G.R. No.

134062             April 17, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent.

DECISION

CORONA, J.:

This is a petition for review on certiorari1 of a decision2 of the Court of Appeals (CA) dated May 29, 1998
in CA-G.R. SP No. 41025 which reversed and set aside the decision 3 and resolution4 of the Court of Tax
Appeals (CTA) dated November 16, 1995 and May 27, 1996, respectively, in CTA Case No. 4715.

In two notices dated October 28, 1988, petitioner Commissioner of Internal Revenue (CIR) assessed
respondent Bank of the Philippine Islands’ (BPI’s) deficiency percentage and documentary stamp taxes
for the year 1986 in the total amount of P129,488,656.63:

1986 – Deficiency Percentage Tax

Deficiency percentage tax P 7, 270,892.88

Add: 25% surcharge 1,817,723.22
20% interest from 1-21-87 to 10-28-88 3,215,825.03
15,000.00
Compromise penalty

TOTAL AMOUNT DUE AND COLLECTIBLE P12,319,441.13

1986 – Deficiency Documentary Stamp Tax

Deficiency percentage tax P93,723,372.40

Add: 25% surcharge 23,430,843.10
15,000.00
Compromise penalty

TOTAL AMOUNT DUE AND COLLECTIBLE P117,169,215.50.5

Both notices of assessment contained the following note:

Please be informed that your [percentage and documentary stamp taxes have] been assessed as shown
above. Said assessment has been based on return – (filed by you) – (as verified) – (made by this Office)
– (pending investigation) – (after investigation). You are requested to pay the above amount to this
Office or to our Collection Agent in the Office of the City or Deputy Provincial Treasurer of xxx 6

In a letter dated December 10, 1988, BPI, through counsel, replied as follows:
 1. Your "deficiency assessments" are no assessments at all. The taxpayer is not informed, even in
the vaguest terms, why it is being assessed a deficiency. The very purpose of a deficiency
assessment is to inform taxpayer why he has incurred a deficiency so that he can make an
intelligent decision on whether to pay or to protest the assessment. This is all the more so when
the assessment involves astronomical amounts, as in this case.

We therefore request that the examiner concerned be required to state, even in the briefest
form, why he believes the taxpayer has a deficiency documentary and percentage taxes, and as
to the percentage tax, it is important that the taxpayer be informed also as to what particular
percentage tax the assessment refers to.

2. As to the alleged deficiency documentary stamp tax, you are aware of the compromise forged
between your office and the Bankers Association of the Philippines [BAP] on this issue and of
BPI’s submission of its computations under this compromise. There is therefore no basis
whatsoever for this assessment, assuming it is on the subject of the BAP compromise. On the
other hand, if it relates to documentary stamp tax on some other issue, we should like to be
informed about what those issues are.

3. As to the alleged deficiency percentage tax, we are completely at a loss on how such
assessment may be protested since your letter does not even tell the taxpayer what particular
percentage tax is involved and how your examiner arrived at the deficiency. As soon as this is
explained and clarified in a proper letter of assessment, we shall inform you of the taxpayer’s
decision on whether to pay or protest the assessment. 7

On June 27, 1991, BPI received a letter from CIR dated May 8, 1991 stating that:

… although in all respects, your letter failed to qualify as a protest under Revenue Regulations No. 12-85
and therefore not deserving of any rejoinder by this office as no valid issue was raised against the validity
of our assessment… still we obliged to explain the basis of the assessments.

xxx xxx xxx

… this constitutes the final decision of this office on the matter. 8

On July 6, 1991, BPI requested a reconsideration of the assessments stated in the CIR’s May 8, 1991
letter.9 This was denied in a letter dated December 12, 1991, received by BPI on January 21, 1992. 10

On February 18, 1992, BPI filed a petition for review in the CTA.11 In a decision dated November 16,
1995, the CTA dismissed the case for lack of jurisdiction since the subject assessments had become final
and unappealable. The CTA ruled that BPI failed to protest on time under Section 270 of the National
Internal Revenue Code (NIRC) of 1986 and Section 7 in relation to Section 11 of RA 1125. 12 It denied
reconsideration in a resolution dated May 27, 1996.13

On appeal, the CA reversed the tax court’s decision and resolution and remanded the case to the CTA 14
for a decision on the merits.15 It ruled that the October 28, 1988 notices were not valid assessments
because they did not inform the taxpayer of the legal and factual bases therefor. It declared that the
proper assessments were those contained in the May 8, 1991 letter which provided the reasons for the
claimed deficiencies.16 Thus, it held that BPI filed the petition for review in the CTA on time. 17 The CIR
elevated the case to this Court.

This petition raises the following issues:

 1) whether or not the assessments issued to BPI for deficiency percentage and documentary
stamp taxes for 1986 had already become final and unappealable and

2) whether or not BPI was liable for the said taxes.

The former Section 27018 (now renumbered as Section 228) of the NIRC stated:

Sec. 270. Protesting of assessment. — When the [CIR] or his duly authorized representative
finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings.
Within a period to be prescribed by implementing regulations, the taxpayer shall be required to respond
to said notice. If the taxpayer fails to respond, the [CIR] shall issue an assessment based on his
findings.

xxx xxx xxx (emphasis supplied)

Were the October 28, 1988 Notices Valid Assessments?

The first issue for our resolution is whether or not the October 28, 1988 notices 19 were valid assessments.
If they were not, as held by the CA, then the correct assessments were in the May 8, 1991 letter,
received by BPI on June 27, 1991. BPI, in its July 6, 1991 letter, seasonably asked for a reconsideration
of the findings which the CIR denied in his December 12, 1991 letter, received by BPI on January 21,
1992. Consequently, the petition for review filed by BPI in the CTA on February 18, 1992 would be well
within the 30-day period provided by law.20

The CIR argues that the CA erred in holding that the October 28, 1988 notices were invalid assessments.
He asserts that he used BIR Form No. 17.08 (as revised in November 1964) which was designed for the
precise purpose of notifying taxpayers of the assessed amounts due and demanding payment thereof. 21
He contends that there was no law or jurisprudence then that required notices to state the reasons for
assessing deficiency tax liabilities.22

BPI counters that due process demanded that the facts, data and law upon which the assessments were
based be provided to the taxpayer. It insists that the NIRC, as worded now (referring to Section 228),
specifically provides that:

"[t]he taxpayer shall be informed in writing of the law and the facts on which the assessment is made;
otherwise, the assessment shall be void."

According to BPI, this is declaratory of what sound tax procedure is and a confirmation of what due
process requires even under the former Section 270.

BPI’s contention has no merit. The present Section 228 of the NIRC provides:

Sec. 228. Protesting of Assessment. — When the [CIR] or his duly authorized representative
finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings:
Provided, however, That a preassessment notice shall not be required in the following cases:

xxx xxx xxx

The taxpayer shall be informed in writing of the law and the facts on which the assessment
is made; otherwise, the assessment shall be void.
 xxx xxx xxx (emphasis supplied)

Admittedly, the CIR did not inform BPI in writing of the law and facts on which the assessments of the
deficiency taxes were made. He merely notified BPI of his findings, consisting only of the computation of
the tax liabilities and a demand for payment thereof within 30 days after receipt.

In merely notifying BPI of his findings, the CIR relied on the provisions of the former Section 270 prior to
its amendment by RA 8424 (also known as the Tax Reform Act of 1997). 23 In CIR v. Reyes,24 we held
that:

In the present case, Reyes was not informed in writing of the law and the facts on which the assessment
of estate taxes had been made. She was merely notified of the findings by the CIR, who had simply relied
upon the provisions of former Section 229 prior to its amendment by [RA] 8424, otherwise known as the
Tax Reform Act of 1997.

First, RA 8424 has already amended the provision of Section 229 on protesting an assessment. The old
requirement of merely notifying the taxpayer of the CIR's findings was changed in 1998 to
informing the taxpayer of not only the law, but also of the facts on which an assessment would be made;
otherwise, the assessment itself would be invalid.

It was on February 12, 1998, that a preliminary assessment notice was issued against the estate. On
April 22, 1998, the final estate tax assessment notice, as well as demand letter, was also issued. During
those dates, RA 8424 was already in effect. The notice required under the old law was no longer
sufficient under the new law.25 (emphasis supplied; italics in the original)

Accordingly, when the assessments were made pursuant to the former Section 270, the only requirement
was for the CIR to "notify" or inform the taxpayer of his "findings." Nothing in the old law required a
written statement to the taxpayer of the law and facts on which the assessments were based. The Court
cannot read into the law what obviously was not intended by Congress. That would be judicial legislation,
nothing less.

Jurisprudence, on the other hand, simply required that the assessments contain a computation of tax
liabilities, the amount the taxpayer was to pay and a demand for payment within a prescribed period. 26
Everything considered, there was no doubt the October 28, 1988 notices sufficiently met the
requirements of a valid assessment under the old law and jurisprudence.

The sentence

[t]he taxpayers shall be informed in writing of the law and the facts on which the assessment is made;
otherwise, the assessment shall be void

was not in the old Section 270 but was only later on inserted in the renumbered Section 228 in 1997.
Evidently, the legislature saw the need to modify the former Section 270 by inserting the aforequoted
sentence.27 The fact that the amendment was necessary showed that, prior to the introduction of the
amendment, the statute had an entirely different meaning. 28

Contrary to the submission of BPI, the inserted sentence in the renumbered Section 228 was not an
affirmation of what the law required under the former Section 270. The amendment introduced by RA
8424 was an innovation and could not be reasonably inferred from the old law. 29 Clearly, the legislature
intended to insert a new provision regarding the form and substance of assessments issued by the CIR .30
In ruling that the October 28, 1988 notices were not valid assessments, the CA explained:

xxx. Elementary concerns of due process of law should have prompted the [CIR] to inform [BPI] of the
legal and factual basis of the former’s decision to charge the latter for deficiency documentary stamp and
gross receipts taxes.31

In other words, the CA’s theory was that BPI was deprived of due process when the CIR failed to inform
it in writing of the factual and legal bases of the assessments —even if these were not called for under
the old law.

We disagree.

Indeed, the underlying reason for the law was the basic constitutional requirement that "no person shall
be deprived of his property without due process of law." 32 We note, however, what the CTA had to say:

xxx xxx xxx

From the foregoing testimony, it can be safely adduced that not only was [BPI] given the opportunity to
discuss with the [CIR] when the latter issued the former a Pre-Assessment Notice (which [BPI] ignored)
but that the examiners themselves went to [BPI] and "we talk to them and we try to [thresh] out the
issues, present evidences as to what they need." Now, how can [BPI] and/or its counsel honestly tell this
Court that they did not know anything about the assessments?

Not only that. To further buttress the fact that [BPI] indeed knew beforehand the assessments[,]
contrary to the allegations of its counsel[,] was the testimony of Mr. Jerry Lazaro, Assistant Manager of
the Accounting Department of [BPI]. He testified to the fact that he prepared worksheets which contain
his analysis regarding the findings of the [CIR’s] examiner, Mr. San Pedro and that the same worksheets
were presented to Mr. Carlos Tan, Comptroller of [BPI].

xxx xxx xxx

From all the foregoing discussions, We can now conclude that [BPI] was indeed aware of the nature and
basis of the assessments, and was given all the opportunity to contest the same but ignored it despite
the notice conspicuously written on the assessments which states that "this ASSESSMENT becomes final
and unappealable if not protested within 30 days after receipt." Counsel resorted to dilatory tactics and
dangerously played with time. Unfortunately, such strategy proved fatal to the cause of his client. 33

The CA never disputed these findings of fact by the CTA:

[T]his Court recognizes that the [CTA], which by the very nature of its function is dedicated exclusively to
the consideration of tax problems, has necessarily developed an expertise on the subject, and its
conclusions will not be overturned unless there has been an abuse or improvident exercise of authority.
Such findings can only be disturbed on appeal if they are not supported by substantial evidence or there
is a showing of gross error or abuse on the part of the [CTA]. 34

Under the former Section 270, there were two instances when an assessment became final and
unappealable: (1) when it was not protested within 30 days from receipt and (2) when the adverse
decision on the protest was not appealed to the CTA within 30 days from receipt of the final decision: 35

Sec. 270. Protesting of assessment.1a\^/phi1.net

 xxx xxx xxx

Such assessment may be protested administratively by filing a request for reconsideration or

reinvestigation in such form and manner as may be prescribed by the implementing regulations within
thirty (30) days from receipt of the assessment; otherwise, the assessment shall become final and
unappealable.

If the protest is denied in whole or in part, the individual, association or corporation adversely affected by
the decision on the protest may appeal to the [CTA] within thirty (30) days from receipt of the said
decision; otherwise, the decision shall become final, executory and demandable.

Implications Of A Valid Assessment

Considering that the October 28, 1988 notices were valid assessments, BPI should have protested the
same within 30 days from receipt thereof. The December 10, 1988 reply it sent to the CIR did not qualify
as a protest since the letter itself stated that "[a]s soon as this is explained and clarified in a proper letter
of assessment, we shall inform you of the taxpayer’s decision on whether to pay or protest the
assessment."36 Hence, by its own declaration, BPI did not regard this letter as a protest against the
assessments. As a matter of fact, BPI never deemed this a protest since it did not even consider the
October 28, 1988 notices as valid or proper assessments.

The inevitable conclusion is that BPI’s failure to protest the assessments within the 30-day period
provided in the former Section 270 meant that they became final and unappealable. Thus, the CTA
correctly dismissed BPI’s appeal for lack of jurisdiction. BPI was, from then on, barred from disputing the
correctness of the assessments or invoking any defense that would reopen the question of its liability on
the merits.37 Not only that. There arose a presumption of correctness when BPI failed to protest the
assessments:

Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the
duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties, an
assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior officers
will not be disturbed. All presumptions are in favor of the correctness of tax assessments. 38

Even if we considered the December 10, 1988 letter as a protest, BPI must nevertheless be deemed to
have failed to appeal the CIR’s final decision regarding the disputed assessments within the 30-day
period provided by law. The CIR, in his May 8, 1991 response, stated that it was his "final decision … on
the matter." BPI therefore had 30 days from the time it received the decision on June 27, 1991 to appeal
but it did not. Instead it filed a request for reconsideration and lodged its appeal in the CTA only on
February 18, 1992, way beyond the reglementary period. BPI must now suffer the repercussions of its
omission. We have already declared that:

… the [CIR] should always indicate to the taxpayer in clear and unequivocal language whenever his
action on an assessment questioned by a taxpayer constitutes his final determination on the disputed
assessment, as contemplated by Sections 7 and 11 of [RA 1125], as amended. On the basis of his
statement indubitably showing that the Commissioner's communicated action is his final
decision on the contested assessment, the aggrieved taxpayer would then be able to take
recourse to the tax court at the opportune time. Without needless difficulty, the taxpayer
would be able to determine when his right to appeal to the tax court accrues.

The rule of conduct would also obviate all desire and opportunity on the part of the taxpayer
to continually delay the finality of the assessment — and, consequently, the collection of the
amount demanded as taxes — by repeated requests for recomputation and reconsideration.
On the part of the [CIR], this would encourage his office to conduct a careful and thorough study of
every questioned assessment and render a correct and definite decision thereon in the first instance. This
would also deter the [CIR] from unfairly making the taxpayer grope in the dark and speculate as to which
action constitutes the decision appealable to the tax court. Of greater import, this rule of conduct would
meet a pressing need for fair play, regularity, and orderliness in administrative action. 39 (emphasis
supplied)

Either way (whether or not a protest was made), we cannot absolve BPI of its liability under the subject
tax assessments.

We realize that these assessments (which have been pending for almost 20 years) involve a considerable
amount of money. Be that as it may, we cannot legally presume the existence of something which was
never there. The state will be deprived of the taxes validly due it and the public will suffer if taxpayers
will not be held liable for the proper taxes assessed against them:

Taxes are the lifeblood of the government, for without taxes, the government can neither exist nor
endure. A principal attribute of sovereignty, the exercise of taxing power derives its source from the very
existence of the state whose social contract with its citizens obliges it to promote public interest and
common good. The theory behind the exercise of the power to tax emanates from necessity; without
taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the
people.40

WHEREFORE, the petition is hereby GRANTED. The May 29, 1998 decision of the Court of Appeals in
CA-G.R. SP No. 41025 is REVERSED and SET ASIDE.

SO ORDERED.

RENATO C. CORONA
Associate Justice
G.R. No. L-22734             September 15, 1967

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MANUEL B. PINEDA, as one of the heirs of deceased ATANASIO PINEDA, respondent.

Office of the Solicitor General for petitioner.

Manuel B. Pineda for and in his own behalf as respondent.

BENGZON, J.P., J.:

On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15 children, the
eldest of whom is Manuel B. Pineda, a lawyer. Estate proceedings were had in the Court of First Instance
of Manila (Case No. 71129) wherein the surviving widow was appointed administratrix. The estate was
divided among and awarded to the heirs and the proceedings terminated on June 8, 1948. Manuel B.
Pineda's share amounted to about P2,500.00.

After the estate proceedings were closed, the Bureau of Internal Revenue investigated the income tax
liability of the estate for the years 1945, 1946, 1947 and 1948 and it found that the corresponding
income tax returns were not filed. Thereupon, the representative of the Collector of Internal Revenue
filed said returns for the estate on the basis of information and data obtained from the aforesaid estate
proceedings and issued an assessment for the following:

1. Deficiency income tax

1945 P135.83
1946 436.95
1947 1,206.91 P1,779.69
  Add: 5% surcharge 88.98
1% monthly interest
from November 30,
1953 to April 15, 1957 720.77
Compromise for late
filing 80.00
Compromise for late
payment 40.00

Total amount due P2,707.44

===========
Additional residence tax for P14.50
2.
1945 ===========
3. Real Estate dealer's tax for
the fourth quarter of 1946 P207.50
and the whole year of 1947 ===========

Manuel B. Pineda, who received the assessment, contested the same. Subsequently, he appealed to the
Court of Tax Appeals alleging that he was appealing "only that proportionate part or portion pertaining to
him as one of the heirs."
After hearing the parties, the Court of Tax Appeals rendered judgment reversing the decision of the
Commissioner on the ground that his right to assess and collect the tax has prescribed. The
Commissioner appealed and this Court affirmed the findings of the Tax Court in respect to the
assessment for income tax for the year 1947 but held that the right to assess and collect the taxes for
1945 and 1946 has not prescribed. For 1945 and 1946 the returns were filed on August 24, 1953;
assessments for both taxable years were made within five years therefrom or on October 19, 1953; and
the action to collect the tax was filed within five years from the latter date, on August 7, 1957. For
taxable year 1947, however, the return was filed on March 1, 1948; the assessment was made on
October 19, 1953, more than five years from the date the return was filed; hence, the right to assess
income tax for 1947 had prescribed. Accordingly, We remanded the case to the Tax Court for further
appropriate proceedings.1

In the Tax Court, the parties submitted the case for decision without additional evidence.

On November 29, 1963 the Court of Tax Appeals rendered judgment holding Manuel B. Pineda liable for
the payment corresponding to his share of the following taxes:

Deficiency income tax

1945 P135.83
1946 436.95
Real estate dealer's
fixed tax 4th quarter of
1946 and whole year of
1947 P187.50

The Commissioner of Internal Revenue has appealed to Us and has proposed to hold Manuel B. Pineda
liable for the payment of all the taxes found by the Tax Court to be due from the estate in the total
amount of P760.28 instead of only for the amount of taxes corresponding to his share in the
estate.1awphîl.nèt

Manuel B. Pineda opposes the proposition on the ground that as an heir he is liable for unpaid income tax
due the estate only up to the extent of and in proportion to any share he received. He relies on
Government of the Philippine Islands v. Pamintuan 2 where We held that "after the partition of an estate,
heirs and distributees are liable individually for the payment of all lawful outstanding claims against the
estate in proportion to the amount or value of the property they have respectively received from the
estate."

We hold that the Government can require Manuel B. Pineda to pay the full amount of the taxes assessed.

Pineda is liable for the assessment as an heir and as a holder-transferee of property belonging to the
estate/taxpayer. As an heir he is individually answerable for the part of the tax proportionate to the share
he received from the inheritance.3 His liability, however, cannot exceed the amount of his share.4

As a holder of property belonging to the estate, Pineda is liable for he tax up to the amount of the
property in his possession. The reason is that the Government has a lien on the P2,500.00 received by
him from the estate as his share in the inheritance, for unpaid income taxes 4a for which said estate is
liable, pursuant to the last paragraph of Section 315 of the Tax Code, which we quote hereunder:
 If any person, corporation, partnership, joint-account ( cuenta en participacion), association, or
insurance company liable to pay the income tax, neglects or refuses to pay the same after
demand, the amount shall be a lien in favor of the Government of the Philippines from the time
when the assessment was made by the Commissioner of Internal Revenue until paid with
interest, penalties, and costs that may accrue in addition thereto upon all property and rights to
property belonging to the taxpayer: . . .

By virtue of such lien, the Government has the right to subject the property in Pineda's possession, i.e.,
the P2,500.00, to satisfy the income tax assessment in the sum of P760.28. After such payment, Pineda
will have a right of contribution from his co-heirs,5 to achieve an adjustment of the proper share of each
heir in the distributable estate.

All told, the Government has two ways of collecting the tax in question. One, by going after all the heirs
and collecting from each one of them the amount of the tax proportionate to the inheritance received.
This remedy was adopted in Government of the Philippine Islands v. Pamintuan , supra. In said case, the
Government filed an action against all the heirs for the collection of the tax. This action rests on the
concept that hereditary property consists only of that part which remains after the settlement of all lawful
claims against the estate, for the settlement of which the entire estate is first liable. 6 The reason why in
case suit is filed against all the heirs the tax due from the estate is levied proportionately against them is
to achieve thereby two results: first, payment of the tax; and second, adjustment of the shares of each
heir in the distributed estate as lessened by the tax.

Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all property and rights
to property belonging to the taxpayer for unpaid income tax, is by subjecting said property of the estate
which is in the hands of an heir or transferee to the payment of the tax due, the estate. This second
remedy is the very avenue the Government took in this case to collect the tax. The Bureau of Internal
Revenue should be given, in instances like the case at bar, the necessary discretion to avail itself of the
most expeditious way to collect the tax as may be envisioned in the particular provision of the Tax Code
above quoted, because taxes are the lifeblood of government and their prompt and certain availability is
an imperious need.7 And as afore-stated in this case the suit seeks to achieve only one objective:
payment of the tax. The adjustment of the respective shares due to the heirs from the inheritance, as
lessened by the tax, is left to await the suit for contribution by the heir from whom the Government
recovered said tax.

WHEREFORE, the decision appealed from is modified. Manuel B. Pineda is hereby ordered to pay to the
Commissioner of Internal Revenue the sum of P760.28 as deficiency income tax for 1945 and 1946, and
real estate dealer's fixed tax for the fourth quarter of 1946 and for the whole year 1947, without
prejudice to his right of contribution for his co-heirs. No costs. So ordered.
G.R. No. L-31364 March 30, 1979

MISAEL P. VERA, as Commissioner of Internal Revenue, and JAIME ARANETA, as Regional

Director, Revenue Region No. 14, Bureau of Internal Revenue, petitioners,
vs.
HON. JOSE F. FERNANDEZ, Judge of the Court of First Instance of Negros Occidental, Branch
V, and FRANCIS A. TONGOY, Administrator of the Estate of the late LUIS D. TONGOY
respondents.

DE CASTRO, J.:

Appeal from two orders of the Court of First Instance of Negros Occidental, Branch V in Special
Proceedings No. 7794, entitled: "Intestate Estate of Luis D. Tongoy," the first dated July 29, 1969
dismissing the Motion for Allowance of Claim and for an Order of Payment of Taxes by the Government of
the Republic of the Philippines against the Estate of the late Luis D. Tongoy, for deficiency income taxes
for the years 1963 and 1964 of the decedent in the total amount of P3,254.80, inclusive 5% surcharge,
1% monthly interest and compromise penalties, and the second, dated October 7, 1969, denying the
Motion for reconsideration of the Order of dismissal.

The Motion for allowance of claim and for payment of taxes dated May 28, 1969 was filed on June 3,
1969 in the abovementioned special proceedings, (par. 3, Annex A, Petition, pp. 1920, Rollo). The claim
represents the indebtedness to the Government of the late Luis D. Tongoy for deficiency income taxes in
the total sum of P3,254.80 as above stated, covered by Assessment Notices Nos. 11-50-29-1-11061-21-
63 and 11-50-291-1 10875-64, to which motion was attached Proof of Claim (Annex B, Petition, pp. 21-
22, Rollo). The Administrator opposed the motion solely on the ground that the claim was barred under
Section 5, Rule 86 of the Rules of Court (par. 4, Opposition to Motion for Allowance of Claim, pp. 23-24,
Rollo). Finding the opposition well-founded, the respondent Judge, Jose F. Fernandez, dismissed the
motion for allowance of claim filed by herein petitioner, Regional Director of the Bureau of Internal
Revenue, in an order dated July 29, 1969 (Annex D, Petition, p. 26, Rollo). On September 18, 1969, a
motion for reconsideration was filed, of the order of July 29, 1969, but was denied in an Order dated
October 7, 1969.

Hence, this appeal on certiorari, petitioner assigning the following errors:

1. The lower court erred in holding that the claim for taxes by the government against
the estate of Luis D. Tongoy was filed beyond the period provided in Section 2, Rule 86
of the Rules of Court.

2. The lower court erred in holding that the claim for taxes of the government was
already barred under Section 5, Rule 86 of the Rules of Court.

which raise the sole issue of whether or not the statute of non-claims Section 5, Rule 86 of the New Rule
of Court, bars claim of the government for unpaid taxes, still within the period of limitation prescribed in
Section 331 and 332 of the National Internal Revenue Code.

Section 5, Rule 86, as invoked by the respondent Administrator in hid Oppositions to the Motion for
Allowance of Claim, etc. of the petitioners reads as follows:
 All claims for money against the decedent, arising from contracts, express or implied,
whether the same be due, not due, or contingent, all claims for funeral expenses and
expenses for the last sickness of the decedent, and judgment for money against the
decedent, must be filed within the time limited in they notice; otherwise they are barred
forever, except that they may be set forth as counter claims in any action that the
executor or administrator may bring against the claimants. Where the executor or
administrator commence an action, or prosecutes an action already commenced by the
deceased in his lifetime, the debtor may set forth may answer the claims he has against
the decedents, instead of presenting them independently to the court has herein
provided, and mutual claims may be set off against each other in such action; and in
final judgment is rendered in favored of the decedent, the amount to determined shall be
considered the true balance against the estate, as though the claim has been presented
directly before the court in the administration proceedings. Claims not yet due, or
contingent may be approved at their present value.

A perusal of the aforequoted provisions shows that it makes no mention of claims for monetary obligation
of the decedent created by law, such as taxes which is entirely of different character from the claims
expressly enumerated therein, such as: "all claims for money against the decedent arising from contract,
express or implied, whether the same be due, not due or contingent, all claim for funeral expenses and
expenses for the last sickness of the decedent and judgment for money against the decedent." Under the
familiar rule of statutory construction of expressio unius est exclusio alterius, the mention of one thing
implies the exclusion of another thing not mentioned. Thus, if a statute enumerates the things upon
which it is to operate, everything else must necessarily, and by implication be excluded from its operation
and effect (Crawford, Statutory Construction, pp. 334-335).

In the case of Commissioner of Internal Revenue vs. Ilagan Electric & Ice Plant, et al. , G.R. No. L-23081,
December 30, 1969, it was held that the assessment, collection and recovery of taxes, as well as the
matter of prescription thereof are governed by the provisions of the National Internal revenue Code,
particularly Sections 331 and 332 thereof, and not by other provisions of law. (See also Lim Tio, Dy Heng
and Dee Jue vs. Court of Tax Appeals & Collector of Internal Revenue, G.R. No. L-10681, March 29,
1958). Even without being specifically mentioned, the provisions of Section 2 of Rule 86 of the Rules of
Court may reasonably be presumed to have been also in the mind of the Court as not affecting the
aforecited Section of the National Internal Revenue Code.

In the case of Pineda vs. CFI of Tayabas, 52 Phil. 803, it was even more pointedly held that "taxes
assessed against the estate of a deceased person ... need not be submitted to the committee on claims
in the ordinary course of administration. In the exercise of its control over the administrator, the court
may direct the payment of such taxes upon motion showing that the taxes have been assessed against
the estate." The abolition of the Committee on Claims does not alter the basic ruling laid down giving
exception to the claim for taxes from being filed as the other claims mentioned in the Rule should be filed
before the Court. Claims for taxes may be collected even after the distribution of the decedent's estate
among his heirs who shall be liable therefor in proportion of their share in the inheritance. (Government
of the Philippines vs. Pamintuan, 55 Phil. 13).

The reason for the more liberal treatment of claims for taxes against a decedent's estate in the form of
exception from the application of the statute of non-claims, is not hard to find. Taxes are the lifeblood of
the Government and their prompt and certain availability are imperious need. (Commissioner of Internal
Revenue vs. Pineda, G. R. No. L-22734, September 15, 1967, 21 SCRA 105). Upon taxation depends the
Government ability to serve the people for whose benefit taxes are collected. To safeguard such interest,
neglect or omission of government officials entrusted with the collection of taxes should not be allowed to
bring harm or detriment to the people, in the same manner as private persons may be made to suffer
individually on account of his own negligence, the presumption being that they take good care of their
personal affairs. This should not hold true to government officials with respect to matters not of their
own personal concern. This is the philosophy behind the government's exception, as a general rule, from
the operation of the principle of estoppel. (Republic vs. Caballero, L-27437, September 30, 1977, 79
SCRA 177; Manila Lodge No. 761, Benevolent and Protective Order of the Elks Inc. vs. Court of Appeals,
L-41001, September 30, 1976, 73 SCRA 162; Sy vs. Central Bank of the Philippines, L-41480, April
30,1976, 70 SCRA 571; Balmaceda vs. Corominas & Co., Inc., 66 SCRA 553; Auyong Hian vs. Court of
Tax Appeals, 59 SCRA 110; Republic vs. Philippine Rabbit Bus Lines, Inc., 66 SCRA 553; Republic vs.
Philippine Long Distance Telephone Company, L-18841, January 27, 1969, 26 SCRA 620; Zamora vs.
Court of Tax Appeals, L-23272, November 26, 1970, 36 SCRA 77; E. Rodriguez, Inc. vs. Collector of
Internal Revenue, L- 23041, July 31, 1969, 28 SCRA 119.) As already shown, taxes may be collected
even after the distribution of the estate of the decedent among his heirs (Government of the Philippines
vs. Pamintuan, supra; Pineda vs. CFI of Tayabas, supra Clara Diluangco Palanca vs. Commissioner of
Internal Revenue, G. R. No. L-16661, January 31, 1962).

Furthermore, as held in Commissioner of Internal Revenue vs. Pineda, supra, citing the last paragraph of
Section 315 of the Tax Code payment of income tax shall be a lien in favor of the Government of the
Philippines from the time the assessment was made by the Commissioner of Internal Revenue until paid
with interests, penalties, etc. By virtue of such lien, this court held that the property of the estate already
in the hands of an heir or transferee may be subject to the payment of the tax due the estate. A fortiori
before the inheritance has passed to the heirs, the unpaid taxes due the decedent may be collected, even
without its having been presented under Section 2 of Rule 86 of the Rules of Court. It may truly be said
that until the property of the estate of the decedent has vested in the heirs, the decedent, represented
by his estate, continues as if he were still alive, subject to the payment of such taxes as would be
collectible from the estate even after his death. Thus in the case above cited, the income taxes sought to
be collected were due from the estate, for the three years 1946, 1947 and 1948 following his death in
May, 1945.

Even assuming arguendo that claims for taxes have to be filed within the time prescribed in Section 2,
Rule 86 of the Rules of Court, the claim in question may be filed even after the expiration of the time
originally fixed therein, as may be gleaned from the italicized portion of the Rule herein cited which
reads:

Section 2. Time within which claims shall be filed. - In the notice provided in the
preceding section, the court shall state the time for the filing of claims against the estate,
which shall not be more than twelve (12) nor less than six (6) months after the date of
the first publication of the notice. However, at any time before an order of distribution is
entered, on application of a creditor who has failed to file his claim within the time
previously limited the court may, for cause shown and on such terms as are equitable,
allow such claim to be flied within a time not exceeding one (1) month. (Emphasis
supplied)

In the instant case, petitioners filed an application (Motion for Allowance of Claim and for an Order of
Payment of Taxes) which, though filed after the expiration of the time previously limited but before an
order of the distribution is entered, should have been granted by the respondent court, in the absence of
any valid ground, as none was shown, justifying denial of the motion, specially considering that it was for
allowance Of claim for taxes due from the estate, which in effect represents a claim of the people at
large, the only reason given for the denial that the claim was filed out of the previously limited period,
sustaining thereby private respondents' contention, erroneously as has been demonstrated.

WHEREFORE, the order appealed from is reverse. Since the Tax Commissioner's assessment in the total
amount of P3,254.80 with 5 % surcharge and 1 % monthly interest as provided in the Tax Code is a final
one and the respondent estate's sole defense of prescription has been herein overruled, the Motion for
Allowance of Claim is herein granted and respondent estate is ordered to pay and discharge the same,
subject only to the limitation of the interest collectible thereon as provided by the Tax Code. No
pronouncement as to costs.

SO ORDERED.

G.R. No. L-47421 May 14, 1990

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
HON. COURT OF TAX APPEALS and MANILA GOLF & COUNTRY CLUB, INC., respondents.

Bito, Misa & Lozada for private respondent.

MEDIALDEA, J.:

In Commissioner of Internal Revenue v. Manila Hotel Corporation, et al., G.R. No. 83250, September 26,
1989, We overruled a decision of the Court of Tax Appeals which declared the collection of caterer's tax
under Section 191-A of Republic Act No. 6110 illegal because Sec. 42 of House Bill No. 17839, which
carries that proviso, was vetoed by then President Ferdinand E. Marcos when the bill was presented to
him and Congress had not taken any step to override the presidential veto. We held thus:

The power of the State to impose the 3% caterer's tax is not debatable. The Court of Tax
Appeals erred, however, in holding that the tax was abolished as a result of the
presidential veto of August 4, 1969. It failed to examine the law then, and up to now,
existing on the subject which has always imposed a 3% caterer's tax on operators of
restaurants. Since the Manila Hotel operates restaurants in its premises, it is liable to pay
the tax provided in paragraph (1), Section 206 of the Tax Code. (Commissioner of
Internal Revenue v. Manila Hotel Corporation and the Court of Tax Appeals, G.R. No.
83250, September 26, 1989)

The petition now before Us presents an identical question: whether the presidential veto referred to the
entire section or merely to the imposition of 20% tax on gross receipts of operators or proprietors of
restaurants, refreshment parlors, bars and other eating places which are maintained within the premises
or compound of a hotel, motel or resthouses. Reference to the Manila Hotel case, therefore, might have
been sufficient to dispose of this petition were it not for the position of the CTA that a chief executive has
no power to veto part of an item in a bill; either he vetoes an entire section or approves it but not a
fraction thereof.

Herein private respondent, Manila Golf & Country Club, Inc. is a non-stock corporation. True, it maintains
a golf course and operates a clubhouse with a lounge, bar and dining room, but these facilities are for
the exclusive use of its members and accompanied guests, and it charges on cost-plus-expense basis. As
such, it claims it should have been exempt from payment of privilege taxes were it not for the last
paragraph of Section 191-A of R.A. No. 6110, otherwise known as the "Omnibus Tax Law." Section 191-A
reads:
 Sec. 191-A. Caterer. — A caterer's tax is hereby imposed as follows:

(1) On proprietors or operators of restaurants, refreshment parlors and other eating

places, including clubs, and caterers, three per cent of their gross receipts.

(2) On proprietors or operators of restaurants, bars, cafes and other eating places,
including clubs, where distilled spirits, fermented liquors, or wines are served, three per
cent of their gross receipts from sale of food or refreshments and seven per cent of their
gross receipts from sale of distilled spirits, fermented liquors or wines. Two sets of
commercial invoices or receipts serially numbered in duplicate shall be separately
prepared and issued, one for sale of refreshments served, and another for each sale of
distilled spirits, fermented liquors or wines served, the originals of the invoices or receipts
to be issued to the purchaser or customer.

(3) On proprietors or operators of restaurants, refreshment parlors, bars, cafes and other
eating places which are maintained within the preferences or compound of a hotel,
motel, resthouse, cockpit, race track, jai-alai, cabaret, night or day club by means of a
connecting door or passage twenty per cent of their gross receipts.

Where the establishments are operated or maintained by clubs of any kind or nature
(irrespective of the disposition of their net income and whether or not they cater
exclusively to members or their guests) the keepers of the establishments shall pay the
corresponding tax at the rate fixed above. (Emphasis supplied)

Republic Act No. 6110 took effect on September 1, 1969. By this virtue, petitioners assessed the club
fixed taxes as operators of golf links and restaurants, and also percentage tax (caterer's tax) for its sale
of foods and fermented liquors/wines for the period covering September 1969 to December 1970 in the
amount of P32,504.96. The club protested claiming the assessment to be without basis because Section
42 was vetoed by then President Marcos. The veto message reads:

MALACAÑANG
Manila

4, 19Gentlemen of tof Representatives:

I have the honor to inform you that I have this day signed H.B. No. 17839, entitled:

AN ACT AMENDING CERTAIN

PROVISIONS OF THE NATIONAL INTERNAL

REVENUE CODE, AS AMENDED

Pursuant to the provisions of Section 20-(3), Article VI, of the Constitution, however, I
have vetoed the following items in this bill:

xxx xxx xxx

pp. 44, SEC. 42. Inserting a new Section 191-A which imposes a caterer's tax of three
percent of the gross receipts of proprietors or operators of restaurants, refreshment
parlors and other eating places; three percent of gross receipts from sale of food or
 refreshment and seven percent on gross receipts from the sale of distilled spirits,
fermented liquors or wines, on proprietors or operators of restaurants, bars, cafes and
other eating places, including clubs, where distilled spirits, fermented liquors, or wines
are served; and twenty percent of gross receipts on proprietor or operators of
restaurants, refreshment parlors, bars, cafes and other eating places maintained within
the premises or compound of a hotel, motel, resthouse, cockpit, race track, jai-alai,
cabaret, night or day club, or which are accessible to patrons of said establishments by
means of a connecting door or passage.

The burden of petition will be shifted to the consuming public.

The development of hotels, essential to our tourist industry, may be

restrained considering that a big portion of hotel earnings comes from
food sale. . . .

This bill, H.B. No. 17839, has become Republic Act No. 6110.

Respect
fully,

(SGD.)
FERDIN
AND E.
MARCO
S

[Emphasis ours]

The protestation of the club was denied by the petitioner who maintains that Section 42 was not entirely
vetoed but merely the words "hotels, motels, resthouses" on the ground that it might restrain the
development of hotels which is essential to the tourism industry. This in fact was the position of the
House Ways and Means Committee which reported, to wit:

When Congress decided to split Section 191 into two parts, one dealing with contractors,
and the other dealing with those who serve food and drinks, the intention was to classify
and to improve. While the Congress expanded the coverage of both 191 and 191-A, it
also provided for certain exemptions. The veto message seems to object to certain
additions to 191-A. What additions are objectionables can be gleaned from the reasons
given: a general reason that this sort of tax is passed on to the consuming public, and a
particular reason that hotel developments, so essential to the tourist industry, may be
restrained. These reasons have been taken together in the interpretations of the veto
message and the deletions of such enterprises as are connected with the tourist industry
has therefore been recommended.

To interpret the veto. message otherwise would result in the exemption of entities
already subject of tax. This would be absurd. Where the Congress wanted to exempt, it
was so provided in the bill. While the President may veto any item or items in a revenue
bill the constitution does not give him the power to repeal an existing tax. (2nd
Indorsement dated December 9, 1969, Chairman on Ways and Means, Sixth Congress of
the Republic of the Phil.) (Exhs. 14, p. 85, B.I.R. rec.). (pp. 20-21, Rollo)
It was by reason of this interpretation of the Committee that R.A. No. 6110 was published in Volume 66,
No. 18, p. 4531 of the Official Gazette (May 4, 1970) in such a way that Section 191-A was included in
the text save for the words "hotels, motels, resthouses."

As already mentioned, the Court of Tax Appeals, upon petition by the club, sustained the latter's position
reasoning that the veto message was clear and unqualified, as in fact it was confirmed three years later,
after much controversy, by the Office of the President, thus:

Mr. Antero M. Sison, Jr.

San Martin Building, 1564,

A. Mabini, P.O. Box 2288

Manila, Philippines

Dear Sir:

With reference to your letter dated July 14, 1972, we wish to inform you that Section 42
(which contains Sec. 191-A) of House Bill No. 17839, now R.A. 6110 was one of the
Sections vetoed by the President in his veto message dated August 4, 1969, vetoing
certain sections of the said revenue bill. stant

(p. 49, Rollo)

As mentioned earlier, We have already ruled that the presidential veto referred merely to the inclusion of
hotels, motels and resthouses in the 20% caterer's tax bracket but not to the whole section. But, as
mentioned earlier also, the CTA opined that the President could not veto words or phrases in a bill but
only an entire item. Obviously, what the CTA meant by "item" was an entire section. We do not agree.
But even assuming it to be so, it would also be to petitioner's favor. The ineffectual veto by the President
rendered the whole section 191-A as not having been vetoed at all and it, therefore, became law as an
unconstitutional veto has no effect, whatsoever. (See Bolinao Electronics Corp. v. Valeria No. L-20740,
June 30, 1964, 11 SCRA 486).

However, We agree with then Solicitor General Estelito Mendoza and his associates that inclusion of
hotels, motels and resthouses in the 20% caterer's tax bracket are "items" in themselves within the
meaning of Sec. 20(3), Art. VI of the 1935 Constitution which, therefore, the President has the power to
veto. An "item" in a revenue bill does not refer to an entire section imposing a particular kind of tax, but
rather to the subject of the tax and the tax rate. In the portion of a revenue bill which actually imposes a
tax, a section identifies the tax and enumerates the persons liable therefor with the corresponding tax
rate. To construe the word "item" as referring to the whole section would tie the President's hand in
choosing either to approve the whole section at the expense of also approving a provision therein which
he deems unacceptable or veto the entire section at the expense of foregoing the collection of the kind of
tax altogether. The evil which was sought to be prevented in giving the President the power to
disapprove items in a revenue bill would be perpetrated rendering that power inutile (See Commonwealth
ex rel. Elkin v. Barnett, 199 Pa. 161, 55 LRA 882 [1901]).

ACCORDINGLY, the petition is GRANTED and the decision of the Court of Tax Appeals in CTA Case No.
2630 is set aside. Section 191-A of RA No. 6110 is valid and enforceable and, hence, the Manila Golf &
Country Club Inc. is liable for the amount assessed against it. SO ORDERED.
G.R. No. L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.

CRUZ, J.:

Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On
the other hand, such collection should be made in accordance with law as any arbitrariness will negate
the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting
interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion
of the common good, may be achieved.

The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the
P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in its income
tax returns. The corollary issue is whether or not the appeal of the private respondent from the decision
of the Collector of Internal Revenue was made on time and in accordance with law.

We deal first with the procedural question.

The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in
engineering, construction and other allied activities, received a letter from the petitioner assessing it in
the total amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959. 1 On January
18, 1965, Algue flied a letter of protest or request for reconsideration, which letter was stamp received
on the same day in the office of the petitioner. 2 On March 12, 1965, a warrant of distraint and levy was
presented to the private respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to
receive it on the ground of the pending protest. 3 A search of the protest in the dockets of the case
proved fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon Reyes,
who deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that the BIR
was not taking any action on the protest and it was only then that he accepted the warrant of distraint
and levy earlier sought to be served. 5 Sixteen days later, on April 23, 1965, Algue filed a petition for
review of the decision of the Commissioner of Internal Revenue with the Court of Tax Appeals. 6

The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the
appeal may be made within thirty days after receipt of the decision or ruling challenged. 7 It is true that
as a rule the warrant of distraint and levy is "proof of the finality of the assessment" 8 and renders
hopeless a request for reconsideration," 9 being "tantamount to an outright denial thereof and makes the
said request deemed rejected." 10 But there is a special circumstance in the case at bar that prevents
application of this accepted doctrine.

The proven fact is that four days after the private respondent received the petitioner's notice of
assessment, it filed its letter of protest. This was apparently not taken into account before the warrant of
distraint and levy was issued; indeed, such protest could not be located in the office of the petitioner. It
was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at all, considered by the
tax authorities. During the intervening period, the warrant was premature and could therefore not be
served.

As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro
forma and was based on strong legal considerations. It thus had the effect of suspending on January 18,
1965, when it was filed, the reglementary period which started on the date the assessment was received,
viz., January 14, 1965. The period started running again only on April 7, 1965, when the private
respondent was definitely informed of the implied rejection of the said protest and the warrant was finally
served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the reglementary
period had been consumed.

Now for the substantive question.

The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was
not an ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it
differently. Agreeing with Algue, it held that the said amount had been legitimately paid by the private
respondent for actual services rendered. The payment was in the form of promotional fees. These were
collected by the Payees for their work in the creation of the Vegetable Oil Investment Corporation of the
Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate Development
Company.

Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to
be personal holding company income 12 but later conformed to the decision of the respondent court
rejecting this assertion. 13 In fact, as the said court found, the amount was earned through the joint
efforts of the persons among whom it was distributed It has been established that the Philippine Sugar
Estate Development Company had earlier appointed Algue as its agent, authorizing it to sell its land,
factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo
Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable
Oil Investment Corporation, inducing other persons to invest in it. 14 Ultimately, after its incorporation
largely through the promotion of the said persons, this new corporation purchased the PSEDC properties.
15
For this sale, Algue received as agent a commission of P126,000.00, and it was from this commission
that the P75,000.00 promotional fees were paid to the aforenamed individuals. 16

There is no dispute that the payees duly reported their respective shares of the fees in their income tax
returns and paid the corresponding taxes thereon. 17 The Court of Tax Appeals also found, after
examining the evidence, that no distribution of dividends was involved. 18

The petitioner claims that these payments are fictitious because most of the payees are members of the
same family in control of Algue. It is argued that no indication was made as to how such payments were
made, whether by check or in cash, and there is not enough substantiation of such payments. In short,
the petitioner suggests a tax dodge, an attempt to evade a legitimate assessment by involving an
imaginary deduction.

We find that these suspicions were adequately met by the private respondent when its President, Alberto
Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump
sum but periodically and in different amounts as each payee's need arose. 19 It should be remembered
that this was a family corporation where strict business procedures were not applied and immediate
issuance of receipts was not required. Even so, at the end of the year, when the books were to be
closed, each payee made an accounting of all of the fees received by him or her, to make up the total of
P75,000.00. 20 Admittedly, everything seemed to be informal. This arrangement was understandable,
however, in view of the close relationship among the persons in the family corporation.

We agree with the respondent court that the amount of the promotional fees was not excessive. The
total commission paid by the Philippine Sugar Estate Development Co. to the private respondent was
P125,000.00. 21 After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from
the transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable
proportion, considering that it was the payees who did practically everything, from the formation of the
Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties. This
finding of the respondent court is in accord with the following provision of the Tax Code:
 SEC. 30. Deductions from gross income.--In computing net income there shall be allowed
as deductions —

(a) Expenses:

(1) In general.--All the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business, including a reasonable allowance for
salaries or other compensation for personal services actually rendered; ... 22

and Revenue Regulations No. 2, Section 70 (1), reading as follows:

SEC. 70. Compensation for personal services.--Among the ordinary and necessary
expenses paid or incurred in carrying on any trade or business may be included a
reasonable allowance for salaries or other compensation for personal services actually
rendered. The test of deductibility in the case of compensation payments is whether they
are reasonable and are, in fact, payments purely for service. This test and deductibility in
the case of compensation payments is whether they are reasonable and are, in fact,
payments purely for service. This test and its practical application may be further stated
and illustrated as follows:

Any amount paid in the form of compensation, but not in fact as the purchase price of
services, is not deductible. (a) An ostensible salary paid by a corporation may be a
distribution of a dividend on stock. This is likely to occur in the case of a corporation
having few stockholders, Practically all of whom draw salaries. If in such a case the
salaries are in excess of those ordinarily paid for similar services, and the excessive
payment correspond or bear a close relationship to the stockholdings of the officers of
employees, it would seem likely that the salaries are not paid wholly for services
rendered, but the excessive payments are a distribution of earnings upon the stock. . . .
(Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)

It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were
they its controlling stockholders. 23

The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of
the claimed deduction. In the present case, however, we find that the onus has been discharged
satisfactorily. The private respondent has proved that the payment of the fees was necessary and
reasonable in the light of the efforts exerted by the payees in inducing investors and prominent
businessmen to venture in an experimental enterprise and involve themselves in a new business requiring
millions of pesos. This was no mean feat and should be, as it was, sufficiently recompensed.

It is said that taxes are what we pay for civilization society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to
surrender part of one's hard earned income to the taxing authorities, every person who is able to must
contribute his share in the running of the government. The government for its part, is expected to
respond in the form of tangible and intangible benefits intended to improve the lives of the people and
enhance their moral and material values. This symbiotic relationship is the rationale of taxation and
should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of
power.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all
democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it
is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the
awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can
demonstrate, as it has here, that the law has not been observed.

We hold that the appeal of the private respondent from the decision of the petitioner was filed on time
with the respondent court in accordance with Rep. Act No. 1125. And we also find that the claimed
deduction by the private respondent was permitted under the Internal Revenue Code and should
therefore not have been disallowed by the petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.

SO ORDERED.