding charge is made against the account of SM in Yutivo's books. The payments for and charges against SM are
made by Yutivo as a matter of course and without need of any further request, the latter would advance all such cash requirements for
the benefit of SM. Any and all payments and cash vouchers are made on Yutivo stationery and made under authority of Yutivo's
corporate officers, without any copy thereof being furnished to SM. All detailed records such as cash disbursements, such as expenses,
purchases, etc. for the account of SM, are kept by Yutivo and SM merely keeps a summary record thereof on the basis of information
received from Yutivo.

All the above plainly show that cash or funds of SM, including those of its branches which are directly remitted to Yutivo, are placed in
the custody and control of Yutivo, resources and subject to withdrawal only by Yutivo. SM's being under Yutivo's control, the former's
operations and existence became dependent upon the latter.

Consideration of various other circumstances, especially when taken together, indicates that Yutivo treated SM merely as its
department or adjunct. For one thing, the accounting system maintained by Yutivo shows that it maintained a high degree of control
over SM accounts. All transactions between Yutivo and SM are recorded and effected by mere debit or credit entries against the
reciprocal account maintained in their respective books of accounts and indicate the dependency of SM as branch upon Yutivo.

Apart from the accounting system, other facts corroborate or independently show that SM is a branch or department of Yutivo. Even the
branches of SM in Bacolod, Iloilo, Cebu, and Davao treat Yutivo — Manila as their "Head Office" or "Home Office" as shown by their
letters of remittances or other correspondences. These correspondences were actually received by Yutivo and the reference to Yutivo
as the head or home office is obvious from the fact that all cash collections of the SM's branches are remitted directly to Yutivo. Added
to this fact, is that SM may freely use forms or stationery of Yutivo

The fact that SM is a mere department or adjunct of Yutivo is made more patent by the fact that arrastre conveying, and charges paid
for the "operation of receiving, loading or unloading" of imported cars and trucks on piers and wharves, were charged against SM.
Overtime charges for the unloading of cars and trucks as requested by Yutivo and incurred as part of its acquisition cost thereof, were
likewise charged against and treated as expenses of SM. If Yutivo were the importer, these arrastre and overtime charges were
Yutivo's expenses in importing goods and not SM's. But since those charges were made against SM, it plainly appears that Yutivo had
sole authority to allocate its expenses even as against SM in the sense that the latter is a mere adjunct, branch or department of the
former.

Proceeding to another aspect of the relation of the parties, the management fees due from SM to Yutivo were taken up as expenses of
SM and credited to the account of Yutivo. If it were to be assumed that the two organizations are separate juridical entities, the
corresponding receipts or receivables should have been treated as income on the part of Yutivo. But such management fees were
recorded as "Reserve for Bonus" and were therefore a liability reserve and not an income account. This reserve for bonus were
subsequently distributed directly to and credited in favor of the employees and directors of Yutivo, thereby clearly showing that the
management fees were paid directly to Yutivo officers and employees.

Briefly stated, Yutivo financed principally, if not wholly, the business of SM and actually extended all the credit to the latter not only in
the form of starting capital but also in the form of credits extended for the cars and vehicles allegedly sold by Yutivo to SM as well as
advances or loans for the expenses of the latter when the capital had been exhausted. Thus, the increases in the capital stock were
made in advances or "Guarantee" payments by Yutivo and credited in favor of SM. The funds of SM were all merged in the cash fund of
Yutivo. At all times Yutivo thru officers and directors common to it and SM, exercised full control over the cash funds, policies,
expenditures and obligations of the latter.

Southern Motors being but a mere instrumentality, or adjunct of Yutivo, the Court of Tax Appeals correctly disregarded the technical
defense of separate corporate entity in order to arrive at the true tax liability of Yutivo.

Petitioner contends that the respondent Collector had lost his right or authority to issue the disputed assessment by reason of
prescription. The contention, in our opinion, cannot be sustained. It will be noted that the first assessment was made on November 7,
1950 for deficiency sales tax from 1947 to 1949. The corresponding returns filed by petitioner covering the said period was made at the
earliest on October 1, as regards the third quarter of 1947, so that it cannot be claimed that the assessment was not made within the
five-year period prescribed in section 331 of the Tax Code invoked by petitioner. The assessment, it is admitted, was withdrawn by the
Collector on insufficiency of evidence, but November 15, 1952 due to insufficiency of evidence, but the withdrawal was made subject to
the approval of the Secretary of Finance and the Board of Tax Appeals, pursuant to the provisions of section 9 of Executive Order No.
401-A, series of 1951. The decision of the previous assessment of November 7, Collector countermanding the as 1950 was forwarded
to the Board of Tax Appeals through the Secretary of Finance but that official, apparently disagreeing with the decision, sent it back for
re-investigation. Consequently, the assessment of November 7, 1950 cannot be considered to have been finally withdrawn. That the
assessment was subsequently reiterated in the decision of respondent Collector on December 16, 1954 did not alter the fact that it was
made seasonably. In this connection, it would appear that a warrant of distraint and levy had been issued on March 28, 1951 in relation
with this case and by virtue thereof the properties of Yutivo were placed under constructive distraint. Said warrant and constructive
distraint have not been lifted up to the present, which shows that the assessment of November 7, 1950 has always been valid and
subsisting.

Anent the deficiency sale tax for 1950, considering that the assessment thereof was made on December 16, 1954, the same was
assessed well within the prescribed five-year period.

Petitioner argues that the original assessment of November 7, 1950 did not extend the prescriptive period on assessment. The
argument is untenable, for, as already seen, the assessment was never finally withdrawn, since it was not approved by the Secretary of
Finance or of the Board of Tax Appeals. The authority of the Secretary to act upon the assessment cannot be questioned, for he is
expressly granted such authority under section 9 of Executive Order No. 401-And under section 79 (c) of the Revised Administrative
Code, he has "direct control, direction and supervision over all bureaus and offices under his jurisdiction and may, any provision of
existing law to the contrary not withstanding, repeal or modify the decision of the chief of said Bureaus or offices when advisable in
public interest."

It should here also be stated that the assessment in question was consistently protested by petitioner, making several requests for
reinvestigation thereof. Under the circumstances, petitioner may be considered to have waived the defense of prescription.

"Estoppel has been employed to prevent the application of the statute of limitations against the government in certain instances in
which the taxpayer has taken some affirmative action to prevent the collection of the tax within the statutory period. It is generally held
that a taxpayer is estopped to repudiate waivers of the statute of limitations upon which the government relied. The cases frequently
involve dissolved corporations. If no waiver has been given, the cases usually show come conduct directed to a postponement of
collection, such, for example, as some variety of request to apply an overassessment. The taxpayer has 'benefited' and 'is not in a
position to contest' his tax liability. A definite representation of implied authority may be involved, and in many cases the taxpayer has
received the 'benefit' of being saved from the inconvenience, if not hardship of immediate collection. "

Conceivably even in these cases a fully informed Commissioner may err to the sorrow of the revenues, but generally speaking, the
cases present a strong combination of equities against the taxpayer, and few will seriously quarrel with their application of the doctrine
of estoppel." (Mertens Law of Federal Income Taxation, Vol. 10-A, pp. 159-160.)

It is also claimed that section 9 of Executive Order No. 401-A, series of 1951 — es involving an original assessment of more than
P5,000 — refers only to compromises and refunds of taxes, but not to total withdrawal of the assessment. The contention is without
merit. A careful examination of the provisions of both sections 8 and 9 of Executive Order No. 401-A, series of 1951, reveals the
procedure prescribed therein is intended as a check or control upon the powers of the Collector of Internal Revenue in respect to
assessment and refunds of taxes. If it be conceded that a decision of the Collector of Internal Revenue on partial remission of taxes is
subject to review by the Secretary of Finance and the Board of Tax Appeals, then with more reason should the power of the Collector to
withdraw totally an assessment be subject to such review.

We find merit, however, in petitioner's contention that the Court of Tax Appeals erred in the imposition of the 5% fraud surcharge. As
already shown in the early part of this decision, no element of fraud is present.

Pursuant to Section 183 of the National Internal Revenue Code the 50% surcharge should be added to the deficiency sales tax "in case
a false or fraudulent return is willfully made." Although the sales made by SM are in substance by Yutivo this does not necessarily
establish fraud nor the willful filing of a false or fraudulent return.

The case of Court Holding Co. v. Commissioner of Internal Revenue (August 9, 1943, 2 TC 531, 541-549) is in point. The petitioner
Court Holding Co. was a corporation consisting of only two stockholders, to wit: Minnie Miller and her husband Louis Miller. The only
assets of third husband and wife corporation consisted of an apartment building which had been acquired for a very low price at a
judicial sale. Louis Miller, the husband, who directed the company's business, verbally agreed to sell this property to Abe C. Fine and
Margaret Fine, husband and wife, for the sum of $54,000.00, payable in various installments. He received $1,000.00 as down payment.
The sale of this property for the price mentioned would have netted the corporation a handsome profit on which a large corporate
income tax would have to be paid. On the afternoon of February 23, 1940, when the Millers and the Fines got together for the execution
of the document of sale, the Millers announced that their attorney had called their attention to the large corporate tax which would have
to be paid if the sale was made by the corporation itself. So instead of proceeding with the sale as planned, the Millers approved a
resolution to declare a dividend to themselves "payable in the assets of the corporation, in complete liquidation and surrender of all the
outstanding corporate stock." The building, which as above stated was the only property of the corporation, was then transferred to Mr.
and Mrs. Miller who in turn sold it to Mr. and Mrs. Fine for exactly the same price and under the same terms as had been previously
agreed upon between the corporation and the Fines.

The return filed by the Court Holding Co. with the respondent Commissioner of Internal Revenue reported no taxable gain as having
been received from the sale of its assets. The Millers, of course, reported a long term capital gain on the exchange of their corporate
stock with the corporate property. The Commissioner of Internal Revenue contended that the liquidating dividend to stockholders had
no purpose other than that of tax avoidance and that, therefore, the sale by the Millers to the Fines of the corporation's property was in
substance a sale by the corporation itself, for which the corporation is subject to the taxable profit thereon. In requiring the corporation
to pay the taxable profit on account of the sale, the Commissioner of Internal Revenue, imposed a surcharge of 25% for delinquency,
plus an additional surcharge as fraud penalties.
The U. S. Court of Tax Appeals held that the sale by the Millers was for no other purpose than to avoid the tax and was, in substance, a
sale by the Court Holding Co., and that, therefore, the said corporation should be liable for the assessed taxable profit thereon. The
Court of Tax Appeals also sustained the Commissioner of Internal Revenue on the delinquency penalty of 25%. However, the Court of
Tax Appeals disapproved the fraud penalties, holding that an attempt to avoid a tax does not necessarily establish fraud; that it is a
settled principle that a taxpayer may diminish his tax liability by means which the law permits; that if the petitioner, the Court Holding
Co., was of the opinion that the method by which it attempted to effect the sale in question was legally sufficient to avoid the imposition
of a tax upon it, its adoption of that methods not subject to censure; and that in taking a position with respect to a question of law, the
substance of which was disclosed by the statement indorsed on it return, it may not be said that that position was taken fraudulently.
We quote in full the pertinent portion of the decision of the Court of Tax Appeals: .

". . . The respondent's answer alleges that the petitioner's failure to report as income the taxable profit on the real estate sale was
fraudulent and with intent to evade the tax. The petitioner filed a reply denying fraud and averring that the loss reported on its return
was correct to the best of its knowledge and belief. We think the respondent has not sustained the burden of proving a fraudulent intent.
We have concluded that the sale of the petitioner's property was in substance a sale by the petitioner, and that the liquidating dividend
to stockholders had no purpose other than that of tax avoidance. But the attempt to avoid tax does not necessarily establish fraud. It is
a settled principle that a taxpayer may diminish his liability by any means which the law permits. United States v. Isham, 17 Wall.
496; Gregory v. Helvering, supra; Chrisholm v. Commissioner, 79 Fed. (2d) 14. If the petitioner here was of the opinion that the method
by which it attempted to effect the sale in question was legally sufficient to avoid the imposition of tax upon it, its adoption of that
method is not subject to censure. Petitioner took a position with respect to a question of law, the substance of which was disclosed by
the statement endorsed on its return. We can not say, under the record before us, that that position was taken fraudulently. The
determination of the fraud penalties is reversed."

When GM was the importer and Yutivo, the wholesaler, of the cars and trucks, the sales tax was paid only once and on the original
sales by the former and neither the latter nor SM paid taxes on their subsequent sales. Yutivo might have, therefore, honestly believed
that the payment by it, as importer, of the sales tax was enough as in the case of GM Consequently, in filing its return on the basis of its
sales to SM and not on those by the latter to the public, it cannot be said that Yutivo deliberately made a false return for the purpose of
defrauding the government of its revenues which will justify the imposition of the surcharge penalty.

We likewise find meritorious the contention that the Tax Court erred in computing the alleged deficiency sales tax on the selling price of
SM without previously deducting therefrom the sales tax due thereon. The sales tax provisions (sees. 184.186, Tax Code) impose a tax
on original sales measured by "gross selling price" or "gross value in money". These terms, as interpreted by the respondent Collector,
do not include the amount of the sales tax, if invoiced separately. Thus, General Circular No. 431 of the Bureau of Internal Revenue
dated July 29, 1939, which implements sections 184.186 of the Tax Code provides: "

. . .'Gross selling price' or gross value in money' of the articles sold, bartered, exchanged, transferred as the term is used in the
aforecited sections (sections 184, 185 and 186) of the National Internal Revenue Code, is the total amount of money or its equivalent
which the purchaser pays to the vendor to receive or get the goods. However, if a manufacturer, producer, or importer, in fixing the
gross selling price of an article sold by him has included an amount intended to cover the sales tax in the gross selling price of the
articles, the sales tax shall be based on the gross selling price less the amount intended to cover the tax, if the same is billed to the
purchaser as a separate item.

General Circular No. 440 of the same Bureau reads:

Amount intended to cover the tax must be billed as a separate em so as not to pay a tax on the tax. — On sales made after he third
quarter of 1939, the amount intended to cover the sales tax must be billed to the purchaser as separate items in the, invoices in order
that the reduction thereof from the gross ailing price may be allowed in the computation of the merchants' percentage tax on the sales.
Unless billed to the purchaser as a separate item in the invoice, the amounts intended to cover the sales tax shall be considered as part
of the gross selling price of the articles sold, and deductions thereof will not be allowed, (Cited in Dalupan, Nat. Int. Rev. Code,
Annotated, Vol. II, pp. 52-53.)

Yutivo complied with the above circulars on its sales to SM, and as separately billed, the sales taxes did not form part of the "gross
selling price" as the measure of the tax. Since Yutivo had previously billed the sales tax separately in its sales invoices to SM General
Circulars Nos. 431 and 440 should be deemed to have been complied. Respondent Collector's method of computation, as opined by
Judge Nable in the decision complained of —

. . . is unfair, because . . .(it is) practically imposing tax on a tax already paid. Besides, the adoption of the procedure would in certain
cases elevate the bracket under which the tax is based. The late payment is already penalized, thru the imposition of surcharges, by
adopting the theory of the Collector, we will be creating an additional penalty not contemplated by law."

If the taxes based on the sales of SM are computed in accordance with Gen. Circulars Nos. 431 and 440 the total deficiency sales
taxes, exclusive of the 25% and 50% surcharges for late payment and for fraud, would amount only to P820,549.91 as shown in the
following computation:

Sales Taxes Due

Gross Sales of Total Gross Selling
Rates of and Computed under
Vehicles Exclusive of Price Charged to the
Sales Tax Gen. Cir Nos. 431 &
Sales Tax Public
400

5% P11,912,219.57 P595,610.98 P12,507,83055

7% 909,559.50 63,669.16 973,228.66

10% 2,618,695.28 261,869.53 2,880,564.81

 15% 3,602,397.65 540,359.65 4,142,757.30

20% 267,150.50 53,430.10 320,580.60

30% 837,146.97 251,114.09 1,088,291.06

50% 74,244.30 37,122.16 111,366.46

75%           8,000.00           6,000.00         14,000.00

TOTAL P20,220,413.77 P1,809,205.67 P22,038,619.44

Less Taxes Paid by Yutivo 988,655.76

Deficiency Tax still due P820,549.91

This is the exact amount which, according to Presiding Judge Nable of the Court of Tax Appeals, Yutivo would pay, exclusive of the
surcharges.

Petitioner finally contends that the Court of Tax Appeals erred or acted in excess of its jurisdiction in promulgating judgment for the
affirmance of the decision of respondent Collector by less than the statutory requirement of at least two votes of its judges. Anent this
contention, section 2 of Republic Act No. 1125, creating the Court of Tax Appeals, provides that "Any two judges of the Court of Tax
Appeals shall constitute a quorum, and the concurrence of two judges shall be necessary to promulgate decision thereof. . . . " It is on
record that the present case was heard by two judges of the lower court. And while Judge Nable expressed his opinion on the issue of
whether or not the amount of the sales tax should be excluded from the gross selling price in computing the deficiency sales tax due
from the petitioner, the opinion, apparently, is merely an expression of his general or "private sentiment" on the particular issue, for he
concurred the dispositive part of the decision. At any rate, assuming that there is no valid decision for lack of concurrence of two
judges, the case was submitted for decision of the court below on March 28, 1957 and under section 13 of Republic Act 1125, cases
brought before said court hall be decided within 30 days after submission thereof. "If no decision is rendered by the Court within thirty
days from the date a case is submitted for decision, the party adversely affected by said ruling, order or decision, may file with said
Court a notice of his intention to appeal to the Supreme Court, and if no decision has as yet been rendered by the Court, the aggrieved
party may file directly with the Supreme Court an appeal from said ruling, order or decision, notwithstanding the foregoing provisions of
this section." The case having been brought before us on appeal, the question raised by petitioner as become purely academic.

IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals under review is hereby modified in that petitioner shall be
ordered to pay to respondent the sum of P820,549.91, plus 25% surcharge thereon for late payment.

So ordered without costs.

G.R. No. 179115 : September 26, 2012

ASIA INTERNATIONAL AUCTIONEERS, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

RESOLUTION

PERLAS-BERNABE, J.:

Before the Court is a Petition for Review seeking to reverse and set aside the Decision dated August 3, 2007 of the Court of Tax
Appeals (CTA) En Banc, 1Ï‚rνll and the Resolutions dated November 20, 20062Ï‚rνll and February 22, 20073Ï‚rνll of the CTA First
Division dismissing Asia International Auctioneers, Inc.s (AIA) appeal due to its alleged failure to timely protest the Commissioner of
Internal Revenues (CIR) tax assessment.

The Factual Antecedents

AIA is a duly organized corporation operating within the Subic Special Economic Zone. It is engaged in the importation of used motor
vehicles and heavy equipment which it sells to the public through auction.4ςrνll

On August 25, 2004, AIA received from the CIR a Formal Letter of Demand, dated July 9, 2004, containing an assessment for
deficiency value added tax (VAT) and excise tax in the amounts of P 102,535,520.00 and P 4,334,715.00, respectively, or a total
amount of P 106,870,235.00, inclusive of penalties and interest, for auction sales conducted on February 5, 6, 7, and 8, 2004.5Ï‚rνll

AIA claimed that it filed a protest letter dated August 29, 2004 through registered mail on August 30, 2004.6Ï‚rνll It also submitted
additional supporting documents on September 24, 2004 and November 22, 2004.7ςrνll

The CIR failed to act on the protest, prompting AIA to file a petition for review before the CTA on June 20, 2005,8Ï‚rνll to which the CIR
filed its Answer on July 26, 2005.9ςrνll

On March 8, 2006, the CIR filed a motion to dismiss10Ï‚rνll on the ground of lack of jurisdiction citing the alleged failure of AIA to timely
file its protest which thereby rendered the assessment final and executory. The CIR denied receipt of the protest letter dated August 29,
2004 claiming that it only received the protest letter dated September 24, 2004 on September 27, 2004, three days after the lapse of
the 30-day period prescribed in Section 22811Ï‚rνll of the Tax Code.12Ï‚rνll

In opposition to the CIRs motion to dismiss, AIA submitted the following evidence to prove the filing and the receipt of the protest letter
dated August 29, 2004: (1) the protest letter dated August 29, 2004 with attached Registry Receipt No. 3824;13Ï‚rνll (2) a Certification
dated November 15, 2005 issued by Wilfredo R. De Guzman, Postman III, of the Philippine Postal Corporation of Olongapo City, stating
that Registered Letter No. 3824 dated August 30, 2004 , addressed to the CIR, was dispatched under Bill No. 45 Page 1 Line 11 on
September 1, 2004 from Olongapo City to Quezon City;14Ï‚rνll (3) a Certification dated July 5, 2006 issued by Acting Postmaster,
Josefina M. Hora, of the Philippine Postal Corporation-NCR, stating that Registered Letter No. 3824 was delivered to the BIR Records
Section and was duly received by the authorized personnel on September 8, 2004;15Ï‚rνll and (4) a certified photocopy of the Receipt
of Important Communication Delivered issued by the BIR Chief of Records Division, Felisa U. Arrojado, showing that Registered Letter
No. 3824 was received by the BIR.16Ï‚rνll AIA also presented Josefina M. Hora and Felisa U. Arrojado as witnesses to testify on the
due execution and the contents of the foregoing documents.

Ruling of the Court of Tax Appeals

After hearing both parties, the CTA First Division rendered the first assailed Resolution dated November 20, 2006 granting the CIRs
motion to dismiss. Citing Republic v. Court of Appeals,17Ï‚rνll it ruled that "while a mailed letter is deemed received by the addressee in
the course of the mail, still, this is merely a disputable presumption, subject to controversion, and a direct denial of the receipt thereof
shifts the burden upon the party favored by the presumption to prove that the mailed letter indeed was received by the
addressee."18ςrνll

The CTA First Division faulted AIA for failing to present the registry return card of the subject protest letter. Moreover, it noted that the
text of the protest letter refers to a Formal Demand Letter dated June 9, 2004 and not the subject Formal Demand Letter dated July 9,
2004. Furthermore, it rejected AIAs argument that the September 24, 2004 letter merely served as a cover letter to the submission of its
supporting documents pointing out that there was no mention therein of a prior separate protest letter.19ςrνll

AIAs motion for reconsideration was subsequently denied by the CTA First Division in its second assailed Resolution dated February
22, 2007. On appeal, the CTA En Banc in its Decision dated August 3, 2007 affirmed the ruling of the CTA First Division holding that
AIAs evidence was not sufficient to prove receipt by the CIR of the protest letter dated August 24, 2004.

Hence, the instant petition.

Issue Before the Court

Both parties discussed the legal bases for AIAs tax liability, unmindful of the fact that this case stemmed from the CTAs dismissal of
AIAs petition for review for failure to file a timely protest, without passing upon the substantive merits of the case.

Relevantly, on January 30, 2008, AIA filed a Manifestation and Motion with Leave of the Honorable Court to Defer or Suspend Further
Proceedings20Ï‚rνll on the ground that it availed of the Tax Amnesty Program under Republic Act 948021Ï‚rνll (RA 9480), otherwise
known as the Tax Amnesty Act of 2007. On February 13, 2008, it submitted to the Court a Certification of Qualification22Ï‚rνll issued by
the BIR on February 5, 2008 stating that AIA "has availed and is qualified for Tax Amnesty for the Taxable Year 2005 and Prior Years"
pursuant to RA 9480.

With AIAs availment of the Tax Amnesty Program under RA 9480, the Court is tasked to first determine its effects on the instant
petition.

Ruling of the Court

A tax amnesty is a general pardon or the intentional overlooking by the State of its authority to impose penalties on persons otherwise
guilty of violating a tax law. It partakes of an absolute waiver by the government of its right to collect what is due it and to give tax
evaders who wish to relent a chance to start with a clean slate.23ςrνll

A tax amnesty, much like a tax exemption, is never favored or presumed in law. The grant of a tax amnesty, similar to a tax exemption,
must be construed strictly against the taxpayer and liberally in favor of the taxing authority.24ςrνll

In 2007, RA 9480 took effect granting a tax amnesty to qualified taxpayers for all national internal revenue taxes for the taxable year
2005 and prior years, with or without assessments duly issued therefor, that have remained unpaid as of December 31, 2005.25ςrνll

The Tax Amnesty Program under RA 9480 may be availed of by any person except those who are disqualified under Section 8 thereof,
to wit:chanroblesvirtuallawlibrary

Section 8. Exceptions. The tax amnesty provided in Section 5 hereof shall not extend to the following persons or cases existing as of
the effectivity of this Act:

(a) Withholding agents with respect to their withholding tax liabilities;

(b) Those with pending cases falling under the jurisdiction of the Presidential Commission on Good Government;

(c) Those with pending cases involving unexplained or unlawfully acquired wealth or under the Anti-Graft and Corrupt Practices Act;

(d) Those with pending cases filed in court involving violation of the Anti-Money Laundering Law;

(e) Those with pending criminal cases for tax evasion and other criminal offenses under Chapter II of Title X of the National Internal
Revenue Code of 1997, as amended, and the felonies of frauds, illegal exactions and transactions, and malversation of public funds
and property under Chapters III and IV of Title VII of the Revised Penal Code; and

(f) Tax cases subject of final and executory judgment by the courts.(Emphasis supplied)

The CIR contends that AIA is disqualified under Section 8(a) of RA 9480 from availing itself of the Tax Amnesty Program because it is
"deemed" a withholding agent for the deficiency taxes. This argument is untenable.
The CIR did not assess AIA as a withholding agent that failed to withhold or remit the deficiency VAT and excise tax to the BIR under
relevant provisions of the Tax Code. Hence, the argument that AIA is "deemed" a withholding agent for these deficiency taxes is
fallacious.

Indirect taxes, like VAT and excise tax, are different from withholding taxes. To distinguish, in indirect taxes, the incidence of taxation
falls on one person but the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon goods
before reaching the consumer who ultimately pays for it.26Ï‚rνll On the other hand, in case of withholding taxes, the incidence and
burden of taxation fall on the same entity, the statutory taxpayer. The burden of taxation is not shifted to the withholding agent who
merely collects, by withholding, the tax due from income payments to entities arising from certain transactions27and remits the same to
the government. Due to this difference, the deficiency VAT and excise tax cannot be "deemed" as withholding taxes merely because
they constitute indirect taxes. Moreover, records support the conclusion that AIA was assessed not as a withholding agent but, as the
one directly liable for the said deficiency taxes.28ςrνll

The CIR also argues that AIA, being an accredited investor/taxpayer situated at the Subic Special Economic Zone, should have availed
of the tax amnesty granted under RA 939929Ï‚rνll and not under RA 9480. This is also untenable.

RA 9399 was passed prior to the passage of RA 9480. RA 9399 does not preclude taxpayers within its coverage from availing of other
tax amnesty programs available or enacted in futuro  like RA 9480. More so, RA 9480 does not exclude from its coverage taxpayers
operating within special economic zones. As long as it is within the bounds of the law, a taxpayer has the liberty to choose which tax
amnesty program it wants to avail.

Lastly, the Court takes judicial notice of the "Certification of Qualification"30Ï‚rνll issued by Eduardo A. Baluyut, BIR Revenue District
Officer, stating that AlA "has availed and is qualified for Tax Amnesty for the Taxable Year 2005 and Prior Years" pursuant to RA 9480.
In the absence of sufficient evidence proving that the certification was issued in excess of authority, the presumption that it was issued
in the regular performance of the revenue district officer's official duty stands.31ςrνll

WHEREFORE, the petition is DENIED for being MOOT and ACADEMIC in view of Asia International Auctioneers, Inc.'s (AlA)
availment of the Tax Amnesty Program under RA 9480. Accordingly, the outstanding deficiency taxes of AlA are deemed fully
settled.ςrαlαωlιbrαr

SO ORDERED.
G.R. No. 193381, February 08, 2017

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. APO CEMENT CORPORATION, Respondent.

DECISION

LEONEN, J.:

This resolves a Petition for Review1  seeking to reverse and set asidethe Court of Tax Appeals En Banc's Decision2 dated June 24,
2010, which affirmed the Second Division's Resolution3 dated June 11, 2009 granting respondent's Motion to Cancel Tax Assessment;
and Resolution4 dated August 23, 2010 denying respondent's motion for reconsideration.

On September 1, 2003, the Bureau of Internal Revenue sent Apo Cement Corporation (Apo Cement) a Final Assessment Notice (FAN)
for deficiency taxes for the taxable year 1999, as follows:

DEFICIENCY TAXES AMOUNT

Income Tax P 479,977,176.22

Value-Added Tax 181,345,963.86

VAT Withholding 23,536,374.48

Withholding Tax on Compensation 15,595,098.12

Unremitted Withholding Tax on Compensation 10,388,757.86

Expanded Withholding Tax 17,642,981.74

 Unremitted Expanded Withholding Tax 3,510,390.71

Final Withholding Tax 53,808,355.59

Fringe Benefits Tax 167,337.31

Documentary Stamp Tax 52,480,372.77

Administrative Penalties 25,000.005

Apo Cement protested the FAN.6 The Bureau issued the Final Decision on Disputed Assessment dated June 15, 2006 denying the Apo
Cement's protest.7 The Final Decision contained the following deficiency

DEFICIENCY TAXES AMOUNT

Income Tax P 9,305,697.74

Value-Added Tax 1,610,070.51

Withholding Tax on Compensation 20,916,611.66

Unremitted Withholding Tax on Compensation 13,479,061.25

Expanded Withholding Tax 23,664,416.36

Unremitted Expanded Withholding Tax 4,549,677.32

Final Withholding Tax 3,095,786.45

Fringe Benefits Tax 213,656.97

Documentary Stamp Tax 67,433,862.97

Administrative Penalties 25,000.00

P144293840.658
Total
(Emphasis supplied)

On August 3, 2006, Apo Cement filed a Petition for Review with the Court of Tax Appeals.9

In its Answer, the Commissioner of Internal Revenue admitted that Apo Cement had already paid the deficiency assessments reflected
in the Bureau's Final Decision on Disputed Assessment, except for the documentary stamp taxes.10 The deficiency documentary stamp
taxes were allegedly based on several real property transactions of the corporation consisting of the assignment of several parcels of
land with mineral deposits to Apo Land and Quarry Corporation, a wholly owned subsidiary, and land acquisitions in 1999.11 According
to the Commissioner, Apo Cement should have paid documentary stamp taxes based on the zonal value of property with
mineral/quarry content, not on the zonal value of regular residential property.12

On January 25, 2008, Apo Cement availed of the tax amnesty under Republic Act No. 9480, particularly affecting the 1999 deficiency
documentary stamp taxes.13

After stipulation of facts and presentation of evidence, Apo Cement filed on April 17, 2009 a Motion to Cancel Tax Assessment (with
Motion to Admit Attached Formal Offer of Evidence).14 The Commissioner filed her Opposition.15

On June 11, 2009, the Court of Tax Appeals (Second Division) granted16 Apo Cement's Motion to Cancel Tax Assessment. It found Apo
Cement a qualified tax amnesty applicant under Republic Act No. 9480;17 and fully compliant with the requirements of the law, the
Department Order No. 29-07, and Revenue Memorandum Circular No. 19-2008. The Decision disposed as
follows:chanRoblesvirtualLawlibrary

WHEREFORE, premises considered:

the Assessment Notices for deficiency Documentary Stamp Taxes for taxable year 1999 issued against [Apo Cement
1)
Corporation] are hereby CANCELLED and SET ASIDE, solely in view of [its] availment of the Tax Amnesty under RA 9480;
 the Assessment Notices for deficiency Income Tax, Value-Added Tax, VAT Withholding Tax, Withholding Tax on Compensation,
2) Unremitted Withholding Tax on Compensation, Expanded Withholding Tax, Unremitted Expanded Withholding Tax, Final
Withholding Tax, and Fringe Benefits Tax are CANCELLED and SET ASIDE in view of petitioner's payment of said taxes.

Accordingly, the above-captioned case is hereby considered CLOSED and TERMINATED.

SO ORDERED.18

The Commissioner filed a Motion for Reconsideration, which the Court of Tax Appeals denied in a Resolution dated October 19, 2009
for lack of merit.

On November 19,2009, the Commissioner appealed to the En Banc.19 However, in a Decision promulgated on June 24, 2010, the Court
of Tax Appeals En Banc  dismissed the Commissioner's appeal and affirmed the Second Division's resolution ordering the cancellation
of the assessment for deficiency documentary stamp taxes in view of the Apo Cement's availment of the tax amnesty program. The En
Banc ruled that (a) Apo Cement is qualified to avail of the tax amnesty;20 (b) it submitted the required documents to the court;21 (c) the
Commissioner is not the proper party to challenge the SALN;22 (d) the one-year prescriptive period already lapsed;23 and (e) in another
tax case involving the same parties (CTA EB No. 256, CTA Case No. 6710), it was already adjudged that Apo Cement complied with
the requirements ofTaxAmnesty.24

The Commissioner filed a Motion for Reconsideration, but the same was denied in the Court of Tax Appeals En Banc Resolution dated
August 23, 2010.25

Hence, the petitioner filed its Petition for Review with this Court. Respondent filed its Comment26 and petitioner her Reply.27

In a Resolution28 dated June 15, 2011, the Court expunged from the records respondent's Rejoinder to petitioner's Reply.

The core issue is whether respondent had fully complied with all the requirements to avail of the tax amnesty granted under Republic
Act No.9480.

The Petition is devoid of merit. The Court of Tax Appeals committed no reversible error.

We shall first address the procedural issue of defective verification raised by the respondent.

Through the Verification and Certification of Non-Forum Shopping29 attached to the present Petition, Deputy Commissioner Estela V.
Sales of the Legal and Inspection Group of the Bureau of Internal Revenue states that the contents of the Petition are true and correct
of her own "knowledge and

belief based on authentic records."30

In the Court's Resolution31 dated December 8, 2010, the petitioner was directed to submit a sufficient verification within five (5) days
from notice. Petitioner did not comply.

Petitioner would argue however that while the verification still stated "belief," it was qualified by "based on authentic records." Hence,
"the statement implies that the contents of the petition were based not only on the pleader's belief but ultimately they are recitals from
authentic records."32

We are not persuaded.

The amendment to Section 4, Rule 7 entirely removed any reference to "belief' as basis.33 This is to ensure that the pleading is
anchored on facts and not on imagination or speculation, and is filed in good faith.

In Go v. Court of Appeals:34

Mere belief is insufficient basis and negates the verification which should be on the basis of personal knowledge or authentic records.
Verification is required to secure an assurance that the allegations of the petition have been made in good faith, or are true and correct
and not merely speculative.35

To emphasize this further, the third paragraph of Rule 7, Section 4 of the 1997 Rules of Civil Procedure, as amended, expressly treats
pleadings with a verification based on "information and belief' or "knowledge, information and belief," as unsigned.36

In Negros Oriental Planters Association, Inc. v. Hon. Presiding Judge of RTC-Negros Occidental, Branch 52, Bacolod City,37 the Court
explained that the amendment in the rules was made stricter so that a party cannot be allowed to base his statements on his belief.
Otherwise, the pleading is treated as unsigned which produces no legal effect. The court, though, in its discretion, may give the party a
chance to remedy the insufficiency. Thus:chanRoblesvirtualLawlibrary

Clearly, the amendment was introduced in order to make the verification requirement stricter, such that the party cannot now merely
state under oath that he believes the statements made in the pleading. He cannot even merely state under oath that he has knowledge
that such statements are true and correct. His knowledge must be specifically alleged under oath to be either personal knowledge or at
least based on authentic records.
Unlike, however, the requirement for a Certification against Forum Shopping in Section 5, wherein failure to comply with the
requirements is not curable by amendment of the complaint or other initiatory pleading, Section 4 of Rule 7, as amended, states that the
effect of the failure to properly verify a pleading is that the pleading shall be treated as unsigned:chanRoblesvirtualLawlibrary

A pleading required to be verified which contains a verification based on "information and belief'', or upon "knowledge,
information and belief', or lacks a proper verification, shall be treated as an unsigned pleading.

Unsigned pleadings are discussed in the immediately preceding section of Rule 7:

SEC. 3. Signature and address.

An unsigned pleading produces no legal effect. However, the court may, in its discretion, allow such deficiency to be remedied if it
shall appear that the same was due to mere inadvertence and not intended for delay. Counsel who deliberately files an unsigned
pleading, or signs a pleading in violation of this Rule, or alleges scandalous or indecent matter therein, or fails to promptly report to the
court a change of his address, shall be subject to appropriate disciplinary action. (5a)

A pleading, therefore, wherein the Verification is merely based on the party's knowledge and belief produces no legal effect, subject
to the discretion of the court to allow the deficiency to be remedied.38

In this case, petitioner did not submit a corrected verification despite the order of this Court. This alone merits the denial of the Petition
outright.

In any case, we find respondent had fully complied with the requirements of Republic Act No. 9480. Hence, the Court of Tax Appeals
properly cancelled the remaining assessment for deficiency documentary stamp taxes.

II.

The pertinent provisions on the grant and availment of tax amnesty under Republic Act No. 9480 state:chanRoblesvirtualLawlibrary

SECTION 1. Coverage.-There is hereby authorized and granted a tax amnesty which shall cover all national internal revenue taxes for
the taxable year 2005 and prior years, with or without assessments duly issued therefor, that have remained unpaid as of December
31, 2005: Provided, however, That the amnesty hereby authorized and granted shall not cover persons or cases enumerated under
Section 8 hereof.

SEC. 2. Availment of the Amnesty. Any person, natural or juridical, who wishes to avail himself of the tax amnesty authorized and
granted under this Act shall file with the Bureau of Internal Revenue (BIR) a notice and Tax Amnesty Return accompanied by a
Statement of Assets, Liabilities and Net worth (SALN) as of December 31, 2005, in such form as may be prescribed in the
implementing rules and regulations (JRR) of this Act, and pay the applicable amnesty tax within six months from the effectivity of the
IRR.

SECTION 3. What to Declare in the SALN - The SALN shall contain a declaration of the assets, liabilities and net worth as of December
31,2005, as follows:

a) Assets within or without the Philippines, whether real or personal, tangible or intangible, whether or not used in trade or
business: Provided, That property other than money shall be valued at the cost at which the property was acquired: Provided, further,
That foreign currency assets and/or securities shall be valued at the rate of exchange prevailing as of the date of the SALN;

(b) All existing liabilities which are legitimate and enforceable, secured or unsecured, whether or not incurred in trade or business; and

(c) The net worth of the taxpayer, which shall be the difference between the total assets and total liabilities.

SEC. 5.  Grant of Tax Amnesty. Except for the persons or cases covered in Section 8 hereof, any person, whether natural or juridical,
may avail himself of the benefits of tax amnesty under this Act, and pay the amnesty tax due thereon, based on his net worth as of
December 31, 2005 as declared in the SALN as of said period, in accordance with the following schedule of amnesty tax rates and
minimum amnesty tax payments required:chanRoblesvirtualLawlibrary

(b) Corporations

   

With subscribed
5% or P500,000,
  (1) capital of above
whichever is higher
P50 Million

  (2) With subscribed 5% or P250,000,

capital of above whichever is higher
P20 Million up to
 P50 Million

With subscribed
5% or P100,000,
  (3) capital of P5Million to
whichever is higher
P20Million

With subscribed
5% or P25,000,
(4) capital of below
whichever is higher
P5 Million

(d) Taxpayers who :filed their balance sheet/SALN, together with their income tax returns for 2005, and who desire to avail of the tax
amnesty under this Act shall amend such previously :filed statements by including still undeclared assets and/or liabilities and pay an
amnesty tax equal to :five percent (5%) based on the resulting increase in net worth: Provided, That such taxpayers shall likewise be
categorized in accordance with, and subjected to the minimum amounts of amnesty tax prescribed under the provisions of this Section.
(Emphasis supplied)

In addition to the above provisions of law, the Department of Finance Department Order No. 29-0739 provides:

SECTION 6. Method of Availment of Tax Amnesty.-

1.  Forms/Documents to be filed. - To avail of the general tax amnesty, concerned taxpayers shall file the following
documents/requirements:

a. Notice of Availment in such form as may be prescribed by the BIR.

b. Statements of Assets, Liabilities and Net worth (SALN) as of December 31, 2005 in such form, as may be prescribed by the BIR.

c. Tax Amnesty Return in such form as may be prescribed by the BIR.

2. Place of Filing of Amnesty Tax Return. - The Tax Amnesty Return, together with the other documents stated in Sec. 6 (1) hereof,
shall be filed as follows:

a. Residents shall file with the Revenue District Officer (RDO)/Large Taxpayer District Office of the BIR which has jurisdiction over the
legal residence or principal place of business of the taxpayer, as the case may be.

b. Non-residents shall file with the office of the Commissioner of the BIR, or with any RDO.

c. At the option of the taxpayer, the RDO may assist the taxpayer in accomplishing the forms and computing the taxable base and the
amnesty tax payable, but may not look into, question or examine the veracity of the entries contained in the Tax Amnesty Return,
Statement of Assets, Liabilities and Net worth, or such other documents submitted by the taxpayer.

3. Payment of Amnesty Tax and Full Compliance.- Upon filing of the Tax Amnesty Return in accordance with Sec. 6 (2) hereof, the
taxpayer shall pay the amnesty tax to the authorized agent bank or in the absence thereof, the Collection Agent or duly authorized
Treasurer of the city or municipality in which such person has his legal residence or principal place of business.

The RDO shall issue sufficient Acceptance of Payment Forms, as may be prescribed by the BIR for the use of-or to be accomplished by
the bank, the collection agent or the Treasurer, showing the acceptance of the amnesty tax payment. In case of the authorized agent
bank, the branch manager or the assistant branch manager shall sign the acceptance of payment form.

The Acceptance of Payment Form, the Notice of Availment, the SALN, and the Tax Amnesty Return shall be submitted to the RDO,
which shall be received only after complete payment. The completion of these requirements shall be deemed full compliance with the
provisions of RA 9480.

4. Time for Filing and Payment of Amnesty Tax. -The filing of the Tax Amnesty Return, together with the SALN, and the payment of the
amnesty tax shall be made within six (6) months from the effectivity of these Rules.

Taxpayers who availed themselves of the tax amnesty program are entitled to the immunities and privileges under Section 6 of the
law:chanRoblesvirtualLawlibrary

SEC. 6. Immunities and Privileges. Those who availed themselves of the tax amnesty under Section 5 hereof, and have fully complied
with all its conditions shall be entitled to the following immunities and privileges:

(a) The taxpayer shall be immune from the payment of taxes, as well as additions thereto, and the appurtenant civil, criminal or
administrative penalties under the National Internal Revenue Code of 1997, as amended, arising from the failure to pay any and all
internal revenue taxes for taxable year 2005 and prior years.
(b) The taxpayer's Tax Amnesty Return and the SALN as of December 31, 2005 shall not be admissible as evidence in all proceedings
that pertain to taxable year 2005 and prior years, insofar as such proceedings relate to internal revenue taxes, before judicial, quasi-
judicial or administrative bodies in which he is a defendant or respondent, and except for the purpose of ascertaining the net worth
beginning January 1, 2006, the same shall not be examined, inquired or looked into by any person or government office. However, the
taxpayer may use this as a defense, whenever appropriate, in cases brought against him.

(c) The books of accounts and other records of the taxpayer for the years covered by the tax amnesty availed of shall not be
examined: Provided, That the Commissioner of Internal Revenue may authorize in writing the examination of the said books of
accounts and other records to verify the validity or correctness of a claim for any tax refund, tax credit (other than refund or credit of
taxes withheld on wages), tax incentives, and/or exemptions under existing laws.

All these immunities and privileges shall not apply where the person failed to file a SALN and the Tax Amnesty Return, or where the
amount of net worth as of December 31, 2005 is proven to be understated to the extent of thirty percent (30%) or more, in accordance
with the provisions of Section 3 hereof.

This Court has declared40 that submission of the documentary requirements and payment of the amnesty tax is considered full
compliance with Republic Act No. 9480 and the taxpayer can immediately enjoy the immunities and privileges enumerated in Section 6
of the law.

The plain and straightforward conditions were obviously meant to encourage taxpayers to avail of the amnesty program, thereby
enhancing revenue administration and collection. 41

Here, it is undisputed that respondent had submitted all the documentary requirements. The Court of Tax Appeals En Banc found that
respondent had submitted the following:chanRoblesvirtualLawlibrary

i. Letter to the Commissioner of Internal Revenue, addressed to the Chief-LT Audit and Investigation Division II, Ms. Olivia 0.
Lao, received on January 25, 2008;

ii. Notice of Availment of the Tax Amnesty;

iii. Tax Amnesty Payment Form/Acceptance of Payment Form (BIR Form No. 0617);

iv. Tax Amnesty Return (BIR Form No. 2116);

v. Statement of Assets, Liabilities and Net worth;

vi. Annual Income Tax Return for the taxable year 2005 with Audited Financial Statements for the year 2005; and

vii. Development Bank of the Philippines BIR Tax Payment Deposit Slip in the amount of P3,668,951.06.42

The Court of Tax Appeals further found that there was nothing in the records, which would show that proceedings to question the
correctness of the Statement of Assets, Liabilities, and Net Worth (SALN) have been filed within the one-year period stated in Section 4
of the law.43 Hence, it concluded that respondent had duly complied with the requisites enumerated under Republic Act No. 9480 and is
therefore entitled to the benefits under Section 6.44

III.

The Commissioner disputes, however, the correctness of respondent's 2005 SALN because respondent allegedly did not include the
57,500,000 shares of stocks it acquired in 1999 from its subsidiary - Apo Land and Quarry Corporation in exchange for several parcels
of land.45

Consequently, respondent underpaid its amnesty tax by P89,858,951.05, corresponding to the value of the shares of stocks, which
respondent allegedly did not include in its declaration of assets in the SALN.46

Petitioner further submits that the one-year contestability period under Section 4 has not yet lapsed - as it had not yet even commenced
due to respondent's failure to file a complete SALN and to pay the correct amnesty tax.47

Respondent counters that the petitioner is not the proper party to question the correctness of its SALN.48 Under Section 4 of Republic
Act No. 9480, there is a presumption of correctness of the SALN and only parties other than the Bureau of Internal Revenue or its
agents may dispute the correctness of the SALN.49

Even assuming that petitioner has the standing to question the SALN, Republic Act No. 9480 provides that the proceeding to challenge
the SALN must be initiated within one year following the date of filing of the Tax Amnesty documents.50 Respondent asserts that it
availed of the tax amnesty program on January 25, 2008.51 Hence, petitioner's challenge, made only in April2009, was already time-
barred. 52

In her Reply, petitioner argues that: (1) she is the proper party to question the completeness of the applicant's SALN; and (2) the State
is not bound by the acts of the Bureau's officials, who examined respondent's SALN and accepted the wrong amnesty tax payment.53

IV.
Section 4 of Republic Act No. 9480 provides:chanRoblesvirtualLawlibrary

SEC. 4. Presumption of Correctness of the SALN. -The SALN as of December 31, 2005 shall be considered as true and correct
except where the amount of declared net worth is understated to the extent of thirty percent (30%) or more as may be established in
proceedings initiated by, or at the instance of, parties other than the BIR or its agents: Provided, That such proceedings must be
initiated within one year following the date of the filing of the tax amnesty return and the SALN. Findings of or admission in
congressional hearings, other administrative agencies of government, and/or courts shall be admissible to prove a thirty percent (30%)
under-declaration. (Emphasis and underscoring supplied)

Under the above-stated prov1s10n, the SALN is presumed correct unless there is a concurrence of the following:

a. There is under-declaration of net worth by 30%;

b. The under-declaration is established in proceedings initiated by parties other than the BIR; and

c. The proceedings were initiated within one (1) year from the filing of the tax amnesty.

The Court of Tax Appeals ruled that petitioner is not the proper party to question the veracity of respondent's SALN. It emphasized that
"the presumption of correctness of the SALN applies even against the Commissioner . . . Thus, the thirty percent (30%) threshold can
be established in proceedings initiated by, or at the instance of, parties other than the B[ureau of] I[ntemal] R[evenue] or its agents."54

The Court of Tax Appeals is correct.

We cannot disregard the plain and categorical text of Section 4. It is a basic rule of statutory construction that where the language of the
law is clear and unambiguous, it should be applied as written.55 Determining its wisdom or policy is beyond the realm of judicial power.56

In CS Garment, Inc. v. Commissioner of Internal Revenue,57 the Court clarified that -

The one-year period referred to in the law should ... be considered only as a prescriptive period within which third parties, meaning
'parties other than the BIR or its agents,' can question the SALN - not as a waiting period during which the BIR may contest the SALN
and the tax payer prevented from enjoying the immunities and privileges under the law. 58

The Court explained that the documentary requirements and payment of the amnesty tax operate as a suspensive condition, such that
completion of these requirements entitles the taxpayer-applicant to immediately enjoy the immunities and privileges under Republic Act
No. 9480.

However, the Court further stated that Section 6 of the law contains a resolutory condition. Immunities and privileges will cease to apply
to taxpayers who, in their SALN, were proven to have understated their net worth by 30% or more.

This clarification, however, does not mean that the amnesty taxpayers would go scot-free in case they substantially understate the
amounts of their net worth in their SALN. The 2007 Tax Amnesty Law imposes a resolutory condition insofar as the enjoyment of
immunities and privileges under the law is concerned. Pursuant to Section 4 of the law, third parties may initiate proceedings contesting
the declared amount of net worth of the amnesty taxpayer within one year following the date of the filing of the tax amnesty return and
the SALN. Section 6 then states that "All these immunities and privileges shall not apply ... where the amount of net worth as of
December 31, 2005 is proven to be understated to the extent of thirty percent (30%) or more, in accordance with the provisions of
Section 3 hereof." Accordingly, Section 10 provides that amnesty taxpayers who willfully understate their net worth shall be (a) liable for
perjury under the Revised Penal Code; and (b) subject to immediate tax fraud investigation in order to collect all taxes due and to
criminally prosecute those found to have willfully evaded lawful taxes due.59

Thus, the amnesty granted under the law is revoked once the taxpayer is proven to have under-declared his assets in his SALN by 30%
or more. Pursuant to Section 1060of the Tax Amnesty Law, amnesty taxpayers who wilfully understate their net worth shall not only be
liable for perjury under the Revised Penal Code, but, upon conviction, also subject to immediate tax fraud investigation in order to
collect all taxes due and to criminally prosecute for tax evasion.

Here, the requisites to overturn the presumption of correctness of respondent's 2005 SALN were not met.

Respondent filed its Tax Amnesty documents on January 25, 2008. 61 Since then, and up to the time of the filing of respondent's Motion
to Cancel Tax Assessment on April 17, 2009, there had been no proceeding initiated to question its declared amount of net
worth.62 Petitioner never alleged, before the Court of Tax Appeals and this Court, the existence of any such proceeding to challenge
respondent's 2005 SALN during this period. Indeed, petitioner first raised the possibility of under-declaration of assets only in her
Opposition to respondent's Motion to Cancel Tax Assessment. 63 Thus, the lapse of the one-year period effectively closed the window to
question respondent's 2005 SALN.

Significantly, as explained by respondent, there was no understatement in its 2005 SALN because the shares of stocks, which the BIR
repeatedly referred to, were sold in 2002 or more than three (3) years prior to the tax amnesty availment.64 This was already discussed
and detailed before the Court of Tax Appeals together with proofs of the transfer of ownership. 65

Our judicial review under Rule 45 of the Rules of Court is confined only to errors of law and does not extend to questions of fact. 66  This
Court is not a trier of facts.67  At any rate, petitioner's utter failure to refute these material points constitutes an implied admission.

WHEREFORE, the Petition is DENIED.

SO ORDERED.
G.R. No. 106611 July 21, 1994

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
COURT OF APPEALS, CITYTRUST BANKING CORPORATION and COURT OF TAX APPEALS, respondents.

REGALADO, J.:

The judicial proceedings over the present controversy commenced with CTA Case No. 4099, wherein the Court of Tax Appeals ordered
herein petitioner Commissioner of Internal Revenue to grant a refund to herein private respondent Citytrust Banking Corporation
(Citytrust) in the amount of P13,314,506.14, representing its overpaid income taxes for 1984 and 1985, but denied its claim for the
alleged refundable amount reflected in its 1983 income tax return on the ground of prescription. 1 That judgment of the tax court was
affirmed by respondent Court of Appeals in its judgment in CA-G.R. SP
No. 26839.2 The case was then elevated to us in the present petition for review on certiorari wherein the latter judgment is impugned
and sought to be nullified and/or set aside.

It appears that in a letter dated August 26, 1986, herein private respondent corporation filed a claim for refund with the Bureau of
Internal Revenue (BIR) in the amount of P19,971,745.00 representing the alleged aggregate of the excess of its carried-over total
quarterly payments over the actual income tax due, plus carried-over withholding tax payments on government securities and rental
income, as computed in its final income tax return for the calendar year ending December 31, 1985.3

Two days later, or on August 28, 1986, in order to interrupt the running of the prescriptive period, Citytrust filed a petition with the Court
of Tax Appeals, docketed therein as CTA Case No. 4099, claiming the refund of its income tax overpayments for the years 1983, 1984
and 1985 in the total amount of P19,971,745.00.4

In the answer filed by the Office of the Solicitor General, for and in behalf of therein respondent commissioner, it was asserted that the
mere averment that Citytrust incurred a net loss in 1985 does not ipso facto merit a refund; that the amounts of P6,611,223.00,
P1,959,514.00 and P28,238.00 claimed by Citytrust as 1983 income tax overpayment, taxes withheld on proceeds of government
securities investments, as well as on rental income, respectively, are not properly documented; that assuming arguendo that petitioner
is entitled to refund, the right to claim the same has prescribed
with respect to income tax payments prior to August 28, 1984, pursuant to Sections 292 and 295 of the National Internal Revenue Code
of 1977, as amended, since the petition was filed only on August 28, 1986.5

On February 20, 1991, the case was submitted for decision based solely on the pleadings and evidence submitted by herein private
respondent Citytrust. Herein petitioner could not present any evidence by reason of the repeated failure of the Tax Credit/Refund
Division of the BIR to transmit the records of the case, as well as the investigation report thereon, to the Solicitor General.6

However, on June 24, 1991, herein petitioner filed with the tax court a manifestation and motion praying for the suspension of the
proceedings in the said case on the ground that the claim of Citytrust for tax refund in the amount of P19,971,745.00 was already being
processed by the Tax Credit/Refund Division of the BIR, and that said bureau was only awaiting the submission by Citytrust of the
required confirmation receipts which would show whether or not the aforestated amount was actually paid and remitted to the BIR.7

Citytrust filed an opposition thereto, contending that since the Court of Tax Appeals already acquired jurisdiction over the case, it could
no longer be divested of the same; and, further, that the proceedings therein could not be suspended by the mere fact that the claim for
refund was being administratively processed, especially where the case had already been submitted for decision.
It also argued that the BIR had already conducted an audit, citing therefor Exhibits Y, Y-1, Y-2 and Y-3 adduced in the case, which
clearly showed that there was an overpayment of income taxes and for which a tax credit or refund was due to Citytrust. The Foregoing
exhibits are allegedly conclusive proof of and an admission by herein petitioner that there had been an overpayment of income taxes.8

The tax court denied the motion to suspend proceedings on the ground that the case had already been submitted for decision since
February 20, 1991.9

Thereafter, said court rendered its decision in the case, the decretal portion of which declares:

WHEREFORE, in view of the foregoing, petitioner is entitled to a refund but only for the overpaid taxes incurred in 1984 and 1985. The
refundable amount as shown in its 1983 income tax return is hereby denied on the ground of prescription. Respondent is hereby
ordered to grant a refund to petitioner Citytrust Banking Corp. in the amount of P13,314,506.14 representing the overpaid income taxes
for 1984 and 1985, recomputed as follows:

1984 Income tax due P 4,715,533.00

Less: 1984 Quarterly payments P 16,214,599.00*
1984 Tax Credits —
W/T on int. on gov't. sec. 1,921,245.37*
W/T on rental inc. 26,604.30* 18,162,448.67
——————— ———————
Tax Overpayment (13,446,915.67)
Less: FCDU payable 150,252.00
———————
Amount refundable for 1984 P (13,296,663.67)

1985 Income tax due (loss) P — 0 —

Less: W/T on rentals 36,716.47*
———————
Tax Overpayment (36,716.47)*
Less: FCDU payable 18,874.00
———————
Amount Refundable for 1985 P (17,842.47)

* Note:

These credits are smaller than the claimed amount because only the above figures are well supported by the various exhibits presented
during the hearing.

No pronouncement as to costs.

SO ORDERED.10

The order for refund was based on the following findings of the Court of Tax Appeals: (1) the fact of withholding has been established
by the statements and certificates of withholding taxes accomplished by herein private respondent's withholding agents, the authenticity
of which were neither disputed nor controverted by herein petitioner; (2) no evidence was presented which could effectively dispute the
correctness of the income tax return filed by herein respondent corporation and other material facts stated therein; (3) no deficiency
assessment was issued by herein petitioner; and (4) there was an audit report submitted by the BIR Assessment Branch,
recommending the refund of overpaid taxes for the years concerned (Exhibits Y to Y-3), which enjoys the presumption of regularity in
the performance of official duty.11

A motion for the reconsideration of said decision was initially filed by the Solicitor General on the sole ground that the statements and
certificates of taxes allegedly withheld are not conclusive evidence of actual payment and remittance of the taxes withheld to the
BIR.12 A supplemental motion for reconsideration was thereafter filed, wherein it was contended for the first time that herein private
respondent had outstanding unpaid deficiency income taxes. Petitioner alleged that through an inter-office memorandum of the Tax
Credit/Refund Division, dated August 8, 1991, he came to know only lately that Citytrust had outstanding tax liabilities for 1984 in the
amount of P56,588,740.91 representing deficiency income and business taxes covered by Demand/Assessment Notice No. FAS-1-84-
003291-003296.13

Oppositions to both the basic and supplemental motions for reconsideration were filed by private respondent Citytrust. 14 Thereafter, the
Court of Tax Appeals issued a resolution denying both motions for the reason that Section 52 (b) of the Tax Code, as implemented by
Revenue Regulation
6-85, only requires that the claim for tax credit or refund must show that the income received was declared as part of the gross income,
and that the fact of withholding was duly established. Moreover, with regard to the argument raised in the supplemental motion for
reconsideration anent the deficiency tax assessment against herein petitioner, the tax court ruled that since that matter was not raised
in the pleadings, the same cannot be considered, invoking therefor the salutary purpose of the omnibus motion rule which is to obviate
multiplicity of motions and to discourage dilatory pleadings.15

As indicated at the outset, a petition for review was filed by herein petitioner with respondent Court of Appeals which in due course
promulgated its decision affirming the judgment of the Court of Tax Appeals. Petitioner eventually elevated the case to this Court,
maintaining that said respondent court erred in affirming the grant of the claim for refund of Citytrust, considering that, firstly, said
private respondent failed to prove and substantiate its claim for such refund; and, secondly, the bureau's findings of deficiency income
and business tax liabilities against private respondent for the year 1984 bars such payment.16

After a careful review of the records, we find that under the peculiar circumstances of this case, the ends of substantial justice and
public interest would be better subserved by the remand of this case to the Court of Tax Appeals for further proceedings.
It is the sense of this Court that the BIR, represented herein by petitioner Commissioner of Internal Revenue, was denied its day in
court by reason of the mistakes and/or negligence of its officials and employees. It can readily be gleaned from the records that when it
was herein petitioner's turn to present evidence, several postponements were sought by its counsel, the Solicitor General, due to the
unavailability of the necessary records which were not transmitted by the Refund Audit Division of the BIR to said counsel, as well as
the investigation report made by the Banks/Financing and Insurance Division of the said bureau/ despite repeated requests.17 It was
under such a predicament and in deference to the tax court that ultimately, said records being still unavailable, herein petitioner's
counsel was constrained to submit the case for decision on February 20, 1991 without presenting any evidence.

For that matter, the BIR officials and/or employees concerned also failed to heed the order of the Court of Tax Appeals to remand the
records to it pursuant to Section 2, Rule 7 of the Rules of the Court of Tax Appeals which provides that the Commissioner of Internal
Revenue and the Commissioner of Customs shall certify and forward to the Court of Tax Appeals, within ten days after filing his
answer, all the records of the case in his possession, with the pages duly numbered, and if the records are in separate folders, then the
folders shall also be numbered.

The aforestated impassé came about due to the fact that, despite the filing of the aforementioned initiatory petition in CTA Case No.
4099 with the Court of Tax Appeals, the Tax Refund Division of the BIR still continued to act administratively on the claim for refund
previously filed therein, instead of forwarding the records of the case to the Court of Tax Appeals as ordered.18

It is a long and firmly settled rule of law that the Government is not bound by the errors committed by its agents. 19 In the performance of
its governmental functions, the State cannot be estopped by the neglect of its agent and officers. Although the Government may
generally be estopped through the affirmative acts of public officers acting within their authority, their neglect or omission of public
duties as exemplified in this case will not and should not produce that effect.

Nowhere is the aforestated rule more true than in the field of taxation.20 It is axiomatic that the Government cannot and must not be
estopped particularly in matters involving taxes. Taxes are the lifeblood of the nation through which the government agencies continue
to operate and with which the State effects its functions for the welfare of its constituents. 21 The errors of certain administrative officers
should never be allowed to jeopardize the Government's financial position, 22 especially in the case at bar where the amount involves
millions of pesos the collection whereof, if justified, stands to be prejudiced just because of bureaucratic lethargy.

Further, it is also worth nothing that the Court of Tax Appeals erred in denying petitioner's supplemental motion for reconsideration
alleging bringing to said court's attention the existence of the deficiency income and business tax assessment against Citytrust. The
fact of such deficiency assessment is intimately related to and inextricably intertwined with the right of respondent bank to claim for a
tax refund for the same year. To award such refund despite the existence of that deficiency assessment is an absurdity and a polarity in
conceptual effects. Herein private respondent cannot be entitled to refund and at the same time be liable for a tax deficiency
assessment for the same year.

The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated therein are true and correct. The
deficiency assessment, although not yet final, created a doubt as to and constitutes a challenge against the truth and accuracy of the
facts stated in said return which, by itself and without unquestionable evidence, cannot be the basis for the grant of the refund.

Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law when the claim of Citytrust was
filed, provides that "(w)hen an assessment is made in case of any list, statement, or return, which in the opinion of the Commissioner of
Internal Revenue was false or fraudulent or contained any understatement or undervaluation, no tax collected under such assessment
shall be recovered by any suits unless it is proved that the said list, statement, or return was not false nor fraudulent and did not contain
any understatement or undervaluation; but this provision shall not apply to statements or returns made or to be made in good faith
regarding annual depreciation of oil or gas wells and mines."

Moreover, to grant the refund without determination of the proper assessment and the tax due would inevitably result in multiplicity of
proceedings or suits. If the deficiency assessment should subsequently be upheld, the Government will be forced to institute anew a
proceeding for the recovery of erroneously refunded taxes which recourse must be filed within the prescriptive period of ten years after
discovery of the falsity, fraud or omission in the false or fraudulent return involved.23 This would necessarily require and entail additional
efforts and expenses on the part of the Government, impose a burden on and a drain of government funds, and impede or delay the
collection of much-needed revenue for governmental operations.

Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically necessary and legally appropriate that the
issue of the deficiency tax assessment against Citytrust be resolved jointly with its claim for tax refund, to determine once and for all in
a single proceeding the true and correct amount of tax due or refundable.

In fact, as the Court of Tax Appeals itself has heretofore conceded, 24 it would be only just and fair that the taxpayer and the
Government alike be given equal opportunities to avail of remedies under the law to defeat each other's claim and to determine all
matters of dispute between them in one single case. It is important to note that in determining whether or not petitioner is entitled to the
refund of the amount paid, it would necessary to determine how much the Government is entitled to collect as taxes. This would
necessarily include the determination of the correct liability of the taxpayer and, certainly, a determination of this case would constitute
res judicata on both parties as to all the matters subject thereof or necessarily involved therein.

The Court cannot end this adjudication without observing that what caused the Government to lose its case in the tax court may
hopefully be ascribed merely to the ennui or ineptitude of officialdom, and not to syndicated intent or corruption. The evidential cul-de-
sac in which the Solicitor General found himself once again gives substance to the public perception and suspicion that it is another
proverbial tip in the iceberg of venality in a government bureau which is pejoratively rated over the years. What is so distressing, aside
from the financial losses to the Government, is the erosion of trust in a vital institution wherein the reputations of so many honest and
dedicated workers are besmirched by the acts or omissions of a few. Hence, the liberal view we have here taken  pro hac vice, which
may give some degree of assurance that this Court will unhesitatingly react to any bane in the government service, with a replication of
such response being likewise expected by the people from the executive authorities.
WHEREFORE, the judgment of respondent Court of Appeals in CA-G.R. SP No. 26839 is hereby SET ASIDE and the case at bar is
REMANDED to the Court of Tax Appeals for further proceedings and appropriate action, more particularly, the reception of evidence for
petitioner and the corresponding disposition of CTA Case No. 4099 not otherwise inconsistent with our adjudgment herein.

SO ORDERED.
G.R. No. L-22265      December 22, 1967

COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
GOODRICH INTERNATIONAL RUBBER CO., respondent.

CONCEPCION, C.J.:

Appeal by the Government from a decision of the Court of Tax Appeals, setting aside the assessments made by the Commissioner of
Internal Revenue, in the sums of P14,128.00 and P8,439.00, as deficiency income taxes allegedly due from respondent Goodrich
International Rubber Company — hereinafter referred to as Goodrich — for the years 1951 and 1952, respectively.

These assessments were based on disallowed deductions, claimed by Goodrich, consisting of several alleged bad debts, in the
aggregate sum of P50,455.41, for the year 1951, and the sum of P30,138.88, as representation expenses allegedly incurred in the year
1952. Goodrich had appealed from said assessments to the Court of Tax Appeals, which, after appropriate proceedings, rendered, on
June 8, 1963, a decision allowing the deduction for bad debts, but disallowing the alleged representation expenses. On motion for
reconsideration and new trial, filed by Goodrich, on November 19, 1963, the Court of Tax Appeals amended its aforementioned
decision and allowed said deductions for representation expenses. Hence, this appeal by the Government.

The alleged representation expenses are:

1. Expenses at Elks Club P10,959.21

2. Manila Polo Club 4,947.35

3. Army and Navy Club 2,812.95

4. Manila Golf Club 4,478.45

5. Wack Wack Golf Club, Casino Español, 6,940.92

etc.

TOTAL P30,138.88

The claim for deduction thereof is based upon receipts issued, not by the entities in which the alleged expenses had been incurred, but
by the officers of Goodrich who allegedly paid them.

The claim must be rejected. If the expenses had really been incurred, receipts or chits would have been issued by the entities to which
the payments had been made, and it would have been easy for Goodrich or its officers to produce such receipts.lawphil These issued
by said officers merely attest to their claim that they had incurred and paid said expenses. They do not establish payment of said
alleged expenses to the entities in which the same are said to have been incurred. The Court of Tax Appeals erred, therefore, in
allowing the deduction thereof.

The alleged bad debts are:

1. Portillo's Auto Seat Cover P630.31

2. Visayan Rapid Transit 17,810.26

 3. Bataan Auto Seat Cover 373.13

4. Tres Amigos Auto Supply 1,370.31

5. P. C. Teodorolawphil 650.00

6. Ordnance Service, P.A. 386.42

7. Ordnance Service, P.C. 796.26

8. National land Settlement Administration 3,020.76

9. National Coconut Corporation 644.74

10. Interior Caltex Service Station 1,505.87

11. San Juan Auto Supply 4,530.64

12. P A C S A 45.36

13. Philippine Naval Patrol 14.18

14. Surplus Property Commission 277.68

15. Alverez Auto Supply 285.62

16. Lion Shoe Store 1,686.93

17. Ruiz Highway Transit 2,350.00

18. Esquire Auto Seat Cover 3,536.94

TOTAL P50,455.41*

The issue, in connection with these debts is whether or not the same had been properly deducted as bad debts for the year 1951. In
this connection, we find:

Portillo's Auto Seat Cover  (P730.00):

This debt was incurred in 1950. In 1951, the debtor paid P70.00, leaving a balance of P630.31. That same year, the account was
written off as bad debt (Exhibit 3-C-4). Counsel for Goodrich had merely sent two (2) letters of demand in 1951 (Exh. B-14). In 1952,
the debtor paid the full balance (Exhibit A).

Visayan Rapid Transit (P17,810.26):

This debt was, also, incurred in 1950. In 1951, it was charged off as bad debt, after the debtor had paid P275.21. No other payment
had been made.lawphil Taxpayer's Accountant testified that, according to its branch manager in Cebu, he had been unable to collect
the balance. The debtor had merely promised and kept on promising to pay. Taxpayer's counsel stated that the debtor had gone out of
business and became insolvent, but no proof to this effect. was introduced.

Bataan Auto Seat Cover  (P373.13):

This is the balance of a debt of P474.13 contracted in 1949. In 1951, the debtor paid P100.00. That same year, the balance of P373.13
was charged off as bad debt. The next year, the debtor paid the additional sum of P50.00.

Tres Amigos Auto Supply (P1,370.31):

This account had been outstanding since 1949. Counsel for the taxpayer had merely sent demand letters (Exh. B-13) without success.

P. C. Teodoro (P650.00):

In 1949, the account was P751.91. In 1951, the debtor paid P101.91, thus leaving a balance of P650.00, which the taxpayer charged
off as bad debt in the same year. In 1952, the debtor made another payment of P150.00.
Ordinance Service, P.A. (P386.42):

In 1949, the outstanding account of this government agency was P817.55. Goodrich's counsel sent demand letters (Exh. B-8). In 1951,
it paid Goodrich P431.13. The balance of P386.42 was written off as bad debt that same year.

Ordinance Service, P.C. (P796.26):

In 1950, the account was P796.26.lawphil It was referred to counsel for collection. In 1951, the account was written off as a debt. In
1952, the debtor paid it in full.

National Land Settlement Administration (P3,020.76):

The outstanding account in 1949 was P7,041.51. Collection letters were sent (Exh. B-7). In 1951, the debtor paid P4,020.75, leaving a
balance of P3,020.76, which was written off, that same year, as a bad debt. This office was under liquidation, and its Board of
Liquidators promised to pay when funds shall become available.

National Coconut Corporation  (P644.74):

This account had been outstanding since 1949. Collection letters were sent (Exh. B-12) without success. It was written off as bad debt
in 1951, while the corporation was under a Board of Liquidators, which promised to pay upon availability of funds. In 1961, the debt
was  fully paid.

Interior Caltex Service Station  (P1,505.87):

The original account was P2,705.87, when, in 1950, it was turned over for collection to counsel for Goodrich (p. 156, CTA Records).
Counsel began sending letters of collection in April 1950. Interior Caltex made partial payments, so that as of December, 1951, the
balance outstanding was P1,505.87.lawphil.net The debtor paid P200, in 1952; P113.20, in 1954; P750.00, in 1961; and P300.00.00 in
1962. The account had been written off as bad debt in 1951.

The claim for deduction of these ten (10) debts should be rejected. Goodrich has not established either that the debts are actually
worthless or that it had reasonable grounds to believe them to be so in 1951. Our statute permits the deduction of debts "actually
ascertained to be worthless within the taxable year," obviously to prevent arbitrary action by the taxpayer, to unduly avoid tax liability.

The requirement of ascertainment of worthlessness requires proof of two facts: (1) that the taxpayer did in fact ascertain the debt to be
worthlessness, in the year for which the deduction is sought; and (2) that, in so doing, he acted in good faith.1

Good faith on the part of the taxpayer is not enough. He must show, also, that he had reasonably investigated the relevant facts and
had drawn a reasonable inference from the information thus obtained by him.2 Respondent herein has not adequately made such
showing.

The payments made, some in full, after some of the foregoing accounts had been characterized as bad debts, merely stresses the
undue haste with which the same had been written off. At any rate, respondent has not proven that said debts were worthless. There is
no evidence that the debtors can not pay them.lawphil.net It should be noted also that, in violation of Revenue Regulations No. 2,
Section 102, respondent had not attached to its income tax returns a statement showing the propriety of the deductions therein made
for alleged bad debts.

Upon the other hand, we find that the following accounts were properly written off:

San Juan Auto Supply  (P4,530.64):

This account was contracted in 1950. Referred, for collection, to respondent's counsel, the latter secured no payment. In November,
1950, the corresponding suit for collection was filed (Exh. C). The debtor's counsel was allowed to withdraw, as such, the debtor having
failed to meet him. In fact, the debtor did not appear at the hearing of the case.lawphil.net Judgment was rendered in 1951 for the
creditor (Exh. C-2). The corresponding writ of execution (Exh. C-3) was returned unsatisfied, for no properties could be attached or
levied upon.

PACSA (P45.36),

Philippine Naval Patrol (P14.18),

Surplus Property Commission (P277.68),

Alvarez Auto Supply (P285.62):

These four (4) accounts were 2 or 3 years old in 1951. After the collectors of the creditor had failed to collect the same, its counsel
wrote letters of demand (Exhs. B-10, B-11, B-6 and B-2) to no avail. Considering the small amounts involved in these accounts, the
taxpayer was justified in feeling that the unsuccessful efforts therefore exerted to collect the same sufficed to warrant their being written
off.3

Lion Shoe Store (P11,686.93),

 Ruiz Highway Transit (P2,350.00), and

Esquire Auto Seat Cover (P3,536.94):

These three (3) accounts were among those referred to counsel for Goodrich for collection. Up to 1951, when they were written off,
counsel had sent 17 Letters of demand to Lion Shoe Store (Exh. B); 16 demand letters to Ruiz Highway Transit (Exh. B-1); and 6 letters
of demand to Esquire Auto Seat Cover (Exit. B-5) In 1951, Lion Shoe Store, Ruiz Highway Transit, and Esquire Auto Seat Cover had
made partial payments in the sums of P1,050.00, P400.00, and P300.00 respectively. Subsequent to the write-off, additional small
payments were made and accounted for as income of Goodrich. Counsel interviewed the debtors, investigated their ability to pay and
threatened law suits. He found that the debtors were in strained financial condition and had no attachable or leviable property.
Moreover, Lion Shoe Store was burned twice, in 1948 and 1949. Thereafter, it continued to do business on limited scale. Later; it went
out of business. Ruiz Highway Transit, had more debts than assets. Counsel, therefore, advised respondent to write off these accounts
as bad debts without going to court, for it would be "foolish to spend good money after bad."

The deduction of these eight (8) accounts, aggregating P22,627.35, as bad debts should be allowed.

WHEREFORE, the decision appealed from should be, as it is hereby, modified, in the sense that respondent's alleged representation
expenses are totally disallowed, and its claim for bad debts allowed up to the sum of P22,627.35 only. Without special pronouncement
as to costs. It is so ordered.

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.

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 Compañia de Seguros, La Union y El Fenix Español,
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 . . . . . . . . . . . . . . . . . . . . . P842,466.71

1954 . . . . . . . . . . . . . . . . . . . . . 721,471.85

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 . . . . . . . . . . P768,580.00

Withholding tax due thereon at 24% . . . . . . . . P184,459.00

25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . 46,114.00

Compromise for non-filing of withholding

100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL AMOUNT DUE & COLLECTIBLE . . . .

P230,673.00
==========

1954

Gross premium per investigation . . . . . . . . . . P780.880.68

Withholding tax due thereon at 24% . . . . . . . . P184,411.00

25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . P184,411.00

Compromise for non-filing of withholding

100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .

TOTAL AMOUNT DUE & COLLECTIBLE . . . .

P234,364.00
==========

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 withholding tax. Its protest was denied and it appealed to the Court of Tax Appeals.

On July 6, 1963, the Court of Tax Appeals rendered judgment with this dispositive portion:

IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine Guaranty Co., Inc. is hereby ordered to pay to the
Commissioner of Internal Revenue 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 statutory delinquency penalties thereon. With costs against petitioner.

Philippine Guaranty Co, Inc. has appealed, questioning the legality of the Commissioner of Internal Revenue's assessment for
withholding tax on the reinsurance premiums ceded in 1953 and 1954 to the foreign reinsurers.

Petitioner maintain that the reinsurance premiums in question did not constitute income from sources within the Philippines because the
foreign reinsurers did not engage in business in the Philippines, nor did they have office here.

The reinsurance contracts, however, show that the 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 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 Philippines and later signed by the foreign
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.1äwphï1.ñët

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 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 (compañias 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.
G.R. No. L-43082             June 18, 1937

PABLO LORENZO, as trustee of the estate of Thomas Hanley, deceased, plaintiff-appellant,

vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.

LAUREL, J.:

On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as trustee of the estate of Thomas Hanley, deceased, brought this
action in the Court of First Instance of Zamboanga against the defendant, Juan Posadas, Jr., then the Collector of Internal Revenue, for
the refund of the amount of P2,052.74, paid by the plaintiff as inheritance tax on the estate of the deceased, and for the collection of
interst thereon at the rate of 6 per cent per annum, computed from September 15, 1932, the date when the aforesaid tax was [paid
under protest. The defendant set up a counterclaim for P1,191.27 alleged to be interest due on the tax in question and which was not
included in the original assessment. From the decision of the Court of First Instance of Zamboanga dismissing both the plaintiff's
complaint and the defendant's counterclaim, both parties appealed to this court.

It appears that on May 27, 1922, one Thomas Hanley died in Zamboanga, Zamboanga, leaving a will (Exhibit 5) and considerable
amount of real and personal properties. On june 14, 1922, proceedings for the probate of his will and the settlement and distribution of
his estate were begun in the Court of First Instance of Zamboanga. The will was admitted to probate. Said will provides, among other
things, as follows:

4. I direct that any money left by me be given to my nephew Matthew Hanley.

5. I direct that all real estate owned by me at the time of my death be not sold or otherwise disposed of for a period of ten (10) years
after my death, and that the same be handled and managed by the executors, and proceeds thereof to be given to my nephew,
Matthew Hanley, at Castlemore, Ballaghaderine, County of Rosecommon, Ireland, and that he be directed that the same be used only
for the education of my brother's children and their descendants.

6. I direct that ten (10) years after my death my property be given to the above mentioned Matthew Hanley to be disposed of in the way
he thinks most advantageous.

xxx     xxx     xxx

8. I state at this time I have one brother living, named Malachi Hanley, and that my nephew, Matthew Hanley, is a son of my said
brother, Malachi Hanley.

The Court of First Instance of Zamboanga considered it proper for the best interests of ther estate to appoint a trustee to administer the
real properties which, under the will, were to pass to Matthew Hanley ten years after the two executors named in the will, was, on
March 8, 1924, appointed trustee. Moore took his oath of office and gave bond on March 10, 1924. He acted as trustee until February
29, 1932, when he resigned and the plaintiff herein was appointed in his stead.

During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue, alleging that the estate left by the
deceased at the time of his death consisted of realty valued at P27,920 and personalty valued at P1,465, and allowing a deduction of
P480.81, assessed against the estate an inheritance tax in the amount of P1,434.24 which, together with the penalties for deliquency in
payment consisting of a 1 per cent monthly interest from July 1, 1931 to the date of payment and a surcharge of 25 per cent on the tax,
amounted to P2,052.74. On March 15, 1932, the defendant filed a motion in the testamentary proceedings pending before the Court of
First Instance of Zamboanga (Special proceedings No. 302) praying that the trustee, plaintiff herein, be ordered to pay to the
Government the said sum of P2,052.74. The motion was granted. On September 15, 1932, the plaintiff paid said amount under protest,
notifying the defendant at the same time that unless the amount was promptly refunded suit would be brought for its recovery. The
defendant overruled the plaintiff's protest and refused to refund the said amount hausted, plaintiff went to court with the result herein
above indicated.

In his appeal, plaintiff contends that the lower court erred:

I. In holding that the real property of Thomas Hanley, deceased, passed to his instituted heir, Matthew Hanley, from the moment of the
death of the former, and that from the time, the latter became the owner thereof.

II. In holding, in effect, that there was deliquency in the payment of inheritance tax due on the estate of said deceased.

III. In holding that the inheritance tax in question be based upon the value of the estate upon the death of the testator, and not, as it
should have been held, upon the value thereof at the expiration of the period of ten years after which, according to the testator's will,
the property could be and was to be delivered to the instituted heir.

IV. In not allowing as lawful deductions, in the determination of the net amount of the estate subject to said tax, the amounts allowed by
the court as compensation to the "trustees" and paid to them from the decedent's estate.

V. In not rendering judgment in favor of the plaintiff and in denying his motion for new trial.

The defendant-appellant contradicts the theories of the plaintiff and assigns the following error besides:

The lower court erred in not ordering the plaintiff to pay to the defendant the sum of P1,191.27, representing part of the interest at the
rate of 1 per cent per month from April 10, 1924, to June 30, 1931, which the plaintiff had failed to pay on the inheritance tax assessed
by the defendant against the estate of Thomas Hanley.

The following are the principal questions to be decided by this court in this appeal: (a) When does the inheritance tax accrue and when
must it be satisfied? (b) Should the inheritance tax be computed on the basis of the value of the estate at the time of the testator's
death, or on its value ten years later? (c) In determining the net value of the estate subject to tax, is it proper to deduct the
compensation due to trustees? (d) What law governs the case at bar? Should the provisions of Act No. 3606 favorable to the tax-payer
be given retroactive effect? (e) Has there been deliquency in the payment of the inheritance tax? If so, should the additional interest
claimed by the defendant in his appeal be paid by the estate? Other points of incidental importance, raised by the parties in their briefs,
will be touched upon in the course of this opinion.

(a) The accrual of the inheritance tax is distinct from the obligation to pay the same. Section 1536 as amended, of the Administrative
Code, imposes the tax upon "every transmission by virtue of inheritance, devise, bequest, gift mortis causa, or advance in anticipation
of inheritance,devise, or bequest." The tax therefore is upon transmission or the transfer or devolution of property of a decedent, made
effective by his death. (61 C. J., p. 1592.) It is in reality an excise or privilege tax imposed on the right to succeed to, receive, or take
property by or under a will or the intestacy law, or deed, grant, or gift to become operative at or after death. Acording to article 657 of
the Civil Code, "the rights to the succession of a person are transmitted from the moment of his death." "In other words", said Arellano,
C. J., ". . . the heirs succeed immediately to all of the property of the deceased ancestor. The property belongs to the heirs at the
moment of the death of the ancestor as completely as if the ancestor had executed and delivered to them a deed for the same before
his death." (Bondad vs. Bondad, 34 Phil., 232. See also, Mijares vs. Nery, 3 Phil., 195; Suilong & Co., vs. Chio-Taysan, 12 Phil., 13;
Lubrico vs. Arbado, 12 Phil., 391; Innocencio vs. Gat-Pandan, 14 Phil., 491; Aliasas vs.Alcantara, 16 Phil., 489; Ilustre vs. Alaras
Frondosa, 17 Phil., 321; Malahacan vs. Ignacio, 19 Phil., 434; Bowa vs. Briones, 38 Phil., 27; Osario vs. Osario & Yuchausti Steamship
Co., 41 Phil., 531; Fule vs. Fule, 46 Phil., 317; Dais vs. Court of First Instance of Capiz, 51 Phil., 396; Baun vs. Heirs of Baun, 53 Phil.,
654.) Plaintiff, however, asserts that while article 657 of the Civil Code is applicable to testate as well as intestate succession, it
operates only in so far as forced heirs are concerned. But the language of article 657 of the Civil Code is broad and makes no
distinction between different classes of heirs. That article does not speak of forced heirs; it does not even use the word "heir". It speaks
of the rights of succession and the transmission thereof from the moment of death. The provision of section 625 of the Code of Civil
Procedure regarding the authentication and probate of a will as a necessary condition to effect transmission of property does not affect
the general rule laid down in article 657 of the Civil Code. The authentication of a will implies its due execution but once probated and
allowed the transmission is effective as of the death of the testator in accordance with article 657 of the Civil Code. Whatever may be
the time when actual transmission of the inheritance takes place, succession takes place in any event at the moment of the decedent's
death. The time when the heirs legally succeed to the inheritance may differ from the time when the heirs actually receive such
inheritance. "Poco importa", says Manresa commenting on article 657 of the Civil Code, "que desde el falleimiento del causante, hasta
que el heredero o legatario entre en posesion de los bienes de la herencia o del legado, transcurra mucho o poco tiempo, pues la
adquisicion ha de retrotraerse al momento de la muerte, y asi lo ordena el articulo 989, que debe considerarse como complemento del
presente." (5 Manresa, 305; see also, art. 440, par. 1, Civil Code.) Thomas Hanley having died on May 27, 1922, the inheritance tax
accrued as of the date.

From the fact, however, that Thomas Hanley died on May 27, 1922, it does not follow that the obligation to pay the tax arose as of the
date. The time for the payment on inheritance tax is clearly fixed by section 1544 of the Revised Administrative Code as amended by
Act No. 3031, in relation to section 1543 of the same Code. The two sections follow:

SEC. 1543. Exemption of certain acquisitions and transmissions. — The following shall not be taxed:

(a) The merger of the usufruct in the owner of the naked title.

(b) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the trustees.

(c) The transmission from the first heir, legatee, or donee in favor of another beneficiary, in accordance with the desire of the
predecessor.

In the last two cases, if the scale of taxation appropriate to the new beneficiary is greater than that paid by the first, the former must pay
the difference.

SEC. 1544. When tax to be paid. — The tax fixed in this article shall be paid:

(a) In the second and third cases of the next preceding section, before entrance into possession of the property.
(b) In other cases, within the six months subsequent to the death of the predecessor; but if judicial testamentary or intestate
proceedings shall be instituted prior to the expiration of said period, the payment shall be made by the executor or administrator before
delivering to each beneficiary his share.

If the tax is not paid within the time hereinbefore prescribed, interest at the rate of twelve per centum per annum shall be added as part
of the tax; and to the tax and interest due and unpaid within ten days after the date of notice and demand thereof by the collector, there
shall be further added a surcharge of twenty-five per centum.

A certified of all letters testamentary or of admisitration shall be furnished the Collector of Internal Revenue by the Clerk of Court within
thirty days after their issuance.

It should be observed in passing that the word "trustee", appearing in subsection (b) of section 1543, should read "fideicommissary" or
"cestui que trust". There was an obvious mistake in translation from the Spanish to the English version.

The instant case does fall under subsection (a), but under subsection (b), of section 1544 above-quoted, as there is here no fiduciary
heirs, first heirs, legatee or donee. Under the subsection, the tax should have been paid before the delivery of the properties in question
to P. J. M. Moore as trustee on March 10, 1924.

(b) The plaintiff contends that the estate of Thomas Hanley, in so far as the real properties are concerned, did not and could not legally
pass to the instituted heir, Matthew Hanley, until after the expiration of ten years from the death of the testator on May 27, 1922 and,
that the inheritance tax should be based on the value of the estate in 1932, or ten years after the testator's death. The plaintiff
introduced evidence tending to show that in 1932 the real properties in question had a reasonable value of only P5,787. This amount
added to the value of the personal property left by the deceased, which the plaintiff admits is P1,465, would generate an inheritance tax
which, excluding deductions, interest and surcharge, would amount only to about P169.52.

If death is the generating source from which the power of the estate to impose inheritance taxes takes its being and if, upon the death
of the decedent, succession takes place and the right of the estate to tax vests instantly, the tax should be measured by the vlaue of the
estate as it stood at the time of the decedent's death, regardless of any subsequent contingency value of any subsequent increase or
decrease in value. (61 C. J., pp. 1692, 1693; 26 R. C. L., p. 232; Blakemore and Bancroft, Inheritance Taxes, p. 137. See
also Knowlton vs. Moore, 178 U.S., 41; 20 Sup. Ct. Rep., 747; 44 Law. ed., 969.) "The right of the state to an inheritance tax accrues at
the moment of death, and hence is ordinarily measured as to any beneficiary by the value at that time of such property as passes to
him. Subsequent appreciation or depriciation is immaterial." (Ross, Inheritance Taxation, p. 72.)

Our attention is directed to the statement of the rule in Cyclopedia of Law of and Procedure (vol. 37, pp. 1574, 1575) that, in the case of
contingent remainders, taxation is postponed until the estate vests in possession or the contingency is settled. This rule was formerly
followed in New York and has been adopted in Illinois, Minnesota, Massachusetts, Ohio, Pennsylvania and Wisconsin. This rule,
horever, is by no means entirely satisfactory either to the estate or to those interested in the property (26 R. C. L., p. 231.). Realizing,
perhaps, the defects of its anterior system, we find upon examination of cases and authorities that New York has varied and now
requires the immediate appraisal of the postponed estate at its clear market value and the payment forthwith of the tax on its out of
the corpus of the estate transferred. (In re Vanderbilt, 172 N. Y., 69; 69 N. E., 782; In re Huber, 86 N. Y. App. Div., 458; 83 N. Y. Supp.,
769; Estate of Tracy, 179 N. Y., 501; 72 N. Y., 519; Estate of Brez, 172 N. Y., 609; 64 N. E., 958; Estate of Post, 85 App. Div., 611; 82
N. Y. Supp., 1079. Vide also, Saltoun vs. Lord Advocate, 1 Peter. Sc. App., 970; 3 Macq. H. L., 659; 23 Eng. Rul. Cas., 888.) California
adheres to this new rule (Stats. 1905, sec. 5, p. 343).

But whatever may be the rule in other jurisdictions, we hold that a transmission by inheritance is taxable at the time of the
predecessor's death, notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary, and the
tax measured by the value of the property transmitted at that time regardless of its appreciation or depreciation.

(c) Certain items are required by law to be deducted from the appraised gross in arriving at the net value of the estate on which the
inheritance tax is to be computed (sec. 1539, Revised Administrative Code). In the case at bar, the defendant and the trial court allowed
a deduction of only P480.81. This sum represents the expenses and disbursements of the executors until March 10, 1924, among
which were their fees and the proven debts of the deceased. The plaintiff contends that the compensation and fees of the trustees,
which aggregate P1,187.28 (Exhibits C, AA, EE, PP, HH, JJ, LL, NN, OO), should also be deducted under section 1539 of the Revised
Administrative Code which provides, in part, as follows: "In order to determine the net sum which must bear the tax, when an
inheritance is concerned, there shall be deducted, in case of a resident, . . . the judicial expenses of the testamentary or intestate
proceedings, . . . ."

A trustee, no doubt, is entitled to receive a fair compensation for his services (Barney vs. Saunders, 16 How., 535; 14 Law. ed., 1047).
But from this it does not follow that the compensation due him may lawfully be deducted in arriving at the net value of the estate subject
to tax. There is no statute in the Philippines which requires trustees' commissions to be deducted in determining the net value of the
estate subject to inheritance tax (61 C. J., p. 1705). Furthermore, though a testamentary trust has been created, it does not appear that
the testator intended that the duties of his executors and trustees should be separated. (Ibid.; In re Vanneck's Estate, 161 N. Y. Supp.,
893; 175 App. Div., 363; In re  Collard's Estate, 161 N. Y. Supp., 455.) On the contrary, in paragraph 5 of his will, the testator expressed
the desire that his real estate be handled and managed by his executors until the expiration of the period of ten years therein provided.
Judicial expenses are expenses of administration (61 C. J., p. 1705) but, in State vs. Hennepin County Probate Court (112 N. W., 878;
101 Minn., 485), it was said: ". . . The compensation of a trustee, earned, not in the administration of the estate, but in the management
thereof for the benefit of the legatees or devises, does not come properly within the class or reason for exempting administration
expenses. . . . Service rendered in that behalf have no reference to closing the estate for the purpose of a distribution thereof to those
entitled to it, and are not required or essential to the perfection of the rights of the heirs or legatees. . . . Trusts . . . of the character of
that here before the court, are created for the the benefit of those to whom the property ultimately passes, are of voluntary creation, and
intended for the preservation of the estate. No sound reason is given to support the contention that such expenses should be taken into
consideration in fixing the value of the estate for the purpose of this tax."
(d) The defendant levied and assessed the inheritance tax due from the estate of Thomas Hanley under the provisions of section 1544
of the Revised Administrative Code, as amended by section 3 of Act No. 3606. But Act No. 3606 went into effect on January 1, 1930. It,
therefore, was not the law in force when the testator died on May 27, 1922. The law at the time was section 1544 above-mentioned, as
amended by Act No. 3031, which took effect on March 9, 1922.

It is well-settled that inheritance taxation is governed by the statute in force at the time of the death of the decedent (26 R. C. L., p. 206;
4 Cooley on Taxation, 4th ed., p. 3461). The taxpayer can not foresee and ought not to be required to guess the outcome of pending
measures. Of course, a tax statute may be made retroactive in its operation. Liability for taxes under retroactive legislation has been
"one of the incidents of social life." (Seattle vs. Kelleher, 195 U. S., 360; 49 Law. ed., 232 Sup. Ct. Rep., 44.) But legislative intent that a
tax statute should operate retroactively should be perfectly clear. (Scwab vs. Doyle, 42 Sup. Ct. Rep., 491; Smietanka vs. First Trust &
Savings Bank, 257 U. S., 602; Stockdale vs. Insurance Co., 20 Wall., 323; Lunch vs. Turrish, 247 U. S., 221.) "A statute should be
considered as prospective in its operation, whether it enacts, amends, or repeals an inheritance tax, unless the language of the statute
clearly demands or expresses that it shall have a retroactive effect, . . . ." (61 C. J., P. 1602.) Though the last paragraph of section 5 of
Regulations No. 65 of the Department of Finance makes section 3 of Act No. 3606, amending section 1544 of the Revised
Administrative Code, applicable to all estates the inheritance taxes due from which have not been paid, Act No. 3606 itself contains no
provisions indicating legislative intent to give it retroactive effect. No such effect can begiven the statute by this court.

The defendant Collector of Internal Revenue maintains, however, that certain provisions of Act No. 3606 are more favorable to the
taxpayer than those of Act No. 3031, that said provisions are penal in nature and, therefore, should operate retroactively in conformity
with the provisions of article 22 of the Revised Penal Code. This is the reason why he applied Act No. 3606 instead of Act No. 3031.
Indeed, under Act No. 3606, (1) the surcharge of 25 per cent is based on the tax only, instead of on both the tax and the interest, as
provided for in Act No. 3031, and (2) the taxpayer is allowed twenty days from notice and demand by rthe Collector of Internal Revenue
within which to pay the tax, instead of ten days only as required by the old law.

Properly speaking, a statute is penal when it imposes punishment for an offense committed against the state which, under the
Constitution, the Executive has the power to pardon. In common use, however, this sense has been enlarged to include within the term
"penal statutes" all status which command or prohibit certain acts, and establish penalties for their violation, and even those which,
without expressly prohibiting certain acts, impose a penalty upon their commission (59 C. J., p. 1110). Revenue laws, generally, which
impose taxes collected by the means ordinarily resorted to for the collection of taxes are not classed as penal laws, although there are
authorities to the contrary. (See Sutherland, Statutory Construction, 361; Twine Co. vs. Worthington, 141 U. S., 468; 12 Sup. Ct., 55;
Rice vs. U. S., 4 C. C. A., 104; 53 Fed., 910; Com. vs. Standard Oil Co., 101 Pa. St., 150; State vs. Wheeler, 44 P., 430; 25 Nev. 143.)
Article 22 of the Revised Penal Code is not applicable to the case at bar, and in the absence of clear legislative intent, we cannot give
Act No. 3606 a retroactive effect.

(e) The plaintiff correctly states that the liability to pay a tax may arise at a certain time and the tax may be paid within another given
time. As stated by this court, "the mere failure to pay one's tax does not render one delinqent until and unless the entire period has
eplased within which the taxpayer is authorized by law to make such payment without being subjected to the payment of penalties for
fasilure to pay his taxes within the prescribed period." (U. S. vs. Labadan, 26 Phil., 239.)

The defendant maintains that it was the duty of the executor to pay the inheritance tax before the delivery of the decedent's property to
the trustee. Stated otherwise, the defendant contends that delivery to the trustee was delivery to the cestui que trust, the beneficiery in
this case, within the meaning of the first paragraph of subsection (b) of section 1544 of the Revised Administrative Code. This
contention is well taken and is sustained. The appointment of P. J. M. Moore as trustee was made by the trial court in conformity with
the wishes of the testator as expressed in his will. It is true that the word "trust" is not mentioned or used in the will but the intention to
create one is clear. No particular or technical words are required to create a testamentary trust (69 C. J., p. 711). The words "trust" and
"trustee", though apt for the purpose, are not necessary. In fact, the use of these two words is not conclusive on the question that a
trust is created (69 C. J., p. 714). "To create a trust by will the testator must indicate in the will his intention so to do by using language
sufficient to separate the legal from the equitable estate, and with sufficient certainty designate the beneficiaries, their interest in the
ttrust, the purpose or object of the trust, and the property or subject matter thereof. Stated otherwise, to constitute a valid testamentary
trust there must be a concurrence of three circumstances: (1) Sufficient words to raise a trust; (2) a definite subject; (3) a certain or
ascertain object; statutes in some jurisdictions expressly or in effect so providing." (69 C. J., pp. 705,706.) There is no doubt that the
testator intended to create a trust. He ordered in his will that certain of his properties be kept together undisposed during a fixed period,
for a stated purpose. The probate court certainly exercised sound judgment in appointment a trustee to carry into effect the provisions
of the will (see sec. 582, Code of Civil Procedure).

P. J. M. Moore became trustee on March 10, 1924. On that date trust estate vested in him (sec. 582 in relation to sec. 590, Code of
Civil Procedure). The mere fact that the estate of the deceased was placed in trust did not remove it from the operation of our
inheritance tax laws or exempt it from the payment of the inheritance tax. The corresponding inheritance tax should have been paid on
or before March 10, 1924, to escape the penalties of the laws. This is so for the reason already stated that the delivery of the estate to
the trustee was in esse  delivery of the same estate to the cestui que trust, the beneficiary in this case. A trustee is but an instrument or
agent for the cestui que trust  (Shelton vs. King, 299 U. S., 90; 33 Sup. Ct. Rep., 689; 57 Law. ed., 1086). When Moore accepted the
trust and took possesson of the trust estate he thereby admitted that the estate belonged not to him but to his cestui que
trust  (Tolentino vs. Vitug, 39 Phil.,126, cited in 65 C. J., p. 692, n. 63). He did not acquire any beneficial interest in the estate. He took
such legal estate only as the proper execution of the trust required (65 C. J., p. 528) and, his estate ceased upon the fulfillment of the
testator's wishes. The estate then vested absolutely in the beneficiary (65 C. J., p. 542).

The highest considerations of public policy also justify the conclusion we have reached. Were we to hold that the payment of the tax
could be postponed or delayed by the creation of a trust of the type at hand, the result would be plainly disastrous. Testators may
provide, as Thomas Hanley has provided, that their estates be not delivered to their beneficiaries until after the lapse of a certain period
of time. In the case at bar, the period is ten years. In other cases, the trust may last for fifty years, or for a longer period which does not
offend the rule against petuities. The collection of the tax would then be left to the will of a private individual. The mere suggestion of
this result is a sufficient warning against the accpetance of the essential to the very exeistence of government. (Dobbins vs. Erie
Country, 16 Pet., 435; 10 Law. ed., 1022; Kirkland vs. Hotchkiss, 100 U. S., 491; 25 Law. ed., 558; Lane County vs. Oregon, 7 Wall.,
71; 19 Law. ed., 101; Union Refrigerator Transit Co. vs. Kentucky, 199 U. S., 194; 26 Sup. Ct. Rep., 36; 50 Law. ed., 150; Charles
River Bridge vs. Warren Bridge, 11 Pet., 420; 9 Law. ed., 773.) The obligation to pay taxes rests not upon the privileges enjoyed by, or
the protection afforded to, a citizen by the government but upon the necessity of money for the support of the state (Dobbins vs. Erie
Country, supra). For this reason, no one is allowed to object to or resist the payment of taxes solely because no personal benefit to him
can be pointed out. (Thomas vs. Gay, 169 U. S., 264; 18 Sup. Ct. Rep., 340; 43 Law. ed., 740.) While courts will not enlarge, by
construction, the government's power of taxation (Bromley vs. McCaughn, 280 U. S., 124; 74 Law. ed., 226; 50 Sup. Ct. Rep., 46) they
also will not place upon tax laws so loose a construction as to permit evasions on merely fanciful and insubstantial distictions. (U. S. vs.
Watts, 1 Bond., 580; Fed. Cas. No. 16,653; U. S. vs. Wigglesirth, 2 Story, 369; Fed. Cas. No. 16,690, followed in Froelich & Kuttner vs.
Collector of Customs, 18 Phil., 461, 481; Castle Bros., Wolf & Sons vs. McCoy, 21 Phil., 300; Muñoz & Co. vs. Hord, 12 Phil., 624;
Hongkong & Shanghai Banking Corporation vs. Rafferty, 39 Phil., 145; Luzon Stevedoring Co. vs. Trinidad, 43 Phil., 803.) When
proper, a tax statute should be construed to avoid the possibilities of tax evasion. Construed this way, the statute, without resulting in
injustice to the taxpayer, becomes fair to the government.

That taxes must be collected promptly is a policy deeply intrenched in our tax system. Thus, no court is allowed to grant injunction to
restrain the collection of any internal revenue tax ( sec. 1578, Revised Administrative Code; Sarasola vs. Trinidad, 40 Phil., 252). In the
case of Lim Co Chui vs. Posadas (47 Phil., 461), this court had occassion to demonstrate trenchment adherence to this policy of the
law. It held that "the fact that on account of riots directed against the Chinese on October 18, 19, and 20, 1924, they were prevented
from praying their internal revenue taxes on time and by mutual agreement closed their homes and stores and remained therein, does
not authorize the Collector of Internal Revenue to extend the time prescribed for the payment of the taxes or to accept them without the
additional penalty of twenty five per cent." (Syllabus, No. 3.)

". . . It is of the utmost importance," said the Supreme Court of the United States, ". . . that the modes adopted to enforce the taxes
levied should be interfered with as little as possible. Any delay in the proceedings of the officers, upon whom the duty is developed of
collecting the taxes, may derange the operations of government, and thereby, cause serious detriment to the public." (Dows vs.
Chicago, 11 Wall., 108; 20 Law. ed., 65, 66; Churchill and Tait vs. Rafferty, 32 Phil., 580.)

It results that the estate which plaintiff represents has been delinquent in the payment of inheritance tax and, therefore, liable for the
payment of interest and surcharge provided by law in such cases.

The delinquency in payment occurred on March 10, 1924, the date when Moore became trustee. The interest due should be computed
from that date and it is error on the part of the defendant to compute it one month later. The provisions cases is mandatory (see  and cf.
Lim Co Chui vs. Posadas, supra), and neither the Collector of Internal Revenuen or this court may remit or decrease such interest, no
matter how heavily it may burden the taxpayer.

To the tax and interest due and unpaid within ten days after the date of notice and demand thereof by the Collector of Internal
Revenue, a surcharge of twenty-five per centum should be added (sec. 1544, subsec. (b), par. 2, Revised Administrative Code).
Demand was made by the Deputy Collector of Internal Revenue upon Moore in a communiction dated October 16, 1931 (Exhibit 29).
The date fixed for the payment of the tax and interest was November 30, 1931. November 30 being an official holiday, the tenth day fell
on December 1, 1931. As the tax and interest due were not paid on that date, the estate became liable for the payment of the
surcharge.

In view of the foregoing, it becomes unnecessary for us to discuss the fifth error assigned by the plaintiff in his brief.

We shall now compute the tax, together with the interest and surcharge due from the estate of Thomas Hanley inaccordance with the
conclusions we have reached.

At the time of his death, the deceased left real properties valued at P27,920 and personal properties worth P1,465, or a total of
P29,385. Deducting from this amount the sum of P480.81, representing allowable deductions under secftion 1539 of the Revised
Administrative Code, we have P28,904.19 as the net value of the estate subject to inheritance tax.

The primary tax, according to section 1536, subsection (c), of the Revised Administrative Code, should be imposed at the rate of one
per centum upon the first ten thousand pesos and two per centum upon the amount by which the share exceed thirty thousand pesos,
plus an additional two hundred per centum. One per centum of ten thousand pesos is P100. Two per centum of P18,904.19 is P378.08.
Adding to these two sums an additional two hundred per centum, or P965.16, we have as primary tax, correctly computed by the
defendant, the sum of P1,434.24.

To the primary tax thus computed should be added the sums collectible under section 1544 of the Revised Administrative Code. First
should be added P1,465.31 which stands for interest at the rate of twelve per centum per annum from March 10, 1924, the date of
delinquency, to September 15, 1932, the date of payment under protest, a period covering 8 years, 6 months and 5 days. To the tax
and interest thus computed should be added the sum of P724.88, representing a surhcarge of 25 per cent on both the tax and interest,
and also P10, the compromise sum fixed by the defendant (Exh. 29), giving a grand total of P3,634.43.

As the plaintiff has already paid the sum of P2,052.74, only the sums of P1,581.69 is legally due from the estate. This last sum is
P390.42 more than the amount demanded by the defendant in his counterclaim. But, as we cannot give the defendant more than what
he claims, we must hold that the plaintiff is liable only in the sum of P1,191.27 the amount stated in the counterclaim.

The judgment of the lower court is accordingly modified, with costs against the plaintiff in both instances. So ordered.