G.R. No.

141973
June 28, 2005
PHILIPPINE PHOSPHATE FERTILIZER CORPORATION,
petitioner, vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
Once more, we stand by our ruling that:
If the State expects its taxpayers to observe fairness and
honesty in paying their taxes, so must it apply the same
standard against itself in refunding excess payments. When it
is undisputed that a taxpayer is entitled to a refund, the State
should not invoke technicalities to keep money not belonging
to it. No one, not even the State, should enrich oneself at the
expense of another.1
The antecedents of this case are as follows:
Philippine Phosphate Fertilizer Corporation (Philphos) is a
domestic corporation registered with the Export Processing
Zone Authority (EPZA). It manufactures fertilizers for domestic
and international distribution and as such, utilizes fuel, oil and
other petroleum products which it procures locally from Petron
Philippines Corporation (Petron). Petron initially pays the
Bureau of Internal Revenue (BIR) and the Bureau of Customs
the taxes and duties imposed upon the petroleum products.
Petron is then reimbursed by petitioner when Petron sells such
petroleum products to the petitioner. In a letter dated August
28, 1995, petitioner sought a refund of specific taxes paid on
the purchases of petroleum products from Petron for the
period of September 1993 to December 1994 in the total
amount of P602,349.00 which claim is pursuant to the
incentives it enjoyed by virtue of its EPZA registration. Since
the two-year period within which petitioner could file a case for
tax refund before the Court of Tax Appeals (CTA) was about to
expire and no action had been taken by the BIR, petitioner
instituted a petition for review before the CTA against the
Commissioner of Internal Revenue (CIR).2 During the trial, to
prove that the duties imposed upon the petroleum products
delivered to petitioner by Petron had been duly paid for by
petitioner, petitioner presented a Certification from Petron
dated August 17, 1995; a schedule of petroleum products sold
and delivered to petitioner detailing the volume of sales and
the excise taxes paid thereon; photocopies of Authority to
Accept Payment for Excise Taxes issued by the CIR pertaining
to petroleum products purchased; as well as the testimony of

Sylvia Osorio, officer of Petron, to attest to the summary and

certification presented.3 The CIR did not present any evidence
to controvert the ones presented by petitioner nor did it file an
opposition to petitioners formal offer of evidence.4
On August 11, 1998, the CTA promulgated its Decision finding
that while petitioner is exempt from the payment of excise
taxes, it failed to sufficiently prove that it is entitled to refund
in this particular case since it did not submit invoices to
support the summary of petroleum products sold and delivered
to it by Petron.5 The CTA rationalized thus:
[P]etitioner, as an EPZA registered enterprise is exempted
from the payment of excise taxes, and if said taxes were
passed on by the supplier to EPZA registered enterprise like
the petitioner, tax credit shall be granted to the latter. The fact
that it was not the petitioner who had paid the taxes directly to
the Bureau of Internal Revenue does not have an adverse
effect on petitioners action for refund. The law granting the
exemption makes no distinction as to the circumstances when
the law shall apply. Since the law makes no distinction, neither
should we. The exemption is so broad as to cover the present
situation. Since an export processing zone is not considered to
be covered by Philippine customs and internal revenue laws,
the taxes paid by the petitioner on the petroleum products
should be refunded or credited in its favor. Thus, the only thing
left for us to do is to determine whether or not petitioner is
entitled to the amount claimed for refund. After a careful
scrutiny of the evidence presented, however, there appears to
be a dispute with respect to the amount claimed. Petitioner
submitted in evidence a certification issued by Petron to prove
that the duties imposed upon the petroleum products
delivered to petitioner by Petron had been duly paid for by
petitioner (Exhibit "A", p. 71, CTA records). Petitioner likewise
presented a schedule of petroleum products sold and delivered
to petitioner detailing the volume of sales and the excise taxes
paid thereon (Exhibits "A-1" to "A-1a", pp. 72-73, CTA records).
However, to show that Petron had previously paid the excise
taxes on these petroleum products, petitioner presented
photocopies of Authority to Accept Payment for Excise Taxes
issued by respondent pertaining to petroleum products
purchased (Exhibits "A-2" to "A-80), pp. 74-152, CTA records).
Although these Authority to Accept Payment for Excise Taxes
reflect therein the amount of excise taxes paid by Petron to

respondent, this Court cannot verify the exact amount of

excise taxes which correspond to the petroleum products
delivered to petitioner. This Authority to Accept Payment for
Excise Taxes only proves the payment of millions of pesos in
excise taxes made by Petron during the period covered by the
claim but they fail to show to this Court which part of this huge
amount actually represents the excise taxes paid on the
petroleum products actually delivered to herein petitioner.
Petitioner merely presented a summary of petroleum products
sold and delivered by Petron during the period covered by the
claim. We cannot, by the summary alone, ascertain the
veracity of the amount being claimed neither can it prove the
existence of the invoices being referred to therein. Petitioner
should have submitted the invoices supporting the schedules
of petroleum products sold and delivered to it by Petron. These
invoices would reveal whether or not the amount claimed for
refund by petitioner is correct.
In an action for refund/credits the taxpayer has the burden of
showing that the taxes paid are erroneously collected and that
failure to meet such a burden is fatal to his cause. Tax refunds
partake of the nature of the tax exemptions and therefore
cannot be allowed unless granted in the most explicit and
categorical language. The grant of refund privileges must be
strictly construed against the taxpayer and liberally in favor of
the government. (citations omitted)lawphil.net
Petitioner has the burden to prove the material allegations in
its petition as well as the truth of its claim.6 (Emphasis
supplied) disposing of the case as follows:
WHEREFORE, in view of the foregoing, the claim of refund of
petitioner in the amount of P602,349.00 is hereby DENIED for
lack of merit.7
On August 31, 1998, petitioner filed a motion for
reconsideration alleging that it failed to submit invoices
because it thought that the presentation of said invoices was
not necessary to prove the claim for refund, since petitioners
previous claims, in CTA Case Nos. 4654, 4993 and 4994,8
involving similar facts, were granted by the CTA even without
the presentation of invoices. It then prayed that the CTA
decision be reconsidered and its claim for refund be allowed,
or in the alternative, allow petitioner to present and offer the
invoices in evidence to present its claim.9

The CTA denied the motion for reconsideration on January 6,

1999, explaining as follows:
It is important to note at the outset that Petitioners reliance
on CTA Case Nos. 4994, 4654 and 4993 is misplaced because
during the hearings of these cases up to the time of formal
offer of evidence, CTA Circular No. 1-95 was not yet in effect.
The nature and presentation of evidence involving voluminous
documents prior to the effectivity of CTA Circular No. 1-95
differ from that which is required by this Court from the
effectivity of said Circular beginning January 25, 1995. In the
instant case, the Petition for Review was filed on September 1,
1995. It is obviously clear that the provisions of CTA Circular 195 already applied to Petitioners presentation of evidence.
Quoted hereunder are portions of CTA Circular 1-95:
1. The party who desires to introduce as evidence such
voluminous documents must present: (a) Summary containing
the total amount/s of the tax account or tax paid for the period
involved and a chronological or numerical list of the numbers,
dates and amounts covered by the invoices or receipts; and
(b) a Certification of an independent Certified Public
Accountant attesting to the correctness of the contents of the
summary after making an examination and evaluation of the
voluminous receipts and invoices. Such summary and
certification must properly be identified by a competent
witness from the accounting firm.
2. The method of individual presentation of each and every
receipt or invoice or other documents for marking,
identification and comparison with the originals thereof need
not be done before the Court or the Commissioner anymore
after the introduction of the summary and CPA certification. It
is enough that the receipts, invoices and other documents
covering the said accounts or payments must be pre-marked
by the party concerned and submitted to the Court in order to
be made accessible to the adverse party whenever she/he
desires to check and verify the correctness of the summary
and CPA certification. However, the originals of the said
receipts, invoices or documents should be ready for
verification and comparison in case doubts on the authenticity
of the particular documents presented is raised during the
hearing of the case.
It can be revealed from the evidence presented by the
Petitioner that it failed to present a certification of an

independent Certified Public Accountant, as well as the

invoices supporting the schedules of petroleum products sold
and delivered to it by Petron. From this perspective alone, the
claim for refund was correctly denied. Now that an unfavorable
decision has been rendered by this Court, Petitioner belatedly
seeks to present the invoices as additional evidence.
The prayer to present additional evidence partakes of the
nature of a motion for new trial under Section 1 Rule 37 of the
1997 Rules of Civil Procedure. It has already been emphasized
in several cases that failure to present evidence already
existing at the time of trial does not warrant the grant of a new
trial because said evidence can no longer be considered newly
discovered but is more in the nature of forgotten evidence.
Neither can such inadvertence on the part of the counsel to
present said evidence qualify as excusable negligence.10
(Emphasis supplied)
CTA Presiding Judge Ernesto D. Acosta dissented with the view
that in the interest of justice, petitioner should be given a
chance to prove its case by allowing it to present the invoices
of its purchases.11 He reasoned that:
A review of the schedule of invoices, Exhibits "A-1" "A-1-a",
reveals that there are only about ninety four (94) invoices
which does not need the assistance of an independent CPA. It
can easily be presented before this Court or before a Clerk of
Court for markings and comparison.
The reason advanced by the Petitioner was that they thought
the presentation by the Manager of Petron Corporation of a
duly notarized certification (supporting the schedules of
invoices), coupled with testimonies of witness, Mrs. Sylvia
Osorio of Petron Corporation, are enough to prove their case.
Respondent did not even controvert said exhibits and
testimonies.1avvphi1.zw+ It is this Court that raised doubts on
the veracity of the claim in view of the absence of the invoices.
This ground could easily fall under the phrase "mistake or
excusable negligence" as a ground for new trial under Sec.
1(a) of Rule 37 and not under the phrase "newly discovered
evidence" as stated in our said resolution. The denial of this
motion is too harsh considering that this case is only civil in
nature, govern (sic) merely by the rule on preponderance of
evidence.12
On January 25, 1999, petitioner filed another motion for
reconsideration with motion for new trial praying that it be

allowed to present an additional witness and to have invoices

and receipts pre-marked in accordance with CTA Circular No. 195.13 The CTA denied the same for the reason that it found no
convincing reason to reverse its earlier decision and the
motion for new trial was filed beyond the period prescribed by
Sec. 1, Rule 37 of the Rules of Court as well as for appeals as
provided under Sec. 4, Rule 43.14
Petitioner then went to the Court of Appeals (CA) which issued
the herein assailed Resolution dismissing the petition for
review, to wit:
Considering that the "AFFIDAVIT OF NON-FORUM SHOPPING"
was executed by petitioners counsel, when under Adm.
Circular No. 04-94, the petitioner should be the one to certify
as to the facts and undertakings as required; and since any
violation of the circular "shall be a cause for the dismissal" of
the petition, the petition for review is hereby DENIED DUE
COURSE OUTRIGHT, and is DISMISSED.
SO ORDERED.15
The motion for reconsideration was likewise denied.16
Hence the present petition raising the following issues:
1. Whether or not the Court of Tax Appeals should have
granted petitioners claim for refund.
2. Whether or not the Court of Appeals should have given due
course to the Petition for Review.17
Anent the first issue, petitioner argues that: the CTA erred in
denying its claim for refund for its failure to present invoices
and receipts; the evidence it adduced, which the CIR did not
controvert nor contest, is sufficient to support petitioners
claim for refund or tax credit; as opined by the Presiding Judge
of the CTA in his dissenting opinion, the failure of petitioner to
present invoices and receipts is a minor infraction of CTA
Circular No. 1-95 which should not defeat petitioners right to
refund; there is nothing in said circular which will support the
contention of the CTA that the petitioner is mandated to
present the invoices in the present case; the CTA, in its
previous decisions involving the petitioner, one of which was
even affirmed by the CA, held that a refund may be granted
solely on the basis of certifications issued by Petron;18 if it is
the avowed purpose of CTA Circular No. 1-95 to ensure the
speedy administration of justice, it should not compel
petitioner to present additional voluminous evidence which will
require the presentation of a Certified Public Accountant (CPA)

for court examination aside from entailing additional costs to

petitioner; petitioners counsel was of the honest belief that he
was not required to adhere to what is provided in CTA Circular
No. 1-95; petitioner should not be burdened by the infraction
of its counsel and should be given the fullest opportunity to
establish the merits of its action rather than for it to lose
property on mere technicalities; it has also been held that
evidence not offered and formally presented in evidence
during the trial may still be considered by a court in the
exercise of its discretion so as not to allow a mere technicality
to overcome justice and fairness; petitioner should be granted
its claim for refund, or, in the alternative, be given an
opportunity to present the pre-marked invoices in accordance
with CTA Circular No. 1-95.19
As to the second issue, petitioner explains that: its counsel
was of the belief that he was authorized to execute the
affidavit of non-forum shopping; in any event, its counsel
immediately attached to the motion a copy of the affidavit of
non-forum shopping executed by petitioners President, Ramon
C. Avecilla as soon as he learned of his error; and Supreme
Court Administrative Circular No. 04-94 should be liberally
construed following Maricalum Mining Corp. vs. NLRC,20
Loyola vs. Court of Appeals,21 and Philippine Fishing Boat
Officers and Engineers Union vs. Court of Industrial
Relations.22
It then prayed that: the resolutions of the CA and the Decision
of the CTA be reversed; and an order be issued to award
petitioner tax credit certificate/refund in the amount of
P602,349.00 representing excise taxes paid for the period of
September 1993 to December 1994 or in the alternative to
allow petitioner to adduce evidence before the CTA to support
its case.23
The CIR, in his Comment, contends that: the burden of proving
entitlement to the refund/credit rests upon petitioner; the CTA
was correct in requiring the submission of the invoices to
support the schedules presented especially in this case where
the CTA cannot determine which part of the huge amount paid
by Petron actually represents the excise taxes paid on the
petroleum products actually delivered to petitioner; the
schedules are self-serving and if not corroborated by evidence
have no evidentiary weight; the CTA is not precluded from
requiring other evidence which will once and for all erase

doubts to the claim for refund; claims for refund, partaking of

the nature of tax exemptions, are construed in strictissimi juris
against the taxpayer and liberally in favor of the taxing
authority; even setting aside the requirements in CTA Circular
No. 1-95, petitioner is still obliged to present the invoices in
order to corroborate the entries in the summary and to reveal
whether or not the amount claimed for refund by petitioner is
correct; petitioners Motion for Reconsideration and Motion for
New Trial filed on January 25, 1999 were properly denied by
the CTA for having been filed out of time; and the CTAs
decision must be respected on appeal since it has developed
an expertise on the subject.24
Anent the second issue, respondent avers that the CA did not
err in dismissing the petition for review on the ground that the
affidavit of non-forum shopping was executed by petitioners
counsel contrary to the requirements in Sec. 5, Rule 7 of the
Rules of Court; and that the denial of the motion for
reconsideration was also proper since the failure to comply
with the requirements of non-forum shopping shall not be
curable by mere amendment to the complaint.25
For clarity, we shall first discuss the issue of whether or not the
CA should have given due course to the petition for review.
The primary question that has to be resolved is whether an
Affidavit of Non-Forum Shopping, erroneously signed by
counsel, may be cured by subsequent compliance.
Generally, subsequent compliance with the requirement of
affidavit of non-forum shopping does not excuse a party from
failure to comply in the first instance.26
Supreme Court Administrative Circular No. 04-94 of Section 5,
Rule 7 of the 1997 Rules of Civil Procedure which requires the
pleader to submit a certificate of non-forum shopping to be
executed by the plaintiff or principal party is mandatory.27 A
certification of the plaintiffs counsel will not suffice for the
reason that it is petitioner, and not the counsel, who is in the
best position to know whether he actually filed or caused the
filing of a petition.28 A certification against forum shopping
signed by counsel is a defective certification that is equivalent
to non-compliance with the requirement and constitutes a
valid cause for the dismissal of the petition.29 Hence, strictly
speaking, the CA was correct in dismissing the petition.

There are instances, however, when we treated compliance

with the rule with relative liberality, especially when there are
circumstances or compelling reasons making the strict
application of the rule clearly unjustified.30
In the case of Far Eastern Shipping Co. vs. Court of Appeals,31
while we said that, strictly, a certification against forum
shopping by counsel is a defective certification, the
verification, signed by petitioners counsel in said case, is
substantial compliance inasmuch as it served the purpose of
the Rules of informing the Court of the pendency of another
action or proceeding involving the same issues.32 We then
explained that procedural rules are instruments in the speedy
and efficient administration of justice which should be used to
achieve such end and not to derail it.33
In Damasco vs. NLRC,34 the certifications against forum
shopping were erroneously signed by petitioners lawyers,
which, generally, would warrant the outright dismissal of their
actions.35 We resolved however that as a matter of social
justice, technicality should not be allowed to stand in the way
of equitably and completely resolving the rights and
obligations of the parties.36 In Cavile vs. Heirs of Clarita
Cavile,37 we likewise held that the merits of the substantive
aspects of the case may be deemed as "special circumstance"
for the Court to take cognizance of a petition although the
certification against forum shopping was executed and signed
by only one of the petitioners.38 Finally, in Sy Chin vs. Court of
Appeals,39 we categorically stated that while a petition may
be flawed as the certificate of non-forum shopping was signed
only by counsel and not by the party, such procedural lapse
may be overlooked in the interest of substantial justice.40
Here, the affidavit of non-forum shopping was signed by
petitioners counsel. Upon receipt of the resolution of the CA,
however, which dismissed its petition for non-compliance with
the rules on affidavit of non-forum shopping, petitioner
submitted, together with its motion for reconsideration, an
affidavit signed by petitioners president in compliance with
the said rule.41 We deem this to be sufficient especially in
view of the merits of the case, which may be considered as a
special circumstance or a compelling reason that would justify
tempering the hard consequence of the procedural
requirement on non-forum shopping.42

Which brings us to the other issue of whether or not the CTA

should have granted petitioners claim for refund.
The general rule is that claimants of tax refunds bear the
burden of proving the factual basis of their claims.43 This is
because tax refunds are in the nature of tax exemptions, the
statutes of which are construed strictissimi juris against the
taxpayer and liberally in favor of the taxing authority.44 Taxes
are the lifeblood of the nation, therefore statutes that allow
exemptions are construed strictly against the grantee and
liberally in favor of the government.45
In this case, there is no dispute that petitioner is entitled to
exemption from the payment of excise taxes by virtue of its
being an EPZA registered enterprise.46 As stated by the CTA,
the only thing left to be determined is whether or not
petitioner is entitled to the amount claimed for refund.47
Petitioners entire claim for refund, however, was denied for
petitioners failure to present invoices allegedly in violation of
CTA Circular No. 1-95. But nowhere in said Circular is it stated
that invoices are required to be presented in claiming refunds.
What the Circular states is that:
1. The party who desires to introduce as evidence such
voluminous documents must present: (a) Summary containing
the total amount/s of the tax account or tax paid for the period
involved and a chronological or numerical list of the numbers,
dates and amounts covered by the invoices or receipts; and
(b) a Certification of an independent Certified Public
Accountant attesting to the correctness of the contents of the
summary after making an examination and evaluation of the
voluminous receipts and invoices. Such summary and
certification must properly be identified by a competent
witness from the accounting firm. (Emphasis supplied)
The CTA in denying petitioners motion for reconsideration,
also mentioned for the first time that petitioners failure to
present "a certification of an independent CPA" is another
ground that justified the denial of its claim for refund.
Again, we find such reasoning to be erroneous. The
certification of an independent CPA is not another mandatory
requirement under the Circular which petitioner failed to
comply with. It is rather a requirement that must accompany
the invoices should one decide to present invoices under the
Circular. Since petitioner did not present invoices, on the
assumption that such were not necessary in this case, it

logically did not present a certification because there was

nothing to certify.
The CTA also could not deny that in its previous decisions
involving petitioners claims for refund, invoices were not
deemed necessary to grant such claims. It merely said that in
said decisions, CTA Circular No. 1-95 was not yet in effect.48
Since CTA Circular No. 1-95 did not make it mandatory to
present invoices, coupled with the previous cases of petitioner
where the certifications issued by Petron sufficed, it is
understandable that petitioner did not think it necessary to
present invoices and the accompanying certifications when it
filed the present case for refund before the CTA.
Even then, petitioner, in its motion for reconsideration, asked
the CTA for an opportunity to present invoices to substantiate
its claims. But this was denied by the CTA explaining that its
prayer to present additional evidence partakes of the nature of
a motion for new trial under Section 1, Rule 37 of the Rules of
Court. The CTA held that under such rule, failure to present
evidence already existing at the time of trial does not warrant
the grant of a new trial because such evidence is not newly
discovered but is more in the nature of forgotten evidence
which is not excusable.49
On this point, we agree with the dissenting opinion of CTA
Presiding Judge Ernesto D. Acosta who stated that:
The reason advanced by the Petitionerthat they thought the
presentation by the Manager of Petron Corporation of a duly
notarized certification (supporting the schedules of invoices),
coupled with testimonies of witness, Mrs. Sylvia Osorio of
Petron Corporation, are enough to prove their case could
easily fall under the phrase "mistake or excusable negligence"
as a ground for new trial under Sec. 1(a) of Rule 37 and not
under the phrase "newly discovered evidence" as stated in our
said resolution. The denial of this motion is too harsh
considering that this case is only civil in nature, govern (sic)
merely by the rule on preponderance of evidence.50
Sec. 1, Rule 37 of the Rules of Court provides as follows:
SECTION 1. Grounds of and period for filing motion for new
trial or reconsideration.--- Within the period for taking an
appeal, the aggrieved party may move the trial court to set
aside the judgment or final order and grant a new trial for one
or more of the following causes materially affecting the
substantial rights of said party:

(a) Fraud, accident, mistake or excusable negligence which

ordinary prudence could not have guarded against and by
reason of which such aggrieved party has probably been
impaired in his rights; or
(b) Newly discovered evidence, which could not, with
reasonable diligence, have discovered and produced at the
trial, and which if presented would probably alter the result.

It is true that petitioner could not move for new trial on the
basis of newly discovered evidence because in order to have a
new trial on the basis of newly discovered evidence, it must be
proved that: (a) the evidence was discovered after the trial; (b)
such evidence could not have been discovered and produced
at the trial with reasonable diligence; (c) it is material, not
merely cumulative, corroborative or impeaching; and (d) it is
of such weight that, if admitted, will probably change the
judgment.51 This does not mean however, that petitioner is
altogether barred from having a new trial. As pointed out by
Judge Acosta, the reasons put forth by petitioner could fall
under mistake or excusable negligence.
The "mistake" that is allowable in Rule 37 is one which
ordinary prudence could not have guarded against.52
Negligence to be "excusable" must also be one which ordinary
diligence and prudence could not have guarded against and by
reason of which the rights of an aggrieved party have probably
been impaired.53 The test of excusable negligence is whether
a party has acted with ordinary prudence while transacting
important business.54
In this case, it cannot be said that petitioner did not act with
ordinary prudence in claiming its refund with the CTA, in light
of its previous cases with the CTA which did not require
invoices and the non-mandatory nature of CTA Circular No. 195.
Respondent also argues that petitioners motion for new trial
was filed out of time and should therefore be dismissed in view
of Sec. 1, Rule 37 and Sec. 4, Rule 43 of the Rules of Court.
Sec. 1, Rule 37 provides that:
Section 1. Grounds of and period for filing motion for new trial
or reconsideration.--- Within the period for taking an appeal,
the aggrieved party may move the trial court to set aside the
judgment or final order and grant a new trial
and Sec. 4, Rule 43 holds that

Section 4. Period of appeal. --- The appeal shall be taken within

fifteen (15) days from notice of the award, judgment, final
order or resolution, or from the date of its last publication, if
publication is required by law for its effectivity, or of the denial
of petitioners motion for new trial or reconsideration duly filed
in accordance with the governing law of the court or agency a
quo. Only one (1) motion for reconsideration shall be allowed.
Upon proper motion and the payment of the full amount of the
docket fee before the expiration of the reglementary period,
the Court of Appeals may grant an additional period of fifteen
(15) days only within which to file the petition for review. No
further extension shall be granted except for the most
compelling reason and in no case to exceed fifteen (15) days.
It is borne by the records however that in its first motion for
reconsideration duly filed on time, petitioner had already
prayed that it be allowed to present and offer the pieces of
evidence deemed lacking by the CTA in its Decision dated
August 11, 1998.55 Thus, while it named its pleading as a
Motion for New Trial only in its motion dated January 25, 1999,
petitioner should not be deemed to have moved for new trial
only at such time.
We reiterate the fundamental principle that technical rules of
procedure are not ends in themselves but are primarily
designed to aid in the administration of justice.56 And in cases
before tax courts, Rules of Court applies only by analogy or in
a suppletory character and whenever practicable and
convenient shall be liberally construed in order to promote its
objective of securing a just, speedy and inexpensive
disposition of every action and proceeding.57 The quest for
orderly presentation of issues is not an absolute.58 It should
not bar the courts from considering undisputed facts to arrive
at a just determination of a controversy.59 This is because,
after all, the paramount consideration remains the
ascertainment of truth.60 Section 8 of R.A. No. 1125 creating
the CTA also expressly provides that it shall not be governed
strictly by technical rules of evidence.61
Since it is not disputed that petitioner is entitled to tax
exemption, it should not be precluded from presenting
evidence to substantiate the amount of refund it is claiming on
mere technicality especially in this case, where the failure to
present invoices at the first instance was adequately explained
by petitioner.

As we pronounced in BPI-Family Savings Bank, Inc. vs. Court of

Appeals:62
Technicalities and legalisms, however exalted, should not be
misused by the government to keep money not belonging to it
and thereby enrich itself at the expense of its law-abiding
citizens. If the State expects its taxpayers to observe fairness
and honesty in paying their taxes, so must it apply the same
standard against itself in refunding excess payments of such
taxes. Indeed, the State must lead by its own example of
honor, dignity and uprightness.63
WHEREFORE, the petition is GRANTED. The assailed resolution
is SET ASIDE and the case REMANDED to the Court of Tax
Appeals for the reception of evidence, particularly invoices
supporting the schedules of petroleum products sold and
delivered to petitioner by Petron and the corresponding
certification of an independent Certified Public Accountant, for
the proper and immediate determination of the amount to be
refunded to petitioner.
SO ORDERED.

G.R. No. 86625 December 22, 1989

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
THE COURT OF APPEALS and THE COMMISSIONER OF
CUSTOMS, respondents.
The Chief Legal Counsel for petitioner.

The Development Bank of the Philippines imported IBM

computer equipment from the United States, and in
connection therewith paid to the Bureau of Customs duties,
compensating taxes and import processing fees in the
aggregate sum of P 5,562,926.00. It thereafter asked for a
refund of the amount paid, invoking Section 4(c) of Executive
Order No. 1087 (eff., Jan. 20,1986). The Customs
Commissioner refused to grant the refund, maintaining that
the customs duties, taxes and fees had been correctly
imposed and collected. 1
The DBP appealed to the Court of Tax Appeals, which on July
31, 1987 adjudicated the controversy in its favor, ordering the
Commissioner of Customs "to refund to ... (it [the DBP]) the
amount of P 5,562,926.00 it paid to the Bureau of Customs ...
(which) shall be applied and credited to the payment of the
subscribed capital stock of the Government in the Bank." 2
The Commissioner in turn came up to this Court on an appeal
by certiorari, his appeal being docketed as G.R. No. 79635. By
Resolution of the Court en banc dated September 15, 1987,
however, the appeal was referred to the Court of Appeals for
the reason that "(s)uch cases emanating from the Court of Tax
Appeals now fall within the exclusive appellate jurisdiction of
the Court of Appeals under Section 9 of Batas Pambansa Blg.
129."
In the Court of Appeals the case was docketed as CA-G.R. SP
No. 12887. And in due course, the Ninth Division of the Court
of Appeals rendered judgment under date of October 3, 1988,
3 annulling and setting aside that of the Court of Tax Appeals.
The Court of Appeals sustained the position of the Customs
Commissioner that it was grave error for the Court of Tax
Appeals to have taken cognizance of the case in view of the
explicit provisions of Presidential Decree No. 242, 4 pertinently
providing that:
SECTION 1. Provisions of law to the contrary notwithstanding,
all disputes, claims and controversies solely between or
among the departments, bureaus, offices, agencies and
instrumentalities of the National Government, including
government-owned or controlled corporations but excluding
constitutional offices or agencies, arising from the
interpretation and application of statutes, contracts or
agreements, shall henceforth be administratively settled or
adjudicated as provided hereinafter: Provided, That this shall

not apply to cases already pending in court at the time of the

effectivity of this decree.
The Appellate Tribunal thus held that the controversy between
the DBP and the Commissioner of Customs was not within the
jurisdiction of the CTA and should have been decided in
accordance with the mode of settlement and adjudication set
forth in Sections 2 and 3 of P.D. No. 242, viz:
SEC. 2. In all cases involving only questions of law, the same
shall be submitted to and settled or adjudicated by the
Secretary of Justice, as Attorney General and ex officio legal
adviser of all government-owned or controlled corporations
and entities, in consonance with section 83 of the Revised
Administrative Code. His ruling or determination of the
question in each case shall be conclusive and binding upon all
the parties concerned.
SEC. 3. Cases involving mixed questions of law and of fact or
only factual issues shall be submitted to and settled or
adjudicated by:
(a) The Solicitor General, with respect to disputes or claims or
controversies between or among the departments, bureaus,
offices and other agencies of the National Government;
(b) The Government Corporate Counsel, with respect to
disputes or claims or controversies between or among the
government-owned or controlled corporations or entities being
served by the Office of the Government Corporate Counsel;
and
(c) The Secretary of Justice, with respect to all other disputes
or claims or controversies which do not fall under the
categories mentioned in paragraphs (a) and (b).
The Appellate Court ruled that Section 7 (2) of Republic Act No.
1125-pursuant to which the Court of Tax Appeals had therefore
been exercising exclusive appellate jurisdiction over decisions
of the Commissioner of Customs in cases involving liability for
customs duties, fees or other money charges, inter alia- had
been superseded by said P.D. No. 242, it being "a settled rule
of statutory construction that where there is irreconcilable
repugnancy between two statutes anent the same subject
matter-as there is between P.D. No. 242 and Sec. 7 (2) of R.A.
No. 1125 in regard to the manner of settlement of disputes
involving customs duties, etc. between government offices,
agencies and corporations-the one of late enactment, being

the latest expression of the legislative will, should prevail over

the other which is of earlier enactment." 5
Its motion for reconsideration having been denied on January
10, 1989, 6 the DBP has filed a petition for review on certiorari
with this Court, praying for reversal of the decision of the Court
of Appeals on the ground that:
1) said Court had no jurisdiction to review decisions of the
Court of Tax Appeals, this pertaining exclusively to the
Supreme Court; and
2) said Court had erred in applying P.D. No. 242 in resolution of
the controversy. 7
The petition is without merit.
The Court reaffirms its earlier resolution that it is the Court of
Appeals which is now vested with exclusive appellate
jurisdiction over the Court of Tax Appeals and other quasijudicial agencies, instrumentalities, boards, or commissions.
It is true that originally, appeals from the Court of Tax Appeals
could be taken only to the Supreme Court. This was so stated
in Section 18 8 and Section 19 9 of Republic Act No. 1125 (eff.,
June 16, 1954). There were then, as explained by this Court.
10
... two ways of elevating ... (the)case to the Supreme Court,
i.e., first, by filing in the Court a quo a notice of appeal and
with this Court a petition for review x x (Sec. 18, Rep. Act
1125), and second, by causing such ruling, order or decision of
the Court of Tax Appeals likewise reviewed by us upon a writ of
certiorari in proper cases. Premised on these provisions, it may
be alleged that when a case is taken up to this Court by
petition for review, We could go over the evidence on record
and pass upon the questions of fact; but that in cases of
review upon petition for a writ of certiorari, this Court could
only pass upon issues involving questions of law. In answer to
these possible argument We may say that when the interest of
justice so demands, We may interchangeably consider
petitions for review as petitions for a writ of certiorari and viceversa, and if We have the power to consider the evidence to
determine the facts in cases of review, We find no plausible
reason for depriving this Court of such power in petitions for
certiorari specially if We consider that in the latter cases the
petitioner oftenly charges the respondent court with the
commission of grave abuse of discretion the determination of

which usually depends on the facts and circumstances of the

points in controversy. ...
It is noteworthy that Republic Act No. 5440 (eff., September 9,
1968) amended Section 17 of Republic Act No. 296, otherwise
known as the Judiciary Act of 1948, by explicitly including the
Court of Tax Appeals- together with the Commission on
Elections and such quasi-judicial agencies as the Court of
Industrial Relations, the Public Service Commission and the
Workmen's Compensation Commission-as among the entities
whose final judgments and decrees were subject to review by
the Supreme Court "on certiorari as the law or rules of court
may provide."
These provisions no longer control, in view of the
comprehensive provisions of Batas Pambansa Bilang 129
granting to the Intermediate Appellate Court (now the Court of
Appeals) "(e)xclusive appellate jurisdiction over all final
judgments, decisions, resolutions, orders or awards of Regional
Trial Courts and quasi-judicial agencies, instrumentalities,
boards or commissions, except those falling within the
appellate jurisdiction of the Supreme Court in accordance with
the Constitution, the provisions of this Act, and of
subparagraph (1) of the third paragraph and subparagraph (4)
of the fourth paragraph of Section 17 of the Judiciary Act of
1948." The fact that, as the DBP argues, the Court of Tax
Appeals is not among the agencies reorganized by said Batas
Pambansa Bilang 129, 11 is of no moment. What is essential,
and indisputable, is that the law did not, as the DBP imagines,
deal only with "Changes in the rules on procedures;" and that
not only was the Court of Appeals reorganized, but its
jurisdiction and powers were also broadened by Section 9 of
the Batas. Its original jurisdiction to issue writs of mandamus,
prohibition, certiorari and habeas corpus, which theretofore
could be exercised only in aid of its appellate jurisdiction, was
expanded by (1) extending it so as to include the writ of quo
warranto, and also (2) empowering it to issue all said
extraordinary writs "whether or not in aid of its appellate
jurisdiction. " Its appellate jurisdiction was also extended to
cover not only final judgments of Regional Trial Courts, but also
"all final judgments, decisions, resolutions, orders or awards of
... quasi-judicial agencies, istrumentalities, boards or
commmissions, except those falling within the appellate
jurisdiction of the Supreme Court in accordance with the

Constitution, the provisions of this Act, and of sub-paragraph

(1) of the third paragraph and subparagraph (4) of the fourth
paragraph of Section 17 of the Judiciary Act of 1948," it being
noteworthy in this connection that the text of the law is broad
and comprehensive, and the explicitly stated exceptions have
no reference whatever to the Court of Tax Appeals. Indeed, the
intention to expand the original and appellate jurisdiction of
the Court of Appeals over quasi-judicial agencies,
instrumentalities, boards, or commissions, is further stressed
by the last paragraph of Section 9 which excludes from its
provisions, only the "decisions and interlocutory orders issued
under the Labor Code of the Philippines and by the Central
Board of Assessment Appeals."
Since final judgments or decrees of the Court of Tax Appeals
are now within the exclusive appellate jurisdiction of the Court
of Appeals, and since appeals by certiorari may properly be
taken only to this Court, it follows that the mode of appeal
from the Court of Tax Appeals to the Court of Appeals should
be by notice of appeal cum petition for review, consistently
with mode of appeal from other quasi-judicial bodies and
agencies prescribed by Republic Act No. 5434 (eff., September
9,1968), 12 and that formerly provided for by Republic Act No.
1125, supra. It is on this basis that the interim or transitional
rules adopted in this Court's en banc Resolution of January 11,
1983 on the subject prescribe that "x x appeals to the
Intermediate Appellate Court from quasi-judicial bodies shall
continue to be governed by the provisions of Republic Act No.
5434 insofar as the same is not inconsistent with the
provisions of B.P. Blg. 129. " 13
The Court also rejects the DBP's second argument and
expresses with the conclusion of the Court of Appeals- and the
basic premises thereof that there is an "irreconcilable
repugnancy ... between Section 7(2) of R.A. No. 1125 and P.D.
No. 242," and hence, that the later enactment (P.D. No. 242),
being the latest expression of the legislative will, should
prevail over the earlier.
IN VIEW OF THE FOREGOING, the Court Resolved to DENY the
petition for lack of merit, and AFFIRM the challenged Decision
of the Court of Appeals.
IT SO ORDERED.

Fernan, C.J., Melencio-Herrera, Gutierrez, Jr., Cruz, Paras,

Feliciano, Gancayco, Padilla, Bidin, Sarmiento, Cortes, GrioAquino, Medialdea and Regalado, JJ., concur.
Footnotes
1 Rollo, p. 8.
2 Id., p. 9.
3 Id., pp. 21-25. The opinion was written for the Division by
Lombos-de la Fuente, J., and concurred in by Martinez and Pe,
JJ.
4 Entitled "(An Act) Prescribing the Procedure for
Administrative Settlement or Adjudication of Disputes, Claims
and Controversies Between or Among Government Offices,
Agencies and Instrumentalities, including Government-Owned
or Controlled Corporations, and for Other Purposes." The
avowed purpose of the decree was "to avoid litigations in court
where government lawyers appear for x x (government offices,
agencies and instrumentalities) to espouse and protect their
respective interests although, in the ultimate analysis, there is
but one real party in interest-the Government itself-in such
litigations and to avoid, too, "needlessly contributing to the
clogged dockets of the courts x x (and) dissipating or wasting
the time and energies not only
that of the courts but also of the government lawyers and the
considerable expenses incurred in the filing and prosecution of
judicial actions."
5 Rollo, p. 24.
6 Id., p. 28.
7 Id. p. 10.
8 Providing in part as follows: "Any party adversely affected by
any ruling, order or decision of the Court of Tax Appeals may
appeal therefrom to the Supreme Court by filing with the said
Court a notice of appeal and with the Supreme Court a petition
for review, within thirty days from the date he receives notice
of said ruling, order or decision. ...
9 xx Any ruling, order or decision of the Court of Tax Appeals
may likewise be reviewed by the Supreme Court upon a writ of
certiorari in proper cases. Proceedings in the Supreme Court
upon a writ of certiorari or a petition for review, as the case
may be shall, be in accordance with the provisions of the Rules
of Court or such rules as the Supreme Court may prescribe.
10 Collector of Internal Revenue v. Aznar, et al., 102 Phil.
979,985-986 (Jan. 31, 1958).

11 The courts reorganized were the Intermediate Appellate

Court (now the Court of Appeals, of course), the Courts of First
Instance (now the Regional Trial Courts), and the City,
Municipal and Municipal Circuit Courts (now the Metropolitan
Trial Courts, the Municipal Courts and the Municipal Circuit Trial
Courts), said courts, together with the Supreme Court forming
what is known as the "Integrated Judicial System" in this
jurisdiction as distinguished from other courts and quasijudicial agencies.
12 The Act deals with appeals from the Court of Agrarian
Relations; the Secretary of Labor under Section 7 of RA 602;
the Department of Labor under Sec. 23, RA 875; the Land
Registration Commission, the Securities and Exchange
Commission, the Civil Aeronautics Board, the Patent Office, the
Agricultural Inventions Board.
13 Par. 22(c).

This is a petition for review on certiorari of the July 27, 1984

Decision of the Office of the Presidential Assistant For Legal
Affairs dismissing the appeal from the adverse ruling of the
Philippine Ports Authority on the sole ground that the same
was filed beyond the reglementary period.
On April 28, 1981, the Iloilo Port Manager of respondent
Philippine Ports Authority (PPA for short) wrote petitioner
Victorias Milling Co., requiring it to have its tugboats and
barges undergo harbor formalities and pay entrance/clearance
fees as well as berthing fees effective May 1, 1981. PPA,
likewise, requiring petitioner to secure a permit for cargo
handling operations at its Da-an Banua wharf and remit 10% of
its gross income for said operations as the government's
share.
To these demands, petitioner sent two (2) letters, both dated
June 2, 1981, wherein it maintained that it is exempt from
paying PPA any fee or charge because: (1) the wharf and an its
facilities were built and installed in its land; (2) repair and
maintenance thereof were and solely paid by it; (3) even the
dredging and maintenance of the Malijao River Channel from
Guimaras Strait up to said private wharf are being done by
petitioner's equipment and personnel; and (4) at no time has
the government ever spent a single centavo for such activities.
Petitioner further added that the wharf was being used mainly
to handle sugar purchased from district planters pursuant to
existing milling agreements.
In reply, on November 3, 1981, PPA Iloilo sent petitioner a
memorandum of PPA's Executive Officer, Maximo Dumlao,
which justified the PPA's demands. Further request for
reconsideration was denied on January 14, 1982.

G.R. No. 73705 August 27, 1987

VICTORIAS MILLING CO., INC., petitioner,
vs.
OFFICE OF THE PRESIDENTIAL ASSISTANT FOR LEGAL
AFFAIRS and PHILIPPINE PORTS AUTHORITY,
respondents.

On March 29, 1982, petitioner served notice to PPA that it is

appealing the case to the Court of Tax Appeals; and
accordingly, on March 31, 1982, petitioner filed a Petition for
Review with the said Court, entitled "Victorias Milling Co., Inc.
v. Philippine Ports Authority," and docketed therein as CTA
Case No. 3466.

On January 10, 1984, the Court of Tax Appeals dismissed

petitioner's action on the ground that it has no jurisdiction. It
recommended that the appeal be addressed to the Office of
the President.

the nationwide circulated newspaper, "The Times Journal", on

November 9,1977 (ibid., pp. 79-81).

On January 23, 1984, petitioner filed a Petition for Review with

this Court, docketed as G.R. No. 66381, but the same was
denied in a Resolution dated February 29, 1984.

WHETHER OR NOT THE 30-DAY PERIOD FOR APPEAL UNIDER

SECTION 131 OF PPA ADMINISTRATIVE ORDER NO. 13-77 WAS
TOLLED BY THE PENDENCY OF THE PETITIONS FILED FIRST
WITH THE COURT OF TAX APPEALS, AND THEN WITH THIS
HONORABLE TRIBUNAL.

On April 2, 1984, petitioner filed an appeal with the Office of

the President, but in a Decision dated July 27, 1984 (Record, p.
22), the same was denied on the sole ground that it was filed
beyond the reglementary period. A motion for Reconsideration
was filed, but in an Order dated December 16, 1985, the same
was denied (ibid., pp. 3-21): Hence, the instant petition.
The Second Division of this Court, in a Resolution dated June 2,
1986, resolved to require the respondents to comment (ibid.,
p. 45); and in compliance therewith, the Solicitor General filed
his Comment on June 4, 1986 (Ibid., pp. 50-59).
In a Resolution of July 2, 1986, petitioner was required to file a
reply (Ibid., p. 61) but before receipt of said resolution, the
latter filed a motion on July 1, 1986 praying that it be granted
leave to file a reply to respondents' Comment, and an
extension of time up to June 30, 1986 within which to file the
same. (Ibid., p. 62).
On July 18, 1986, petitioner filed its reply to respondents'
Comment (Ibid., pp. 68-76).
The Second Division of this Court, in a Resolution dated August
25, 1986, resolved to give due course to the petition and to
require the parties to file their respective simultaneous
memoranda (Ibid., p. 78).
On October 8, 1986, the Solicitor General filed a Manifestation
and Rejoinder, stating, among others, that respondents are
adopting in toto their Comment of June 3, 1986 as their
memorandum; with the clarification that the assailed PPA
Administrative Order No. 13-77 was duly published in full in

The sole legal issue raised by the petitioner is

The instant petition is devoid of merit.

Petitioner, in holding that the recourse first to the Court of Tax
Appeals and then to this Court tolled the period to appeal,
submits that it was guided, in good faith, by considerations
which lead to the assumption that procedural rules of appeal
then enforced still hold true. It contends that when Republic
Act No. 1125 (creating the Court of Tax Appeals) was passed in
1955, PPA was not yet in existence; and under the said law,
the Court of Tax Appeals had exclusive appellate jurisdiction
over appeals from decisions of the Commissioner of Customs
regarding, among others, customs duties, fees and other
money charges imposed by the Bureau under the Tariff and
Customs Code. On the other hand, neither in Presidential
Decree No. 505, creating the PPA on July 11, 1974 nor in
Presidential Decree No. 857, revising its charter (said decrees,
among others, merely transferred to the PPA the powers of the
Bureau of Customs to impose and collect customs duties, fees
and other money charges concerning the use of ports and
facilities thereat) is there any provision governing appeals
from decisions of the PPA on such matters, so that it is but
reasonable to seek recourse with the Court of Tax Appeals.
Petitioner, likewise, contends that an analysis of Presidential
Decree No. 857, shows that the PPA is vested merely with
corporate powers and duties (Sec. 6), which do not and can
not include the power to legislate on procedural matters, much
less to effectively take away from the Court of Tax Appeals the
latter's appellate jurisdiction.
These contentions are untenable for while it is true that
neither Presidential Decree No. 505 nor Presidential Decree No.

857 provides for the remedy of appeal to the Office of the

President, nevertheless, Presidential Decree No. 857
empowers the PPA to promulgate such rules as would aid it in
accomplishing its purpose. Section 6 of the said Decree
provides
Sec. 6. Corporate Powers and Duties
a. The corporate duties of the Authority shall be:

Manager, such decision shall be subject to further affirmation

by the PPA Board before it shall become effective; Provided,
however, that if within thirty (30) days from receipt of the
record of the case by the General Manager, no decision is
rendered, the decision under review shall become final and
executory; Provided further, that any party aggrieved by the
decision of the General Manager as affirmed by the PPA Board
may appeal said decision to the Office of the President within
thirty (30) days from receipt of a copy thereof. (Emphasis
supplied).

xxx xxx xxx

(III) To prescribe rules and regulations, procedures, and
guidelines governing the establishment, construction,
maintenance, and operation of all other ports, including
private ports in the country.
xxx xxx xxx
Pursuant to the aforequoted provision, PPA enacted
Administrative Order No. 13-77 precisely to govern, among
others, appeals from PPA decisions. It is now finally settled that
administrative rules and regulations issued in accordance with
law, like PPA Administrative Order No. 13-77, have the force
and effect of law (Valerio vs. Secretary of Agriculture and
Natural Resources, 7 SCRA 719; Antique Sawmills, Inc. vs.
Zayco, et al., 17 SCRA 316; and Macailing vs. Andrada, 31
SCRA 126), and are binding on all persons dealing with that
body.
As to petitioner's contention that Administrative Order No. 1377, specifically its Section 131, only provides for appeal when
the decision is adverse to the government, worth mentioning
is the observation of the Solicitor General that petitioner
misleads the Court. Said Section 131 provides
Sec. 131. Supervisory Authority of General Manager and PPA
Board. If in any case involving assessment of port charges,
the Port Manager/OIC renders a decision adverse to the
government, such decision shall automatically be elevated to,
and reviewed by, the General Manager of the authority; and if
the Port Manager's decision would be affirmed by the General

From a cursory reading of the aforequoted provision, it is

evident that the above contention has no basis.
As to petitioner's allegation that to its recollection there had
been no prior publication of said PPA Administrative Order No.
13-77, the Solicitor General correctly pointed out that said
Administrative Order was duly published in full in the
nationwide newspaper, "The Times Journal", on November
9,1977.
Moreover, it must be stated that as correctly observed by the
Solicitor General, the facts of this case show that petitioner's
failure to appeal to the Office of the President on time stems
entirely from its own negligence and not from a purported
ignorance of the proper procedural steps to take. Petitioner
had been aware of the rules governing PPA procedures. In fact,
as embodied in the December 16, 1985 Order of the Office of
the President, petitioner even assailed the PPA's rule making
powers at the hearing before the Court of Tax Appeals.
It is axiomatic that the right to appeal is merely a statutory
privilege and may be exercised only in the manner and in
accordance with the provision of law (United CMC Textile
Workers Union vs. Clave, 137 SCRA 346, citing the cases of
Bello vs. Fernando, 4 SCRA 138; Aguila vs. Navarro, 55 Phil.
898; and Santiago vs. Valenzuela, 78 Phil. 397).
Furthermore, even if petitioner's appeal were to be given due
course, the result would still be the same as it does not
present a substantially meritorious case against the PPA.

Petitioner maintains and submits that there is no basis for the

PPA to assess and impose the dues and charges it is collecting
since the wharf is private, constructed and maintained at no
expense to the government, and that it exists primarily so that
its tugboats and barges may ferry the sugarcane of its Panay
planters.
As correctly stated by the Solicitor General, the fees and
charges PPA collects are not for the use of the wharf that
petitioner owns but for the privilege of navigating in public
waters, of entering and leaving public harbors and berthing on
public streams or waters. (Rollo, pp. 056-057).
In Compaia General de Tabacos de Filipinas vs. Actg.
Commissioner of Customs (23 SCRA 600), this Court laid down
the rule that berthing charges against a vessel are collectible
regardless of the fact that mooring or berthing is made from a
private pier or wharf. This is because the government
maintains bodies of water in navigable condition and it is to
support its operations in this regard that dues and charges are
imposed for the use of piers and wharves regardless of their
ownership.
As to the requirement to remit 10% of the handling charges,
Section 6B-(ix) of the Presidential Decree No. 857 authorized
the PPA "To levy dues, rates, or charges for the use of the
premises, works, appliances, facilities, or for services provided
by or belonging to the Authority, or any organization
concerned with port operations." This 10% government share
of earnings of arrastre and stevedoring operators is in the
nature of contractual compensation to which a person desiring
to operate arrastre service must agree as a condition to the
grant of the permit to operate.
PREMISES CONSIDERED, the instant petition is hereby
DISMISSED.
SO ORDERED.

G.R. No. L-36181 October 23, 1982

MERALCO SECURITIES CORPORATION (now FIRST
PHILIPPINE HOLDINGS CORPORATION), petitioner,
vs.
HON. VICTORINO SAVELLANO and ASUNCION BARON
VDA. DE MANIAGO, et al., as heirs of the late Juan G.
Maniago, respondents.
G.R. No. L-36748 October 23, 1982
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
HON. VICTORINO SAVELLANO and ASUNCION BARON
VDA. DE MANIAGO, et al., as heirs of the late Juan G.
Maniago, respondents.
G.R. No. L-36181
San Juan, Africa, Gonzales & San Agustin for petitioner.
Ramon A. Gonzales for respondents.

These are original actions for certiorari to set aside and annul
the writ of mandamus issued by Judge Victorino A. Savellano of
the Court of First Instance of Manila in Civil Case No. 80830
ordering petitioner Meralco Securities Corporation (now First
Philippine Holdings Corporation) to pay, and petitioner
Commissioner of Internal Revenue to collect from the former,
the amount of P51,840,612.00, by way of alleged deficiency
corporate income tax, plus interests and surcharges due
thereon and to pay private respondents 25% of the total
amount collectible as informer's reward.
On May 22, 1967, the late Juan G. Maniago (substituted in
these proceedings by his wife and children) submitted to
petitioner Commissioner of Internal Revenue confidential
denunciation against the Meralco Securities Corporation for
tax evasion for having paid income tax only on 25 % of the
dividends it received from the Manila Electric Co. for the years
1962-1966, thereby allegedly shortchanging the government
of income tax due from 75% of the said dividends.
Petitioner Commissioner of Internal Revenue caused the
investigation of the denunciation after which he found and
held that no deficiency corporate income tax was due from the
Meralco Securities Corporation on the dividends it received
from the Manila Electric Co., since under the law then
prevailing (section 24[a] of the National Internal Revenue
Code) "in the case of dividends received by a domestic or
foreign resident corporation liable to (corporate income) tax
under this Chapter . . . .only twenty-five per centum thereof
shall be returnable for the purposes of the tax imposed under
this section." The Commissioner accordingly rejected
Maniago's contention that the Meralco from whom the
dividends were received is "not a domestic corporation liable
to tax under this Chapter." In a letter dated April 5, 1968, the
Commissioner informed Maniago of his findings and ruling and
therefore denied Maniago's claim for informer's reward on a
non-existent deficiency. This action of the Commissioner was
sustained by the Secretary of Finance in a 4th Indorsement
dated May 11, 1971.
On August 28, 1970, Maniago filed a petition for mandamus,
and subsequently an amended petition for mandamus, in the

Court of First Instance of Manila, docketed therein as Civil Case

No. 80830, against the Commissioner of Internal Revenue and
the Meralco Securities Corporation to compel the
Commissioner to impose the alleged deficiency tax
assessment on the Meralco Securities Corporation and to
award to him the corresponding informer's reward under the
provisions of R.A. 2338.
On October 28, 1978, the Commissioner filed a motion to
dismiss, arguing that since in matters of issuance and nonissuance of assessments, he is clothed under the National
Internal Revenue Code and existing rules and regulations with
discretionary power in evaluating the facts of a case and since
mandamus win not lie to compel the performance of a
discretionary power, he cannot be compelled to impose the
alleged tax deficiency assessment against the Meralco
Securities Corporation. He further argued that mandamus may
not lie against him for that would be tantamount to a
usurpation of executive powers, since the Office of the
Commissioner of Internal Revenue is undeniably under the
control of the executive department.
On the other hand, the Meralco Securities Corporation filed its
answer, dated January 15, 1971, interposing as special and/or
affirmative defenses that the petition states no cause of
action, that the action is premature, that mandamus win not
lie to compel the Commissioner of Internal Revenue to make
an assessment and/or effect the collection of taxes upon a
taxpayer, that since no taxes have actually been recovered
and/or collected, Maniago has no right to recover the reward
prayed for, that the action of petitioner had already prescribed
and that respondent court has no jurisdiction over the subject
matter as set forth in the petition, the same being cognizable
only by the Court of Tax Appeals.
On January 10, 1973, the respondent judge rendered a
decision granting the writ prayed for and ordering the
Commissioner of Internal Revenue to assess and collect from
the Meralco Securities Corporation the sum of P51,840,612.00
as deficiency corporate income tax for the period 1962 to
1969 plus interests and surcharges due thereon and to pay
25% thereof to Maniago as informer's reward.

All parties filed motions for reconsideration of the decision but

the same were denied by respondent judge in his order dated
April 6, 1973, with respondent judge denying respondents'
claim for attorneys fees and for execution of the decision
pending appeal.
Hence, the Commissioner filed a separate petition with this
Court, docketed as G.R. No. L-36748 praying that the decision
of respondent judge dated January 10, 1973 and his order
dated April 6, 1973 be reconsidered for respondent judge has
no jurisdiction over the subject matter of the case and that the
issuance or non-issuance of a deficiency assessment is a
prerogative of the Commissioner of Internal Revenue not
reviewable by mandamus.
The Meralco Securities Corporation (now First Philippine
Holdings Corporation) likewise appealed the same decision of
respondent judge in G.R. No. L-36181 and in the Court's
resolution dated June 13, 1973, the two cases were ordered
consolidated.
We grant the petitions.
Respondent judge has no jurisdiction to take cognizance of the
case because the subject matter thereof clearly falls within the
scope of cases now exclusively within the jurisdiction of the
Court of Tax Appeals. Section 7 of Republic Act No. 1125,
enacted June 16, 1954, granted to the Court of Tax Appeals
exclusive appellate jurisdiction to review by appeal, among
others, decisions of the Commissioner of Internal Revenue in
cases involving disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties imposed in
relation thereto, or other matters arising under the National
Internal Revenue Code or other law or part of law administered
by the Bureau of Internal Revenue. The law transferred to the
Court of Tax Appeals jurisdiction over all cases involving said
assessments previously cognizable by courts of first instance,
and even those already pending in said courts. 1 The question
of whether or not to impose a deficiency tax assessment on
Meralco Securities Corporation undoubtedly comes within the
purview of the words "disputed assessments" or of "other

matters arising under the National Internal Revenue

Code . . . .In the case of Blaquera vs. Rodriguez, et al, 2 this
Court ruled that "the determination of the correctness or
incorrectness of a tax assessment to which the taxpayer is not
agreeable, falls within the jurisdiction of the Court of Tax
Appeals and not of the Court of First Instance, for under the
provisions of Section 7 of Republic Act No. 1125, the Court of
Tax Appeals has exclusive appellate jurisdiction to review, on
appeal, any decision of the Collector of Internal Revenue in
cases involving disputed assessments and other matters
arising under the National Internal Revenue Code or other law
or part of law administered by the Bureau of Internal
Revenue."
Thus, even assuming arguendo that the right granted the
taxpayers affected to question and appeal disputed
assessments, under section 7 of Republic Act No. 1125, may
be availed of by strangers or informers like the late Maniago,
the most that he could have done was to appeal to the Court
of Tax Appeals the ruling of petitioner Commissioner of Internal
Revenue within thirty (30) days from receipt thereof pursuant
to section 11 of Republic Act No. 1125. 3 He failed to take such
an appeal to the tax court. The ruling is clearly final and no
longer subject to review by the courts. 4
It is furthermore a well-recognized rule that mandamus only
lies to enforce the performance of a ministerial act or duty 5
and not to control the performance of a discretionary power. 6
Purely administrative and discretionary functions may not be
interfered with by the courts. 7 Discretion, as thus intended,
means the power or right conferred upon the office by law of
acting officially under certain circumstances according to the
dictates of his own judgment and conscience and not
controlled by the judgment or conscience of others. 8
mandamus may not be resorted to so as to interfere with the
manner in which the discretion shall be exercised or to
influence or coerce a particular determination. 9
In an analogous case, where a petitioner sought to compel the
Rehabilitation Finance Corporation to accept payment of the
balance of his indebtedness with his backpay certificates, the
Court ruled that "mandamus does not compel the

Rehabilitation Finance Corporation to accept backpay

certificates in payment of outstanding loans. Although there is
no provision expressly authorizing such acceptance, nor is
there one prohibiting it, yet the duty imposed by the Backpay
Law upon said corporation as to the acceptance or discount of
backpay certificates is neither clear nor ministerial, but
discretionary merely, and such special civil action does not
issue to control the exercise of discretion of a public officer."
10 Likewise, we have held that courts have no power to order
the Commissioner of Customs to confiscate goods imported in
violation of the Import Control Law, R.A. 426, as said forfeiture
is subject to the discretion of the said official, 11 nor may
courts control the determination of whether or not an applicant
for a visa has a non-immigrant status or whether his entry into
this country would be contrary to public safety for it is not a
simple ministerial function but an exercise of discretion. 12
Moreover, since the office of the Commissioner of Internal
Revenue is charged with the administration of revenue laws,
which is the primary responsibility of the executive branch of
the government, mandamus may not he against the
Commissioner to compel him to impose a tax assessment not
found by him to be due or proper for that would be tantamount
to a usurpation of executive functions. As we held in the case
of Commissioner of Immigration vs. Arca 13 anent this
principle, "the administration of immigration laws is the
primary responsibility of the executive branch of the
government. Extensions of stay of aliens are discretionary on
the part of immigration authorities, and neither a petition for
mandamus nor one for certiorari can compel the
Commissioner of Immigration to extend the stay of an alien
whose period to stay has expired.
Such discretionary power vested in the proper executive
official, in the absence of arbitrariness or grave abuse so as to
go beyond the statutory authority, is not subject to the
contrary judgment or control of others. " "Discretion," when
applied to public functionaries, means a power or right
conferred upon them by law of acting officially, under certain
circumstances, uncontrolled by the judgment or consciences of
others. A purely ministerial act or duty in contradiction to a
discretional act is one which an officer or tribunal performs in a

given state of facts, in a prescribed manner, in obedience to

the mandate of a legal authority, without regard to or the
exercise of his own judgment upon the propriety or impropriety
of the act done. If the law imposes a duty upon a public officer
and gives him the right to decide how or when the duty shall
be performed, such duty is discretionary and not ministerial.
The duty is ministerial only when the discharge of the same
requires neither the exercise of official discretion or judgment."
14
Thus, after the Commissioner who is specifically charged by
law with the task of enforcing and implementing the tax laws
and the collection of taxes had after a mature and thorough
study rendered his decision or ruling that no tax is due or
collectible, and his decision is sustained by the Secretary, now
Minister of Finance (whose act is that of the President unless
reprobated), such decision or ruling is a valid exercise of
discretion in the performance of official duty and cannot be
controlled much less reversed by mandamus. A contrary view,
whereby any stranger or informer would be allowed to usurp
and control the official functions of the Commissioner of
Internal Revenue would create disorder and confusion, if not
chaos and total disruption of the operations of the
government.
Considering then that respondent judge may not order by
mandamus the Commissioner to issue the assessment against
Meralco Securities Corporation when no such assessment has
been found to be due, no deficiency taxes may therefore be
assessed and collected against the said corporation. Since no
taxes are to be collected, no informer's reward is due to
private respondents as the informer's heirs. Informer's reward
is contingent upon the payment and collection of unpaid or
deficiency taxes. An informer is entitled by way of reward only
to a percentage of the taxes actually assessed and collected.
Since no assessment, much less any collection, has been
made in the instant case, respondent judge's writ for the
Commissioner to pay respondents 25% informer's reward is
gross error and without factual nor legal basis.
WHEREFORE, the petitions are hereby granted and the
questioned decision of respondent judge dated January 10,

1973 and order dated April 6, 1973 are hereby reversed and
set aside. With costs against private respondents.

This case is about the legality of the arrastre and checking

charges which the Collector of Customs of Cebu collected on
export cargo. Also in issue are the jurisdiction of the Court of
First Instance and the Court of Tax Appeals to entertain that
question, whether the petitioners had exhausted their
administrative remedies, and whether the action is an
unwarranted suit against the State.
Legal background. The Tariff and Customs Code, Republic
Act No. 1937, in Title VII of its Book II (Customs Law), which
title deals with the fees, dues and charges collectible by the
Bureau of Customs, contains Part 5 which specifies the arrastre
rates chargeable at the Ports of Manila, Cebu, Zamboanga,
Davao, Iloilo and other ports (Secs. 3101 to 3108).

G.R. No. L-29466 May 18, 1978

ABOITIZ AND CO., INC., VISAYAN COCONUT GROWERS,
INC., LU DO AND LU YM CORP., FEDERAL MARKETING
CORP., OVERSEAS COMMODITY CORP., SOUTHERN
PRODUCTS IMPORT AND EXPORT CORP., INTERNATIONAL
COPRA EXPORT CORP., EAST VISAYAS PRODUCTS, GRAN
EXPORT CORP., AIC DEVELOPMENT CORP., KAYLIN
INTERNATIONAL, INC., and JOMASCO, INC., plaintiffsappellees,
vs.
THE COLLECTOR OF CUSTOMS OF CEBU, in his capacity
as Acting General Manager of the Cebu Customs
Arrastre Service, and CEBU PORT TERMINAL, INC.,
defendants-appellants.
Juan, Collas, Jr., Guerrero & Torres and Marcelo B. Fernan for
plaintiffs-appellees.
Juan T. David, Ernesto Morales, Eduardo P. Gabriel & Eddy A.
Deen and Osmea & Ramirez for defendant-appellant Cebu
Port Terminal, Inc.
Solicitor General Estelito P. Mendoza, Assistant Solicitor
General Nathanael P. de Pano, Jr. and Solicitor Jesus P. Mapanao
for defendant-appellant The Collector of Customs of Cebu.

Arrastre refers to the handling of cargo on the wharf or

between the establishment of the consignee or shipper and
the ship's tackle. (Compania Maritima vs. Allied Free Workers
Union, L-28999, May 24, 1977, 77 SCRA 24, 26). "Arrastre
charge is the amount which the owner, consignee, or agent of
either, of article or baggage has to pay for the handling,
receiving and custody of the imported or exported article or
the baggage of the passengers" (Sec. 3101, Tariff and Customs
Code).
Sections 3102, 3104 and 3106 of the Tariff and Customs Code
provide for the arrastre charges collectible on export cargo
which is loaded in the Ports of Manila, Zamboanga and Iloilo,
respectively.
In contrast, sections 3103 and 3105 of the Code, as originally
enacted, inexplicably do not contain any provisions as to the
arrastre charges on export cargo which is shipped from the
Ports of Cebu and Davao, lively, although the two sections fix
the arrastre charges for handling import cargo. (Customs
Administrative Order No. 23-7066 O. G. 11053, fixes the
arrastre charges, including those for export cargo, collectible
at the Port of San Fernando.)
In the case of the Port of Davao, the Secretary of Finance in
1960 directed that the arrastre charges for export cargo

loaded in the Port of Iloilo, as provided in section 3106(b),

should be collected in the Port of Davao (Exh. 3 and 9).
For the Port of Cebu, the Secretary of Finance in his first
indorsement of March 18, 1965 adopted the recommendation
of the Commissioner of Customs (who was "amazed" because
section 3103 does not provide for the arrastre charges for
handling export cargo in the Port of Cebu) that the arrastre
charges for export cargo which is loaded in the Port of Iloilo
should also be collected on export cargo which is loaded in the
Port of Cebu (Exh. 4 and 5).
The deficiency (call it a hiatus valde deflendus) in sections
3103 and 3105 (as to the arrastre charges on export cargo)
could have been easily cured by means of amendatory
legislation. But, instead of resorting to that simple expedient,
the Commissioner of Customs and the Secretary of Finance
chose to fill that deplorable gap by means of an administrative
regulation.
Thus, on September 2, 1965, the Acting Commissioner of
Customs, with the approval of the Secretary of Finance, issued
Customs Administrative Order (CAO) No. 1-66 (62 O.G. 1759).
It should be stressed that in CAO No. 1-66 arrastre charges for
export cargo loaded in the Ports of Cebu and Davao are
provided for. That order was issued pursuant to section 551 of
the Revised Administrative Code and sections 608 and 3108 of
the Tariff and Customs Code.
The arrastre charges for handling export cargo at the Port of
Iloilo were incorporated into the management contract
executed between the Bureau of Customs and Cebu Port
Terminal Inc. dated October 19, 1966 (Exhs. 2 and 5). That
contractual provision is the point of controversy in this case.
Customs Administrative Order CAO No. 15-70 dated
September 7, 1970, issued by the Acting Commissioner of
Customs and approved by the Acting Secretary of Finance, also
pursuant to the legal provisions cited above, went farther than
CAO No. 1-66 (66 O. G. 9434).

CAO No. 15-70 inserted in section 3103 (which, as already

noted, governs the collection of arrastre charges in the Port of
Cebu) provisions for the collection of checking charges,
arrastre charges on export cargo, transit cargo and heavy
cargo, pier lighting service, hire of auto-trucks, and water
service. Those provisions are not found in section 3103 as
originally enacted.
So CAO, No. 15-70 also supplied the deficiencies of the original
enactment and increased the rates of arrastre charges. That
was effected by the Commissioner of Customs and the
Secretary of Finance by virtue of their power to make an rules
and regulations necessary for the enforcement of the Tariff and
Customs Code.
In the instant case, petitioners' contention is that the
deficiency of section 3103, as to the arrastre charges for
handling export cargo at the Port of Cebu, should be supplied
by a statutory enactment and not by administrative
regulations and that, in the absence of proper legislation,
arrastre charges cannot be collected for handling export cargo
in the Port of Cebu. That contention arose under the facts now
to be stated.
Factual background. The Cebu Customs Arrastre Service,
which was managed by the Collector of Customs of Cebu,
collected arrastre and checking charges on products
(principally copra) exported from Cebu beginning July 12,
1966. For general cargo, the arrastre charge was P2.80 per ton
of 1,000 kilos or 40 cubic feet. The minimum charges for
general cargo was P1.40. For twelve particular classes of
merchandise (automobiles, coffee, flour, wood furniture, etc.),
the arrastre charges were specified. The checking charge was
P0.55 per ton for shipside deliveries.
On November 5, 1966, the arrastre work was turned over to
Cebu Port-Terminal, Inc. which announced that it was going to
collect the same arrastre and checking charges imposed by
the Cebu Customs Arrastre Service.
As already stated, on October 19, 1966, Cebu Port Terminal
Inc. entered into a management contract with the

Commissioner of Customs. In that contract, it was designated

as sole manager of the arrastre service at the Port of Cebu
under the supervision of the Bureau of Customs. The arrastre
charges are specified in paragraph 17(b) of the management
contract which was approved by the military of Finance (Exh.
2). We have previously noted that, with inspect to the
arrangement charges on export cargo those provided for the
Port of Iloilo in section 3106 were made a part of that
management contract in view of the fact that arrastre charges
for export cargo for the Port Of Cebu are not provided for in
section 3103 of the Tariff and Customs Code.
After that contract was cancelled, or on February 13, 1967, the
Bureau of Customs again took over the arrastre service (Since
May 1, 1977, the Philippine National Oil Company [PNOC] has
been in charge of the arrastre service in the Port of Cebu.)
On July 30, 1966, twelve export filed in the Court of First
Instance of Cebu a petition for certiorari against the Collector
of Customs of Cebu as arrastre operator. The petition is really
an injunction suit assailing the legality of the and charges on
exports from the port of Cebu. The plaintiffs contended that
the Charges were not authorized by section 3103 of the Tariff
and Customs Code. An amended complaint was filed later for
the purpose of impleading Cebu Port Terminal Inc. as arrastre
operator. A preliminary injunction was issued.
That injunction against the collection of arrastre and checking
charges was lifted in the lower court's order of January 10,
1967.
The trial court in its decision dated May 17, 1967 declared for
lack of statutory authorization, the con of arrastre and charges
on export cargo and ordered the defendants to refund the
charges collection firm the plaintiffs or petitioners. The
defendants or respondents appealed. *
The appellants contend that the lower court erred in not
dismissing the petition for lack of jurisdiction, non-exhaustion
of administrative remedies, and because of state immunity
from suit and in holding that the arrastre charges in question
were devoid of legal basis.

From the factual and legal background of this case, it is

manifest that the appeal should be sustained on the grounds
of lack of cause of action, or failure to exhaust administrative
remedies, and lack of jurisdiction, meaning that the subject
matter of the action fails within the exclusive jurisdiction of the
Tax Court.
The record shows that, in spite of the silence of the law,
respondent Collector of Customs imposed the arrastre charges
in question in consonance with the directive of the
Commissioner of Customs and the Secretary of Finance.
Instead of directly going to court, the petitioners should have
appealed to the Secretary of Finance, through the
Commissioner of Customs, or, they should have exhausted
their administrative remedies (Sec. 79[c], Revised
Administrative Code; Secs. 608, 712 2308 et seq. and 3501,
Tariff and Customs Code; Acting Collector of Customs vs.
Caluag, L-23925, May 24, 1967, 20 SCRA 204; Collector of
Customs vs. Torres, L-22977, May 31, 1972, 45 SCRA 272).
If a litigant goes to court without first pursuing his
administrative remedies, his action is premature or he has no
cause of action to ventilate in court. His case is not ripe for
judicial determination (Allied Brokerage Corporation vs.
Commissioner of Customs, L-27641, August 31, 1971, 40 SCRA
555, 561; Pestanas vs. Dyogi L-25786, February 27, 1978, per
Santos, G. S., J.; Pineda vs. Court of First Instance of Davao,
111 Phil 643).
As to the jurisdictional issue, section 7(2) of Republic Act No.
1125 provides that the Tax Court has exclusive appellate
jurisdiction to review by appeal the "decisions of the
Commissioner of Customs in cases involving liability for
customs duties, fees or other money charges" and "Other
matters under the Customs law Or Other law or Part of law
administered by the Bureau of Customs (See sec. 2402, T and
Customs Code).
There is no doubt that the collection of arrastre charges under
the Tariff and customs Code falls within the appellate

jurisdiction of the Tax Court. It is settled that the Tax Court is

vested with exclusive appellee jurisdiction to review the
decisions of the Commissioner of Customs in cases arising
under the Customs Law, like the instant case, and that the
Court of First Instance cannot, by means of certiorari
prohibition or mandamus, review the said decisions Daud vs.
Collector of Customs of the Port of Zamboanga City,
L-24003, November 28, 1975, 68 SCRA 157; General Travel
Service, Ltd. vs. David,
L-19259, September 23, 1966, 18 SCRA 59, 67; Pacis vs.
Averia, L-22526, November 29, 1966, 18 SCRA 907;
Commissioner of Customs vs. Cloribel L-20266, January 31,
1967, 19 SCRA 234; Pacis vs. Geronimo, L-24068, April 23,
1974, 56 SCRA 683).
Hence. the trial court should have dismissed the certiorari or
injunction case, not only on the ground of lack of cause of
action (non-exhaustion of administrative remedies), but on the
ground of palpable lack of jurisdiction. That was what the
Court of First Instance of Manila did in Southwest Agricultural
Marketing Corporation vs. Secretary of Finance, L-24797,
October 8, 1968, 25 SCRA 452, a case strikingly similar to the
instant case.
The Southwest case involves the arrastre charges collectible
on export cargo loaded in the Port of Davao. As already shown
the Port of Davao is in the same situation as the Port of Cebu
insofar as arrastre charges for handling export cargo are
concerned because the Tariff and Customs Code does not
contain any provisions for the collection of arrastre charges on
cargo exported from the Port of Davao. The Tariff and Customs
Code contains provisions for the collection of arrastre charges
on cargo exported only from the Ports of Zamboanga and
Iloilo.
In the Southwest case, it appears that Gustavo A. Suarez, as
arrastre contractor for the Port of Davao, was authorities by
the Secretary of Finance in a communication dated September
30, 1960 to collect on export cargo loaded in the Port of Davao
the arrastre charges provided for the Port of Iloilo by section
3106(b) of the Tariff and Customs Code. That authorization was
made because, as repeatedly shown above, the Code is silent

as to the arrastre charges collectible on cargo imported from

the Ports of Davao and Cebu. Suarez required Southwest
Agricultural Marketing Corporation to pay the said arrastre
charges which had been made a part of his management
contract.
Challenging the legality of the collection of the said arrastre
charges, in view of the silence of the Tariff and Customs Code
on the matter, Southwest Agricultural Marketing Corporation
filed an action in the Court of First Instance of Manila against
Suarez and the Secretary of Finance to restrain the collection
thereof.
Defendants Suarez and Secretary of Finance filed a motion to
dismiss on the ground that the case was within the jurisdiction
of the Tax Court. The Manila court dismissed the action.
Southwest Agricultural Marketing Corporation appealed.
It was held that, since the legality of the arrastre charges
depends upon whether or not they are sanctioned by the Tariff
and Customs Code, it was a case calling for the interpretation
of the Code, which is administered by the Bureau of Customs.
Consequently, the case was within the Tax Court's exclusive
appellate jurisdiction (Millarez vs. Amparo, 97 Phil. 282).
As to the contention in that case that the appellate jurisdiction
of the Tax Court could not be invoked because there was as
yet no decision of the Commissioner of Customs, this Court
disposed of it by observing that the plaintiff did not exhaust its
administrative remedies and its failure to do so a lack of cause
of action".
The instant case is governed by the controlling and dicisive
ruling in the Southwest case. Here, it is obvious that the
petitioners prematurely sought a judicial review of the
Collector's imposition of arrastre charges on export cargo
without giving the Commissioner of Customs and the Secretary
of Finance an opportunity to redress their grievance. Moreover,
the proper forum to pass upon the legality of the said arrastre
charges is the Tax Court, a circumstance which strengthens
the view that the petitioners should have exhausted their
administrative remedies because, before the appellate
jurisdiction of the Tax Court can be invoked, there should be an
appealable decision of the Commissioner of Customs.

WHEREFORE, the lower court's decision is rev Petitioners

complaint is dismissed with costs against them.
SO ORDERED.

G.R. No. L-29485 March 31, 1976

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
AYALA SECURITIES CORPORATION and THE HONORABLE
COURT OF TAX APPEALS, respondents.
Appeal from the decision of the Court of Tax Appeals dated
June 20, 1968, in its CTA Case No. 1346, cancelling and
declaring of no force and effect the assessment made by the
petitioner, Commissioner of Internal Revenue, against the
accumulated surplus of the respondent, Ayala Securities
Corporation.
The factual background of the case is as follows:
On November 29, 1955, respondent Ayala Securities
Corporation, a domestic corporation organized and existing
under the laws of the Philippines, filed its income tax returns
with the office of the petitioner for its fiscal year which ended
on September 30, 1955. Attached to its income tax return was
the audited financial statements of the respondent corporation
as of September 30, 1955, showing a surplus of
P2,758,442.37. The income tax due on the return of the
respondent corporation was duly paid for within the time
prescribed by law.
In a letter dated February 21, 1961, petitioner advised the
respondent corporation of the assessment of P758.687.04 on
its accumulated surplus reflected on its income tax return for
the fiscal year which ended September 30, 1955 (Exit. D). The
respondent corporation, on the other hand, in a letter dated

April 19, 1961, protested against the assessment on its

retained and accumulated surplus pertaining to the taxable
year 1955 and sought reconsideration thereof for the reasons
(1) that the accumulation of the surplus was for a bona fide
business purpose and not to avoid the imposition of income
tax on the individual shareholders, and (2) that the said
assessment was issued beyond the five-year prescriptive
period (Exh. E).
On May 30, 1961, petitioner wrote respondent corporation's
auditing and accounting firm with the "advise that your
request for reconsideration will be the subject matter of
further reinvestigation and a thorough analysis of the issues
involved conditioned, however, upon the execution of your
client of the enclosed form for waiver of the defense of
prescription". (Exh. F) However, respondent corporation did
not execute the requested waiver of the statute of limitations,
considering its claim that the assessment in question had
already prescribed.
On February 21, 1963, respondent corporation received a
letter dated February 18, 1963, from the Chief, Manila
Examiners, of the Office of the herein petitioner, calling the
attention of the respondent corporation to its outstanding and
unpaid tax in the amount of P708,687.04 and thereby
requesting for the payment of the said amount within five (5)
days from receipt of the said letter (Exh. G). Believing the
aforesaid letter to be a denial of its protest, the herein
respondent corporation filed with the Court of Tax Appeals a
Petition for Review of the assessment, docketed as CTA Case
No. 1346.
Respondent corporation in its Petition for Review alleges that
the assessment made by petitioner Commissioner of Internal
Revenue is illegal and invalid considering that (1) the
assessment in question, having been issued only on February
21, 1961, and received by the respondent corporation on
March 22, 1961, the same was issued beyond the five-year
period from the date of the filing of respondent corporations
income tax return November 29, 1955, and, therefore,
petitioner's right to make the assessment has already
prescribed, pursuant to the provision of Section 331 of the

National Internal Revenue Code; and (2) the respondent

corporation's accumulation of surplus for the taxable year
1955 was not improper, considering that the retention of such
surplus was intended for legitimate business purposes and was
not availed of by the corporation to prevent the imposition of
the income tax upon its shareholders.
Petitioner in his answer alleged that the assessment made by
his office on the accumulated surplus of the corporation as
reflected on its income tax return for the taxable year 1955
has not as yet prescribed and, further, that the respondent
corporation's accumulation of surplus for the taxable year
1955 was improper as the retention of such surplus was
availed of by the corporation to prevent the imposition of the
income tax upon the individual shareholders or members of
the said corporation.
After trial the Court of Tax Appeals rendered its decision of
June 20, 1968, the dispositive portion of which is as follows:
WHEREFORE, the decision of the respondent Commissioner of
Internal Revenue assessing petitioner the amount of
P758,687.04 as 25 surtax and interest is reversed.
Accordingly, said assessment of respondent for 1955 is hereby
cancelled and declared of no force and effect. Without
pronouncement as to costs.
From this decision, the Commissioner of Internal Revenue
interposed this appeal.
Petitioner maintains that respondent Court of Tax Appeals
erred in holding that the letter dated February 18, 1963, (Exh.
G) is a denial of the private respondent corporation's protest
against the assessment, and as such, is a decision
contemplated under the provisions of Sections 7 and 11 of
Republic Act No. 1125. Petitioner contends that the letter
dated February 18, 1963, is merely an ordinary office letter
designed to remind delinquent taxpayers of their obligations to
pay their taxes to the Government and, certainly, not a
decision on a disputed or protested assessment contemplated
under Section 7(1) of R.A. 1125.

Petitioner likewise maintains that the respondent Court of Tax

Appeals erred in holding that the assessment of P758,687.04
as surtax on private respondent corporation's unreasonably
accumulated profits or surplus had already prescribed.
Petitioner further contends that the applicable provision of law
to this case is Section 332 (a) of the National Internal Revenue
Code which provides for a ten (10) year prescriptive period of
assessment, and not Section 331 thereof as held by the Tax
Court which provides a period of limitation of assessment for
five (5) years only after the filing of the return. Petitioner's
theory, therefore, is to the effect that since the Corporate
income tax return in question was filed on, November 29,
1955, and the assessment thereto was issued on February 21,
1961, said assessment is not barred by prescription as the
same was made very well within the ten (10) year period
allowed by law.
Petitioner also maintains that the respondent Court of Tax
Appeals erred in not deciding the issue as to whether or not
the accumulated profits or surplus is indispensable to the
business operations of the private respondent corporation. It is
the contention of the petitioner that the accumulation of
profits or surplus was resorted to by the respondent
corporation in order to avoid the payment of taxes by its
stockholders or members, and was not availed of in order to
meet the reasonable needs of its business operations.
The legal issues for resolution by this Court in this case are: (1)
Whether or not the instant case falls within the jurisdiction of
the respondent Court of Tax Appeals; (2) Whether or not the
applicable provision of law to this case is Section 331 of the
National Internal Revenue Code, which provides for a five-year
period of prescription of assessment from the filing of the
return, or Section 332(a) of the same Code which provides for
a ten-year period of limitation for the same purpose; and (3)
Whether or not the respondent Court of Tax Appeals
committed a reversible error in not making any ruling on the
reasonableness or unreasonableness of the accumulated
profits or surplus in question of the private respondent
corporation.
I

It is to be noted that the respondent Court of Tax Appeals is a

court of special appellate jurisdiction created under R. A. No.
1125. Thus under Section 7 (1), R. A. 1125, the Court of Tax
Appeals exercises exclusive appellate jurisdiction to review by
appeal "decisions of the Collector of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties imposed in relation
thereto, or other matters arising under the National Internal
Revenue Code or other law or part of law administered by the
Bureau of Internal Revenue".
The letter of February 18, 1963 (Exh. G), in the view of the
Court, is tantamount to a denial of the reconsideration or
protest of the respondent corporation on the assessment made
by the petitioner, considering that the said letter is in itself a
reiteration of the demand by the Bureau of Internal Revenue
for the settlement of the assessment already made, and for
the immediate payment of the sum of P758, 687.04 in spite of
the vehement protest of the respondent corporation on April
21, 1961. This certainly is a clear indication of the firm stand
of petitioner against the reconsideration of the disputed
assessment in view of the continued refusal of the respondent
corporation to execute the waiver of the period of limitation
upon the assessment in question.
This being so, the said letter amounts to a decision on a
disputed or protested assessment and, therefore, the court a
quo did not err in taking cognizance of this case.
II
On the issue of whether Sec. 331 or See. 332(a) of the
National Internal Revenue Code should apply to this case,
there is no iota of evidence presented by the petitioner as to
any fraud or falsity on the return with intent to evade payment
of tax, not even in the income tax assessment (Exh. 5) nor in
the letter-decision of February 18, 1963 (Exh. G), nor in his
answer to the petition for review. Petitioner merely relies on
the provisions of Sec 25 of the National Internal Revenue Code,
violation of which, according to Petitioner, presupposes the

existence of fraud. But this is begging the question and We do

not subscribe to the view of the petitioner.
Fraud is a question of fact and the circumstances constituting
fraud must be alleged and proved in the court below. The
finding of the trial court as to its existence and non- existence
is final and cannot be reviewed here unless clearly shown to
be erroneous (Republic of the Philippines vs. Ker & Company,
Ltd., L-21609, Sept. 29, 1966, 18 SCRA 207; Commissioner of
Internal Revenue vs. Lilia Yusay Gonzales and the Court of Tax
Appeals,
L-19495, Nov. 24, 1966, 18 SCRA 757). Fraud is never lightly to
be presumed because it is serious charge (Yutivo Sons
Hardware Company vs. Court of Tax Appeals and Collector of
Internal Revenue, L-13203, January 28,1961, 1 SCRA 160).
The applicable provision of law in this case is Section 331 of
the National Internal Revenue Code, to wit:
SEC. 331. Period of limitation upon assessment and collection.
Except as provided in the succeeding section, internal
revenue taxes shall be assessed within five years after the
return was filed, and no proceeding in court without
assessment for the collection of such taxes shall be begun
after the expiration of such period. For the purposes of this
section, a return filed before the last day prescribed by law for
the filing thereof shall be considered as filed on such last day:
Provided, That this limitation shall not apply to cases already
investigated prior to the approval of this Code.
Under Section 46(d) of the National Internal Revenue Code, the
Ayala Securities Corporation designated September 30, 1955,
as the last day of the closing of its fiscal year, and under
Section 46(b) the income tax returns for the said corporation
shall be filed on or before the fifteenth (15th) day of the fourth
(4th) month following the close of its fiscal year. The Ayala
Securities Corporation could, therefore, file its income tax
returns on or before January 15, 1956. The assessment by the
Commissioner of Internal Revenue shall be made within five
(5) years from January 15, 1956, or not later than January 15,
1961, in accordance with Section 331 of the National Internal
Revenue Code herein above-quoted. As the assessment issued

on February 21, 1961, which was received by the Ayala

Securities Corporation on March 22, 1961, was made beyond
the five-year period prescribed under Section 331 of said
Code, the same was made after the prescriptive period had
expired and, therefore, was no longer binding on the Ayala
Securities Corporation.
This Court is of the opinion that the respondent court
committed no reversible error in not making any ruling on the
reasonableness or unreasonableness of the accumulated
profits or surplus of the respondent corporation. For this
reason, We are of the view that after reaching the conclusion
that the right of the Commissioner of Internal Revenue to
assess the 25% surtax had already prescribed under Section
331 of the National Internal Revenue Code, to delve further
into the reasonableness or unreasonableness of the
accumulated profits or surplus of the respondent corporation
for the fiscal year ending September 30, 1955, will only be an
exercise in futility.
WHEREFORE, the decision appealed from is hereby affirmed in
toto.
Without special pronouncement as to costs.
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.
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.

Respondent Las Islas Filipinas Food Corporation (LIFFC) owned

and operated an industry-specific customs bonded warehouse
catering to food manufacturers.[1] Among the conditions for
its establishment and operations was securing an import
allocation from the Sugar Regulatory Administration (SRA)
every time it imported sugar for its clients.[2]
On February 20, 2004, Pat-Pro Overseas Company, Ltd. (PPOC),
a Thai company, appointed LIFFC as its exclusive offshore
trading, storage and transfer facility in the Philippines for its
local and foreign transshipment[3] operations.[4] Pursuant to
this appointment, it shipped ten (10) twenty-foot containers of
refined sugar to LIFFC.
The shipment of refined sugar arrived in Manila on April 24,
2004. Because LIFFC failed to present an import allocation
from the SRA, the shipment became subject of Alert Order No.
A/IE/20040719-101.[5] On July 16, 2004, a decree of
abandonment was issued due to LIFFCs failure to file an import
entry.[6] Thereafter, the Collector of Customs issued a warrant
of seizure and detention[7] on July 27, 2004 in view of the
SRAs advice that no import allocation had been granted to
LIFFC.[8]

G.R. Nos. 171516-17

COMMISSIONER OF CUSTOMS, Petitioner,
-versus
COURT OF TAX APPEALS, LAS ISLAS FILIPINAS FOOD
CORPORATION and PAT-PRO OVERSEAS CO., LTD.,
Respondents.
Promulgated: February 13, 2009
x--------------------------------------------- - - - - -x

On August 16, 2004, LIFFC and PPOC (respondents) moved to

quash the decree of abandonment.[9] However, in an order
dated September 21, 2004,[10] the motion was denied (for
being filed out of time as the decree of abandonment had
already attained finality on August 3, 2004).
Respondents appealed the September 21, 2004 order to the
Commissioner of Customs asserting that they were deprived of
due process. They alleged that they were never notified of the
issuance of the decree of abandonment.
After reviewing the evidence on record, the Commissioner
found that respondents were not informed of the
abandonment proceedings. Thus, in a decision dated February
4, 2005, he set aside the decree of abandonment and ordered
the institution of proceedings for seizure and forfeiture.[11]

Pursuant to the February 4, 2005 decision of the

Commissioner, the Republic instituted proceedings for the
seizure and forfeiture of respondents importation.[12] It
contended that, because respondents imported the refined
sugar without securing an import allocation from the SRA, the
shipment should be forfeited pursuant to Section 2530 (f) and
(1)-5 of the Tariff and Customs Code of the Philippines (TCCP).
[13]
Respondents, on the other hand, asserted that the refined
sugar was merely transshipped to the Philippines while PPOC
was looking for a buyer in the international market. Thus, an
import allocation from the SRA was unnecessary.
In decisions dated February 14, 2005 and February 16, 2005,
the Collectors held that because LIFFC did not secure an
import allocation from the SRA, the shipment was an illegal
importation of refined sugar. They ordered its forfeiture in
favor of the government.[14]

Commissioner of Customs, surrender it upon the filing of a

cash bond, in an amount fixed by him, conditioned upon the
payment of the appraised value of the article and/or any fine,
expenses and costs which may be adjudged in the case:
Provided, That such importation shall not be released under
any bond when there is prima facie evidence of fraud in the
importation of the article: Provided, further, That articles the
importation of which is prohibited by law shall not be released
under any circumstances whatsoever: Provided, finally, That
nothing in this section shall be construed as relieving the
owner or importer from any criminal liability which may arise
from any violation of law committed in connection with the
importation of the article. (emphasis supplied)
The Commissioner argued that the shipment could not be
released inasmuch as respondents had no import allocation
from the SRA. Thus, there was prima facie evidence of fraud in
the importation of refined sugar.

On appeal,[15] the Commissioner affirmed the decisions of

both Collectors.[16]

In a resolution dated July 12, 2005, the CTA granted the motion
and ordered the release of the shipment subject to LIFFCs
filing of a continuing surety bond.[19]

On April 15, 2005, respondents appealed to the Court of Tax

Appeals (CTA) via petitions for review[17] contending that the
Commissioner erred in affirming the February 14, 2005 and
February 16, 2005 decisions of the Collectors.[18] They
insisted that an import allocation from the SRA was
unnecessary inasmuch as the refined sugar was sent to the
Philippines only for temporary storage and warehousing and
would be shipped eventually to PPOCs final buyer.

The Commissioner moved for reconsideration but it was

denied.[20] The CTA ordered respondents to comply with the
July 12, 2005 resolution within 10 days. However, the release
of the shipment was held in abeyance for several months as
respondents failed to comply with the conditions imposed by
the said resolution.[21] It was released only on January 6,
2006[22] when respondents finally complied with all the
conditions stated in the July 12, 2005 resolution.

On April 20, 2005, respondents filed a motion to release cargo

for exportation upon filing of a surety bond. The Commissioner
opposed the said motion on the basis of Section 2301 of the
TCCP which provides:

On March 1, 2006, the Commissioner filed this petition[23]

seeking the annulment of the six resolutions (dated July 12,
2005, July 20, 2005, September 27, 2005, November 8, 2005,
December 13, 2005 and January 6, 2006) issued in CTA Case
Nos. 7198 and 7199.[24]

Section 2301. Warrant for Detention of Property-Cash Bond.

Upon making any seizure, the Commissioner shall issue a
warrant for the detention of the property; and if the owner or
importer desires to secure the release of the property for
legitimate use, the Collector shall, with the approval of the

On March 20, 2006, we issued a temporary restraining order

enjoining the implementation of the said resolutions.

The Commissioner basically contends that the CTA committed

grave abuse of discretion when it disregarded Section 2301 of
the TCCP and ordered the release of respondents shipment of
refined sugar.

Upon the exportation of the articles, and the production of

proof of lading of same beyond the limits of the Philippines,
the irrevocable domestic letter of credit, bank guaranty or
bond shall be released.

We grant the petition.

For an entry for immediate exportation to be allowed under

this provision, the following must concur:

Section 2301 of the TCCP states that seized articles may not
be released under bond if there is prima facie evidence[25] of
fraud in their importation. Fraud is a generic term embracing
all multifarious means which human ingenuity can devise and
which are resorted to by one individual to secure an advantage
and includes all surprise, trick, cunning, dissembling and any
unfair way by which another is cheated.[26] Since fraud is a
state of mind, its presence can only be determined by
examining the attendant circumstances.

(a)
there is a clear intent to export the article as
shown in the bill of lading, invoice, cargo manifest or other
satisfactory evidence;
(b)
the Collector must designate the vessel or aircraft
wherein the articles are laden as a constructive warehouse to
facilitate the direct transfer of the articles to the exporting
vessel or aircraft;

Under Section 1202 of the TCCP,[27] importation takes place

when merchandise is brought into the customs territory of the
Philippines with the intention of unloading the same at port.

(c)
the imported articles are directly transferred from
the vessel or aircraft designated as a constructive warehouse
to the exporting vessel or aircraft and

An exception to this rule is transit cargo[28] entered for

immediate exportation. Section 2103 of the TCCP provides:

(d)
an irrevocable domestic letter of credit, bank
guaranty or bond in an amount equal to the ascertained
duties, taxes and other charges is submitted to the Collector
(unless it appears in the bill of lading, invoice, manifest or
satisfactory evidence that the articles are destined for
transshipment).

Section 2103. Articles Entered for Immediate Exportation.

Where an intent to export the article is shown by the bill of
lading, invoice, manifest or other satisfactory evidence, the
whole or part of a bill (not less than one package) may be
entered for immediate exportation under bond. The Collector
shall designate the vessel or aircraft in which the articles are
laden constructively as warehouse to facilitate the direct
transfer of the articles to the exporting vessel or aircraft.
Unless it shall appear by the bill of lading, invoice, manifest, or
other satisfactory evidence, that the articles arriving in the
Philippines are destined for transshipment, no exportation
thereof shall be permitted except under entry for immediate
exportation under irrevocable domestic letter of credit, bank
guaranty or bond in an amount equal to the ascertained
duties, taxes and other charges.

None of the requisites above was present in this case. While

respondents insist that the shipment was sent to the
Philippines only for temporary storage and warehousing, the
bill of lading clearly denominated South Manila, Philippines as
the port of discharge.[29] This not only negated any intent to
export but also contradicted LIFFCs representation. Moreover,
the shipment was unloaded from the carrying vessel for the
purpose of storing the same at LIFFCs warehouse. Importation
therefore took place and the only logical conclusion is that the
refined sugar was truly intended for domestic consumption.
Furthermore, while respondents insisted that an import
allocation was unnecessary, they filed an application, albeit
belatedly, in the SRA for the shipment of refined sugar.

Respondents web of conflicting statements and actuations

undoubtedly proves bad faith, if not outright fraud.
All things considered, pursuant to Section 2301 of the TCCP,
the shipment of refined sugar should not be released under
bond.
WHEREFORE, the petition is hereby GRANTED. The July 12,
2005, July 20, 2005, September 27, 2005, November 8, 2005,
December 13, 2005 and January 6, 2006 resolutions of the
Court of Tax Appeals in CTA Case Nos. 7198 and 7199 are
REVERSED and SET ASIDE.
The March 20, 2006 temporary restraining order enjoining the
implementation of the assailed CTA resolutions is hereby made
permanent.
The Court of Tax Appeals is ordered to expeditiously decide
CTA Case Nos. 7198 and 7199.

G.R. No. L-26686 & L-26698 October 30, 1980

ATLAS FERTILIZER CORPORATION, petitioner,
vs.
COMMISSION OF INTERNAL REVENUE and COURT OF TAX
APPEALS, respondents;
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ATLAS FERTILIZER CORPORATION and COURT OF TAX APPEALS,
respondents.

Costs against respondents Las Islas Filipinas Food Corporation

and Pat-Pro Overseas Co., Ltd.
SO ORDERED.

These two (2) cases are appeals by way of certiorari from the
decision dated August 24, 1966 of the Court of Tax Appeals
granting Atlas Fertilizer Corporation a tax credit in the sum of
P81,899.00 which may be applied by said corporation in pay
of its outstanding and/or future liability for internal revenue
taxes.
For the material facts, We could very well quote from the
decision of the Court of Tax Appeals, the following.
Petitioner Atlas Fertilizer Corporation was formerly a
department of Atlas Mining z Development Corporation. The
latter was granted by the Secretary of Finance a certificate of
tax exemption under Republic Act No. 901 as a new and
necessary industry for engaging in the manufacture of
fertilizer namely, sulphuric acid, phosphoric acid,
superphosphate, triple superphosphate and sun the tax
exemption privileges of Atlas Consolidated Mining and
Development Corporation were later transferred to the
petitioner under the written authority of the Department of

Finance dated November 27, 1957. During the period from

June 26, 1961 to October 24, 1962, petitioner imported raw
materials, equipment, spare parts, containers and other
supplies on which it paid one-half or 60% of the compensating
taxes due thereon (Exhs. 1 and G, pp. 98-100, BIR rec.).
While petitioner was still enjoying partial tax exemption of 50%
as a new and necessary industry under Republic Act No. 901,
Republic Act No. 3050, which took effect on June 17, 1961,
granted tax exemption to any person, partnership, company or
corporation engaged or which shall engage in the manufacture
of of whatever nature from the payment, among others, of
compensating taxes on their importation of capital goods,
equipment, snare raw materials, supplies containers and fuel
To implement z Republic Act No. 3050, the Department of
Finance issued Department Order No. 105, dated September
15, 1961, which provides, among others, as follows:
Any ... corporation ... which shall engage in the manufacture of
fertilizer and desiring to enjoy the privileges grandted under
the provisions of Republic Act No. 3050 may file its application
therefore with the Secretary of Finance.
Fertilizer manufacturer ... which are granted tax exemption
under Republic Act No. should likewise file appellant
com/implications for tax exemption under Republic Act No.
3050, indicating therein, among other things, that the
applicant waives the benefits of tax exemption authorized
under Republic Act No. 3127.
In compliance with the above regulation, petitioner filed on
January 25, 1962 with the Department of Finance an
application for tax exemption under the provisions of Republic
Act No. 3050, which application was approved by the Secretary
of Finance on February 19, 1962. The tax exemption granted
by the said official to petitioner was made retroactive
commencing on June 17, 1961, the date of the effectivity of
Republic Act No. 3050 (pp. 93-94, BIR rec.).
On the basis of the tax exemption granted by the Secretary of
Finance under Republic Act No. 3050, petitioner filed with
responded on June 21, 1963 a claim for tax at of the

compensating taxes amounting to P 83,629.00 which

petitioner allegedly paid to the Bureau of Customs on
petitioner's importations of tax exempt goods, equipment,
materials and supplies during the period from June 26, 1961 to
October 24, 1962 (pp. 88-90, BIR rec.). On June 22, 1963, the
day after petitioner had filed its for tax credit with respondent,
petitioner filed a petition for review with this Court seek an
order to compel respondent to issue the corresponding letter
of tax credit.
During the pendency of this case, petitioner's claim for tax
credit of P 83,629.00 filed with respondent was referred on
June 26, 1963 to the Regional Director of Manila, BIR Regional
District No. 3, for investigation, report and recommendation.
On July 15, 1963, the case was assigned to Revenue Examiner
Benjamin Fernandez. Shortly thereafter, the Manila Regional
Office (District No. 3) was divided into two (2) districts North
Manila and South Manila (District Nos. 5 and 6). As a
consequence thereof and the confusion which ensued as a
result of the sorting and transfer of revenue dockets and
records, allocation and assignment of personnel, and the
division and transfer of supplies, equipment and furniture, the
papers bearing on the tax credit of petitioner were misplaced.
It was only on January 25, 1965 when the investigating
examiner submitted his report and recommended therein that
petitioner be granted a tax credit of P76,935.00, instead of
P83, 629.00 as because the importations and payment of the
compensating taxes under Item Nos. 1, 17, 35, 50, 58, 61, 62,
64, 65, 67 and 68 were not supported with import entry
declarations and receipts of tax payment
After hearing, the Court of Tax Appeals rendered its decision on
August 24, 1966 from which both parties have appealed to this
Court.
In his appeal, the Commissioner of Internal Revenue
(Commission Commissioner for short) assigns the following
errors:
I

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE

PETITIONER NEED NOT PROVE THAT THE RAW MATERIALS,
EQUIPMENT, SPARE PARTS, CONTAINERS AND OTHER SUPPLIES
IT IMPORTED WERE USED BY IT IN THE MANUFACTURE OF
FERTILIZER TO BE ENTITLED TO TAX EXEMPTION UNDER
REPUBLIC ACT NO. 3050.
II
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT IT IS
INCUMBENT UPON RESPONDENT TO PROVE THAT THE
IMPORTATIONS IN QUESTION WERE NOT USED BY THE
PETITIONER IN THE MANUFACTURE OF FERTILIZER
NOTWITHSTANDING THE FACT THAT THERE WAS ABSOLUTELY
NO EVIDENCE INTRODUCED BY PETITIONER SHOWING THAT
THE SAID IMPORTATIONS WERE USED BY IT IN THE
MANUFACTURE OF FERTILIZER.

On the other hand, Atlas Fertilizer Corporation (AFC for short),

as appellant has also assigned the following errors:
I
THE COURT OF TAX APPEALS ERRED IN DENYING THE AWARD
OF INTEREST TO THE PETITIONER ON THE AMOUNT OF
P81,899.00 FOUND TO BE DUE AS TAX CREDIT IN FAVOR OF
PETITIONER.
II
THE COURT OF TAX APPEALS ERRED IN CONCLUDING
INCLUDING THAT PETITIONER FILED ITS CLAIM FOR TAX CREDIT
QUITE LATE OR ALMOST TWO YEARS FROM THE FIRST
PAYMENT OF THE COMPENSATING TAX AND EIGHT MONTHS
FROM THE LAST PAYMENT THEREOF.

III

III

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE

PETITIONER NEED NOT PROVE THAT IT HAD PREVIOUSLY
SECURED A SPECIFIC AUTHORITY FROM THE SECRETARY OF
FINANCE TO IMPORT THE GOODS IN QUESTION AS A
PREREQUISITE FOR THE ENJOYMENT OF ITS RIGHT TO TAX
EXEMPTION UNDER REPUBLIC ACT NO. 3050.

THE COURT OF TAX APPEALS ERRED IN CONCLUDING

INCLUDING THAT THE DELAY IN PROCESSING THE CLAIM FOR
TAX CREDIT WAS NOT PREMEDITATED AND INTENTIONAL BUT
CAUSED BY CIRCUMSTANCES BEYOND THE CONTROL OF
RESPONDENT.
IV

IV
THE COURT OF FAX APPEALS ERRED IN HOLDING THAT THE
PETITIONER HAS IN EFFECT ABANDONED AND GIVEN UP ITS
PARTIAL EXEMPTION PRIVILEGE UNDER REPUBLIC ACT NO. 901
BY SEEKING TO APPLY ITS TAX EXEMPTION UNDER REPUBLIC
ACT NO. 3050.
V
THE COURT OF TAX APPEALS ERRED IN ORDERING
RESPONDENT TO GRANT PETITIONER A TAX CREDIT OF
P81,899.00 IN SPITE OF THE FACT THAT PETITIONER IS NOT
ENTITLED THERETO.

THE COURT OF TAX APPEALS ERRED IN APPLYING THE

EXISTING DOCTRINE THAT INTEREST ON REFUND (OR TAX
CREDIT) IS AWARDED ONLY WHERE COLLECTIVE TION OF THE
TAXES WAS ATTENDED WITH ARBITRARINESS.
V
THE COURT OF TAX APPEALS ERRED IN NOT APPLYING THE
APPLICABLE PROVISIONS OF THE NEW CIVIL CODE, NAMELY,
ARTICLES 2154, 2155 AND 2209, GOVERNMENT ING THE
RETURN OF PAYMENT'S BY REASON OF MISTAKE AND THE
AWARD OF INTEREST WHEN THE OBLIGOR INCURS DELAY.
Appeal by the Commissioner

The pertinent section upon which AFC based its claim for
exemption reads:
Sec. 1. Notwithstanding any provisions of law to the contrary,
subject to the conditions hereinafter provided, any person,
partnership, company or corporation engaged or which shall
engage in the manufacture of fertilizer of whatever nature be
entitled to exemption until December 31, 1965 from the
payment of special port tax, margin fee on foreign exchange,
sales and compensating taxes and customs duties payable by
such person, partnership, company or corporation, in respect
to the importation of capital goods, equipment, spare parts,
raw materials, supplies, containers and fuel by any of those
engaged in the above industry, ... 1
Anent the first and second assignment of errors, the
Commission Commissioner points out that it is well settled that
exemptions are strictly construed and are never presumed.
And the burden of proof is on the claimant to establish clearly
his right to exempt Being an essential and indispensable
requisite for the enjoyment of its tax exemption, the fact that
the AFC used the goods for the manufacture of fertilizer must
be shown by it.
In refutation to the above contention, AFC claims that since
the Secretary of Finance, on February 19, 1962, approved its
application for tax exemption under R.A. 3050, it may be
assumed that among the matters considered by the Secretary
of Finance in processing the claim for exemption was the fact
of actual use for the manufacture of fertilizer by AFC of the
importations made. It is, therefore, the position of AFC that the
certificate of exemption granted by the Secretary of Finance
was sufficient proof that it used the imported articles in the
manufacture of fertilizer.
That the burden of proof is on the claimant to establish his
right to exemption cannot be gainsaid. In the instant case,
however, We feel that AFC need not adduce further evidence
to show that it is entitled to exemption. It is to be observed
that there is no dispute that AFC is engaged in the
manufacturing capture of fertilizer, as the very name of AFC

suggests the nature of its business. It is also pertinent to state

that when R. A. 3050 took effect, AFC was already enjoying
partial exemption under R.A. 901 as a new and necessary
industry engaged in the manufacture of fertilizer. Furthermore,
when the Secretary of Finance, on February 19, 1962,
approved AFC's application for tax exemption under R. A.
3050, We believe that he already considered that the
importations were needed by AFC for the manufacture of
fertilizer. This may be inferred from the fact that before the
Secretary of Finance approves an application, he requires
applicants to submit an application which "shall be in the form
prescribed by the Secretary of Finance and contain detailed
and complete information caged for in such form. It shall
contain a complete of raw materials, supplies, conre/containers, and fuel needed and for the exclusive use in the
manufacture of fertilizer. There shall be attached to the
appellant com/implication a firm quotation of the complete
machinery equipment and spare parts thereof needed by and
for the exclusive use of the applicant in the manufacture of
fertilizer. The appellant com/implication shall be sworn to
before a notary public and filed in quadruplicate. 2 Likewise,
since it is presumed that official duty has been regularly
performed 3 it can be assumed that the Secretary of Finance in
approving the application, was satisfied that those
importations were not only needed for exclusive use in the
manufacture of fertilizer but that they were actually used
therefor, for otherwise, the Secretary would have not approved
the application.
We, therefore, agree with the position of AFC that the certiorari
certificate of exemption granted by the Secretary of Finance
on February 19, 1962 was sufficient proof that it used the
importations in question in the manufacture of fertilizer. This is
bolstered by the fact that the certificate of exemption was
granted after the imported goods have already arrived.
The Commissioner also argues that AFC failed to secure first
an authority from the Secretary of Finance to import the goods
which AFC wanted to be exempt from tax before said goods
were actually imported. According to the Commissioner, such
an authority is a prerequisite for the enjoyment of tax
exemption, since in the letter of the Secretary of Finance dated

February 19, 1962 granting AFC tax exemption under R.A.

3050, the Secretary stated:
As a bonafide fertilizer manufacturer under the provisions of
the aforesaid Act, you are entitled to exemption from the
payment of the special import tax, margin fee on foreign
exchange, sales and compensating taxes, and customs duties
directly payable by you in respect to the importation of capital
goods, equipment spare part. run materials, supplies,
containers and fuel which this office may specifically authorize
until December 31, 1965 unless sooner let/lat/after terminated
for failure to comply with the requirements of the law and
existing regulations.
Indeed, it would be illogical for the AFC to produce the
acquired specific authority to import because when the tax
exemption was granted on February 19, 1962, sixty-one (61) of
the imported goods have already arrived, and the AFC has
paid the corresponding compensating taxes pursuant P. A. 901
granting manufacturer of fertilizer partial exemption from
payment of compensating taxes. With respect to the seven (7)
importation which arrived after the grant of exemption, it
should be noted that AFC was able to withdraw them from
customs custody. We must not lose sight of the fact that before
goods may be withdrawn from customs custody, it is
necessary that "a true or photostat copy of the letter-grant
authorizing the tax-free importation of the articles applied to
be withdrawn from customs custody" be presented, pursuant
to paragraph of the implementing rules and regulations which
is Department Order No. 105-A 4 issued by the Secretary of
Finance. Since AFC has successfully withdrawn all the seven
(7) imported articles from customs custody, after payment of
the compensating taxes, it may be inferred that AFC has
complied with the above provision of Department Order No.
105-A to produce AFC's authority to import.
On the fourth issue, the Commissioner contends that
respondent court erred in ruling that AFC, by seeking to avail
of its exemption under R. A. No. 3050, has in effect abandoned
and given up its partial exemption privilege under R.A. No.
901. According to the Commissioner, AFC could not have
abandoned or given up its exemption under R. A. No. 901

because it has already applied the same to the importations

involved herein, and that one cannot abandon or give up what
he has already taken advantage of Furthermore, tax
exemptions under R.A. 901 and R.A. 3050 cannot be enjoyed
simultaneous simultaneously.
The Commissioner's contention is without merit. Department,
Order No. 105 issued by the Secretary of Finance expressly
directed fertilizer manufacturers enjoying benefits under R.A.
No. 901 to likewise apply for the benefits of R.A. No. 3050. Said
Department Order No. 105 provides:
Fertilizer manufacturers who or which are granted tax exempt
under R. A. No. 901 should likewise file applications for tax
exemption under R. A. No. 3050. ...
In compliance with said directive, AFC filed its application for
total exemption under R. A. No. 3050 which was granted by
the Secretary of Finance. The Commissioner's argument that
AFC enjoyed simultaneous exemption under R. A. No. 901 and
R. A. No. 3050, is without factual basis. R. A. No. 901 grants
partial exemption while R. A. 3050 grants total exemption.
Once a manufacturer of fertilizer chose to come under R. A.
3050, his partial exemption under R. A. 901 ceased. In effect,
he enjoyed only one exemption benefit, the full exemption
under R. A. No. 3050. As correctly ruled by the respondent
court, when AFC availed of the total exemption under R. A. No.
3050, it has in effect given up the partial exemption which it
was enjoying under R. A. No. 901.
Appeal by AFC
The assignment of errors of AFC may be synthesized to the
sole issue as to whether or not the Government is liable for the
payment of interest on refunds (on tax credit) of taxes
erroneously or illegally paid to it on the ground that the
commission Commissioner is guilty of unjust and unreasonable
delay in performing an obligation of the Government .
AFC points out that the Commissioner received the claim for
tax credit on June 21, 1963 but it was only on January 11, 1965
or more than eighteen (18) months later that a BIR examiner

came to the premises of the taxpayer to investigate the claim.

In other words, the Commissioner did not act on the claim of
AFC and this inaction is the essence of the delay incur red by
the Commissioner in the performance of an obligation which
entitled AFC to reparation in the form of interest payment.
On the alleged delay, the Commissioner in his brief explaining
the following:
The records of this case show that petitioner's claim for tax
credit was received by the Records Control Section of the
Bureau of Internal Revenue on June 21, 1963 (Memorandum
for Petitioner, STA Case No. 1410, p. 2, p. 121 STA par. 5 of
Answer, CTA Case No. 1410, P. 14 STA and was received by the
Appellate Division of the said Bureau which processes claims
of that nature on June 25, 1963. The following day, or on June
26, 1963, the said claim was indorsed to then BIR Regional
District No. 3, Manila, for investigation and report and, on the
same date, petitioner was duly notified of the said
indorsement. (Exh. D, p. 101, CTA rec.).
However, shortly after the claim for tax credit was referred to
Regional District No. 3 for investigation and report, the said
district was divided into two districts to become Regional
District Nos. 5 and 6.
As a consequence of the division, revenue dockets and records
then handled by Region No. 3 had to be sorted and
apportioned between the two new districts. Office supplies,
equipment and furniture were likewise divided and transferred
and personnel had to be allocated and assigned to each of the
new districts. Unfortunately, in the process, the papers bearing
on petitioner's claim for tax credit was misplaced.
This was discovered when the report previously requested on
the said claim was called up in a memorandum of the Deputy
Com- Commissioner dated Nov. 23, 1964. As the fieldmen of
the Bureau of In- internal Revenue are grounded during the
month of December of each year, the investigation could not
be immediately undertaken after the said call-up but had to
wait until January. On January 27, 1965, the desired report

contained in an indorsement dated January 25, 1965 was

submitted (Exh. 1, supra).
Finding the above explanation meritorious, We agree with
respondent court that the delay in processing the claim of AFC
for tax credit was neither premeditated nor intentional. The
Commissioner did not sit on the claim of AFC. If there was any
delay, it was due to the splitting into two (2) districts of
Regional District No. 3 where the claim was filed, as a result of
which the documents requesting for refund was misplaced. But
the more important consideration is the when settled rule that
in the absence of a statutory provision clearly or expressly
directing or authorizing payment of interest on the amount to
be refunded to taxpayer, the Government cannot be acquired
to pay interest. 5 Likewise, it is the rule that interest may be
awarded only when the collection of tax sought to be refunded
was attended with arbitrariness. 6 Such circumstance is not
present in the case at bar as the payment of compensation
taxes in question was made freely and voluntarily and
conformably with the partial exemption granted by Republic
Act No. 901.
WHEREFORE, judgment is hereby rendered affirmed the
decision of the Court of Tax Appeals. Without special proannouncement as to cost.
SO ORDERED.

company's accounting method, the net income from its Fish

Nets Division, miscellaneous income of the Fish Nets Division,
and the income of the Furniture Division are computed
individually
Previously, petitioner acquired a parcel of land in Muntinglupa,
Rizal, as site of the fishing net factory. This transaction was
entered in the books of the Fish Nets Division of the Company.
Later, when another parcel of land in Marikina Heights was
found supposedly more suitable for the needs of petitioner, it
sold the Muntinglupa property, Petitioner derived profit from
this sale which was entered in the books of the Fish Nets
Division as miscellaneous income to distinguish it from its taxexempt income.

G.R. No. L-29790 February 25, 1982

AGUINALDO INDUSTRIES CORPORATION (FISHING NETS
DIVISIONS), petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and THE COURT OF
TAX APPEALS, respondents.
This is a petition for review of the decision and resolution of
the Court of Tax Appeals in CTA Case No. 1636 holding the
petitioner liable for the sum of P17,123.93 as deficiency
income tax for l957, plus 5% surcharge and 1% monthly
interest for late payment from December 15, 1957 until full
payment is made.

For the year 1957, petitioner filed two separate income tax
returns one for its Fish Nets Division and another for its
Furniture Division. After investigation of these returns, the
examiners of the Bureau of Internal Revenue found that the
Fish Nets Division deducted from its gross income for that year
the amount of P61,187.48 as additional remuneration paid to
the officers of petitioner. The examiner further found that this
amount was taken from the net profit of an isolated
transaction (sale of aforementioned land) not in the course of
or carrying on of petitioner's trade or business. (It was
reported as part of the selling expenses of the land in
Muntinglupa, Rizal, the details of said transaction being as
follows:
Selling price of land
P432,031.

As summarized by the respondent Court, the facts are:

... Aguinaldo Industries Corporation is a domestic corporation
engaged in two lines of business, namely: (a) the manufacture
of fishing nets, a tax-exempt industry, and (b) the manufacture
of furniture Its business of manufacturing fishing nets is
handled by its Fish Nets Division, while the manufacture of
Furniture is operated by its Furniture Division. For accounting
purposes, each division is provided with separate books of
accounts as required by the Department of Finance. Under the

00
DEDUCT:
Purchase price of land
P71,120.00
Registration, documentary stamps and other expenses
191.05

Relocation survey

450.00
P71,761.0
5

ADD SELLING EXPENSES

Commission

allocated as allowance in Section 3 of its by-laws but only 20%

of the net profit of the non-exempt operation of the Fish Nets
Division, that is, 20,%, of P305,869.89, which is the sum total
of P305,802.18 representing profit from the sale of the
Muntinglupa land, P45.21 representing interest on savings
accounts, and P90.00 representing dividends from investment
of the Fish Nets Division. (Pages 2-5, Decision.)

51,723.72

Documentary stamps
2,294.05
Topographic survey

450.00

Officer's remuneration
61,187.48
186,416.3

Upon the submission of the case for judgment on the basis of

the pleadings and BIR official records, the respondent Court
rendered the questioned decision. Subsequently, on a motion
for reconsideration filed by petitioner, the respondent Court
issued a resolution dated September 30, 1968 imposing a 5%
surcharge and 1% monthly interest on the deficiency
assessment.
Dissatisfied, petitioner has come to this Court on errors
assigned in its brief.

0
NET PROFIT P
244,416.70
Upon recommendation of aforesaid examiner that the said
sum of P61,187.48 be disallowed as deduction from gross
income, petitioner asserted in its letter of February 19, 1958,
that said amount should be allowed as deduction because it
was paid to its officers as allowance or bonus pursuant to
Section 3 of its by-laws which provides as follows:
From the net profits of the business of the Company shall be
deducted for allowance of the President 3% for the first Vice
President 1 %, for the second Vice President for the
members of the Board of Directors 10% to he divided
equally among themselves, for the Secretary of the Board for
the General Manager for two Assistant General Managers
In this connection, petitioner explains that to arrive at the
aforesaid 20% it gets 20'7o of the profits from the furniture
business and adds (the same) to 20 of the profit of the fish net
venture. The P61,187.48 which is the basis of the assessment
of P17,133.00 does not even represent the entire 20%,

Petitioner argues that the profit derived from the sale of its
Muntinglupa land is not taxable for it is tax-exempt income,
considering that its Fish Nets Division enjoys tax exemption as
a new and necessary industry under Republic Act 901.
It must be stressed however that at the administrative level,
the petitioner implicitly admitted that the profit it derived from
the sale of its Muntinglupa land, a capital asset, was a taxable
gain which was precisely the reason why for tax purposes
the petitioner deducted therefrom the questioned bonus to its
corporate officers as a supposed item of expense incurred for
the sale of the said land, apart from the P51,723.72
commission paid by the petitioner to the real estate agent who
indeed effected the sale. The BIR therefore had no occasion to
pass upon the issue.
To allow a litigant to assume a different posture when he
comes before the court and challenge the position he had
accepted at the administrative level, would be to sanction a
procedure whereby the court which is supposed to review
administrative determinations would not review, but
determine and decide for the first time, a question not raised
at the administrative forum. This cannot be permitted, for the

same reason that underlies the requirement of prior

exhaustion of administrative remedies to give administrative
authorities the prior opportunity to decide controversies within
its competence, and in much the same way that, on the
judicial level, issues not raised in the lower court cannot be
raised for the first time on appeal.
In the instant case, up to the time the questioned decision of
the respondent Court was rendered, the petitioner had always
implicitly admitted that the disputed capital gain was taxable,
although subject to the deduction of the bonus paid to its
corporate officers. It was only after the said decision had been
rendered and on a motion for reconsideration thereof, that the
issue of tax exemption was raised by the petitioner for the first
time. It was thus not one of the issues raised by petitioner in
his petition and supporting memorandum in the Court of Tax
Appeals.
We therefore hold that petitioner's belated claim for tax
exemption was properly rejected.
The remaining issues in this appeal are: (1) whether or not the
bonus given to the officers of the petitioner upon the sale of its
Muntinglupa land is an ordinary and necessary business
expense deductible for income tax purposes; and (2) whether
or not petitioner is hable for surcharge and interest for late
payment.
Anent the first question, the applicable legal provision is Sec.
30 (a) (1) of the Tax Code which reads:
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 personal
services actually rendered. ...

On the basis of the foregoing standards, the bonus given to

the officers of the petitioner as their share of the profit realized
from the sale of petitioner's Muntinglupa land cannot be
deemed a deductible expense for tax purposes, even if the
aforesaid sale could be considered as a transaction for
Carrying on the trade or business of the petitioner and the
grant of the bonus to the corporate officers pursuant to
petitioner's by-laws could, as an intra-corporate matter, be
sustained. The records show that the sale was effected
through a broker who was paid by petitioner a commission of
P51,723.72 for his services. On the other hand, there is
absolutely no evidence of any service actually rendered by
petitioner's officers which could be the basis of a grant to them
of a bonus out of the profit derived from the sale. This being
so, the payment of a bonus to them out of the gain realized
from the sale cannot be considered as a selling expense; nor
can it be deemed reasonable and necessary so as to make it
deductible for tax purposes. As stated by this Court in
Alhambra Cigar and Cigarette Manufacturing Co. vs. Collector
of Internal Revenue, G.R. No. L-12026, May 29, 1959,
construing Section 30 (a) (1) of the Tax Code:
. . . . whenever a controversy arises on the deductibility, for
purposes of income tax, of certain items for alleged
compensation of officers of the taxpayer, two (2) questions
become material, namely: (a) Have personal services been
actually rendered by said officers? (b) In the affirmative case,
what is the reasonable allowance' therefor
Then, this Court quoted with approval the appealed decision:
. . . these extraordinary and unusual amounts paid by
petitioner to these directors in the guise and form of
compensation for their supposed services as such, without any
relation to the measure of their actual services, cannot be
regarded as ordinary and necessary expenses within the
meaning of the law.
This posture is in line with the doctrine in the law of taxation
that the taxpayer must show that its claimed deductions
clearly come within the language of the law since allowances,
like exemptions, are matters of legislative grace.

We now come to the issue regarding the imposition of 5%

surcharge and 1% monthly interest for late payment of the
deficiency tax on petitioner's income which was earned in
1957 and assessed on May 30, 19-08.
The applicable law is Section 51 of the Tax Code which, before
its amendment by Republic Act 2343 effective June 20, 1959,
reads as follows:
SEC. 51. Assessment and payment of income tax Assessment
of tax. All assessments shall be made by the Collector of In
ternal Revenue and all persons and corporations subject to tax
shall be notified of the amount for which they are respectively
liable on or before the first day of May of each successive year.
(b) Time of payment. The total amount of tax imposed by
this Title shall be paid on or before the fifteenth day of May
following the close of the calendar year, by the person subject
to tax, and, in the case of a corporation, by the president, vicepresident, or other responsible officer thereof. If the return is
made on the basis of a fiscal year, the total amount of the tax
shall be paid on or before the f if teenth day of the fifth month
following the close of the fiscal year.

part and parcel of the taxpayer's income tax liability. It should

further be observed that, although the Commissioner (formerly
Collector) of Internal Revenue, under the old Section 51 (a)
was required to assess the tax due, based on the taxpayer's
return, and notify the taxpayer of said assessment, still, under
subsection (b) of the same old Section 51, the time prescribed
for the payment of tax was fixed, whether or not a notice of
the assessment was given to the taxpayer (See Central
Azucarera Don Pedro v. Court of Tax Appeals, et al. G.R. Nos. L23236 & 23254, May 31, 1967).
Inasmuch as petitioner had filed its income tax return for 1957
on the fiscal year basis ending June 30, 1957, the deficiency
income tax in question should have been paid on or before
November 15, 1957-the fifteenth day of the fifth month
following the close of the fiscal year (See Sec. 51 (b), supra). It
follows that petitioner is liable to the 5% surcharge and 1%
monthly interest for late payment, not from June 30, 1958, but
from November 15, 1957. Consequently, the payment of
surcharge and interest on deficiency being statutory and
therefore mandatory, petitioner is also hable, aside from the
basic tax above mentioned, for the 5% surcharge and 1%
monthly interest for late payment of the deficiency income tax
from November 15, 1957 until paid. (CTA Resolution dated
Sept. 30, 1968.)

xxx xxx xxx

(e) Surcharge and interest in case of delinquency. To any
sum or sums due and unpaid after the dates prescribed in
subsections (b), (c) and (d) for the payment of the same, there
shall be added the sum of five per centum on the amount of
tax unpaid and interest at the rate of one per centum a month
upon said tax from the time the same became due, except
from the estates of insane, deceased, or insolvent persons.
Applying the foregoing provisions, the respondent Court said:
It should be observed that, under the old Section 51 (e), the
5% surcharge and interest on deficiency was imposed from the
time the tax became due, and said interest was imposable in
case of non-payment on time, not only on the basic income
tax, but also on the deficiency tax, since the deficiency was

The rule as to when interest and surcharges on delinquency

tax payments become chargeable is wen settled and the
respondent Court applied it correctly. Construing the same
provisions of the old Section 51 (e) and the Section 51 (d) of
the Tax Code, as amended by Republic Act 2343, this Court
held that the interest and surcharges on deficiency taxes are
imposable upon failure of the taxpayer to pay the tax on the
date fixed in the law for the payment thereof, which was,
under the unamended Section 51 of the Tax Code, the fifteenth
day of the fifth month following the close of the fiscal year in
the case of taxpayers whose tax returns were made on the
basis of fiscal years. [Commissioner of Internal Revenue vs.
Connel Bros. Co. (Phil.), 40 SCRA 416.]
The rule has to be so because a deficiency tax indicates nonpayment of the correct tax, and such deficiency exists not only

from the assessment thereof but from the very time the
taxpayer failed to pay the correct amount of tax when it
should have been paid (Ibid.) and the imposition thereof is
mandatory even in the absence of fraud or wilful failure to pay
the tax is full.
As regards interest, the reason is
The imposition of 1% monthly is but a just compensation to
the State for the delay in paying the tax and for the
concomitant use by the taxpayer of funds that rightfully should
be in the government s hands. (U.S. vs. Goldstein, 189 F (2d)
752; Ross vs. U.S. 148 Fed. Supp. 330; U.S. vs. Joffray 97 Fed.
(2d) 488.) The fact that the interest charged is made
proportionate to the period of delay constitutes the best
evidence that such interest is not penal but compensator
(Castro vs. Collector of Internal Revenue, G.R. L-12174, Dec.
28, 1662, Resolution on Motion for Reconsideration.)
As regards the prescribed 5% surcharge, this Court has had
occasion to cite the reason for the strict enforcement thereof.
Strong reasons of policy support a strict observance of this
rule. Tax laws imposing penalties for deliquencies are clearly
intended to hasten tax payments or to punish evasion or
neglect of duty in respect thereof. If delays in tax payments
are to be condoned for light reasons, the law imposing
penalties for delinquencies would be rendered nugatory, and
the maintenance of the government and its multifarious
activities would be as precarious as taxpayers are wining or
unwilling to pay their obligations to the state in time.
Imperatives of public welfare will not approve of this result.
(Jamora vs. Meer, 74 PhiL 22.)
WHEREFORE, the judgment under review is affirmed in toto.
Costs against the petitioner.
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.
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&GUSA 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 Reconsideration and we will deal with them seriatim in this
Resolution resolving that Motion.
I
1. There are certain preliminary aspects of the question of the
capacity of P&G-Phil. to bring the present claim for refund or
tax credit, which need to be examined. This question was
raised for the first time on appeal, i.e., in the proceedings
before this Court on the Petition for Review filed by the
Commissioner of Internal Revenue. The question was not
raised by the Commissioner on the administrative level, and
neither was it raised by him before the CTA.
We believe that the Bureau of Internal Revenue ("BIR") should
not be allowed to defeat an otherwise valid claim for refund by
raising this question of alleged incapacity for the first time on

appeal before this Court. This is clearly a matter of procedure.

Petitioner does not pretend that P&G-Phil., should it succeed in
the claim for refund, is likely to run away, as it were, with the
refund instead of transmitting such refund or tax credit to its
parent and sole stockholder. It is commonplace that in the
absence of explicit statutory provisions to the contrary, the
government must follow the same rules of procedure which
bind private parties. It is, for instance, clear that the
government is held to compliance with the provisions of
Circular No. 1-88 of this Court in exactly the same way that
private litigants are held to such compliance, save only in
respect of the matter of filing fees from which the Republic of
the Philippines is exempt by the Rules of Court.
More importantly, there arises here a question of fairness
should the BIR, unlike any other litigant, be allowed to raise for
the first time on appeal questions which had not been litigated
either in the lower court or on the administrative level. For, if
petitioner had at the earliest possible opportunity, i.e., at the
administrative level, demanded that P&G-Phil. produce an
express authorization from its parent corporation to bring the
claim for refund, then P&G-Phil. would have been able
forthwith to secure and produce such authorization before
filing the action in the instant case. The action here was
commenced just before expiration of the two (2)-year
prescriptive period.
2. The question of the capacity of P&G-Phil. to bring the claim
for refund has substantive dimensions as well which, as will be
seen below, also ultimately relate to fairness.
Under Section 306 of the NIRC, a claim for refund or tax credit
filed with the Commissioner of Internal Revenue is essential for
maintenance of a suit for recovery of taxes allegedly
erroneously or illegally assessed or collected:
Sec. 306. Recovery of tax erroneously or illegally collected.
No suit or proceeding shall be maintained in any court for the
recovery of any national internal revenue tax hereafter alleged
to have been erroneously or illegally assessed or collected, or
of any penalty claimed to have been collected without
authority, or of any sum alleged to have been excessive or in

any manner wrongfully collected, until a claim for refund or

credit has been duly filed with the Commissioner of Internal
Revenue; but such suit or proceeding may be maintained,
whether or not such tax, penalty, or sum has been paid under
protest or duress. In any case, no such suit or proceeding shall
be begun after the expiration of two years from the date of
payment of the tax or penalty regardless of any supervening
cause that may arise after payment: . . . (Emphasis supplied)
Section 309 (3) of the NIRC, in turn, provides:
Sec. 309. Authority of Commissioner to Take Compromises and
to Refund Taxes.The Commissioner may:
xxx xxx xxx
(3) credit or refund taxes erroneously or illegally received, . . .
No credit or refund of taxes or penalties shall be allowed
unless the taxpayer files in writing with the Commissioner a
claim for credit or refund within two (2) years after the
payment of the tax or penalty. (As amended by P.D. No. 69)
(Emphasis supplied)
Since the claim for refund was filed by P&G-Phil., the question
which arises is: is P&G-Phil. a "taxpayer" under Section 309 (3)
of the NIRC? The term "taxpayer" is defined in our NIRC as
referring to "any person subject to 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&GPhil. 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.

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.

II
1. We turn to the principal substantive question before us: the
applicability to the dividend remittances by P&G-Phil. to P&GUSA 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,

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:

least 10 percent of the voting stock of a foreign corporation

from which it receives dividends in any taxable year shall
xxx xxx xxx

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

(2) to the extent such dividends are paid by such foreign

corporation out of accumulated profits [as defined in
subsection (c) (1) (b)] of a year for which such foreign
corporation is a less developed country corporation, be
deemed to have paid the same proportion of any income, war
profits, or excess profits taxes paid or deemed to be paid by
such foreign corporation to any foreign country or to any
possession of the United States on or with respect to such
accumulated profits, which the amount of such dividends
bears to the amount of such accumulated profits.
xxx xxx xxx
(c) Applicable Rules
(1) Accumulated profits defined. For purposes of this
section, the term "accumulated profits" means with respect to
any foreign corporation,
(A) for purposes of subsections (a) (1) and (b) (1), the amount
of its gains, profits, or income computed without reduction by
the amount of the income, war profits, and excess profits taxes
imposed on or with respect to such profits or income by any
foreign country. . . .; and
(B) for purposes of subsections (a) (2) and (b) (2), the amount
of its gains, profits, or income in excess of the income, war
profits, and excess profits taxes imposed on or with respect to
such profits or income.

xxx xxx xxx

Sec. 902. Credit for corporate stockholders in foreign
corporation.
(A) Treatment of Taxes Paid by Foreign Corporation. For
purposes of this subject, a domestic corporation which owns at

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)

fifteen percent (15%) dividend tax rate under Section 24 (b)

(1), NIRC, it is necessary:

Close examination of the above quoted provisions of the US

Tax Code 7 shows the following:

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;

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&GPhil.
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

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 **

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

(2) The amount of 15% of

P75,000 withheld = 11,250

P30,000

(d) Sec. 30. Deductions from Gross Income.In computing net

income, there shall be allowed as deductions . . .

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.

xxx xxx xxx

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.

(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)

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.

(c) Taxes. . . .

(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 . . .

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 governmente.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 excessprofits 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.

case at bar, some revenues have to be foregone in that

process.

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.

WHEREAS, nonresident foreign corporations with investments

in the Philippines are taxed on their earnings from dividends at
the rate of 35%;

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

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, in order to encourage more capital investment for

large projects an appropriate tax need be imposed on
dividends received by non-resident foreign corporations in the
same manner as the tax imposed on interest on foreign loans;
xxx xxx xxx
(Emphasis supplied)
More simply put, Section 24 (b) (1), NIRC, seeks to promote the
in-flow of foreign equity investment in the Philippines by
reducing the tax cost of earning profits here and thereby
increasing the net dividends remittable to the investor. The
foreign investor, however, would not benefit from the
reduction of the Philippine dividend tax rate unless its home
country gives it some relief from double taxation (i.e., secondtier 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

P25.415US corporate tax payable by P&G-USA

without tax credits

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

P25.415
- 9.75 US tax credit for RP dividend tax withheld by P&GPhil.
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)

xxx xxx xxx

(2) The rate of tax imposed by one of the Contracting States
on dividends derived from sources within that Contracting
State by a resident of the other Contracting State shall not
exceed
(a) 25 percent of the gross amount of the dividend; or
(b) When the recipient is a corporation, 20 percent of the gross
amount of the dividend 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.

- 0 - US corporate income tax payable on dividends

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

xxx xxx xxx

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

====== taxes after Section 902 tax credit.

The Tax Convention, at the same time, established a treaty

obligation on the part of the United States that it "shall allow"

(Emphasis supplied)

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.

RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial

Administrator of the Estate of the deceased JOSE P.
FERNANDEZ, Petitioner,
- versus COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, Respondents.
G.R. No. 140944
April 30, 2008
x------------------------------------------------------------------------------------x
Before this Court is a Petition for Review on Certiorari[1] under
Rule 45 of the Rules of Civil Procedure seeking the reversal of
the Court of Appeals (CA) Decision[2] dated April 30, 1999
which affirmed the Decision[3] of the Court of Tax Appeals
(CTA) dated June 17, 1997.[4]
The Facts
On November 7, 1987, Jose P. Fernandez (Jose) died.
Thereafter, a petition for the probate of his will[5] was filed
with Branch 51 of the Regional Trial Court (RTC) of Manila
(probate court).[6] The probate court then appointed retired
Supreme Court Justice Arsenio P. Dizon (Justice Dizon) and
petitioner, Atty. Rafael Arsenio P. Dizon (petitioner) as Special
and Assistant Special Administrator, respectively, of the Estate
of Jose (Estate). In a letter[7] dated October 13, 1988, Justice
Dizon informed respondent Commissioner of the Bureau of

Internal Revenue (BIR) of the special proceedings for the

Estate.
Petitioner alleged that several requests for extension of the
period to file the required estate tax return were granted by
the BIR since the assets of the estate, as well as the claims
against it, had yet to be collated, determined and identified.
Thus, in a letter[8] dated March 14, 1990, Justice Dizon
authorized Atty. Jesus M. Gonzales (Atty. Gonzales) to sign and
file on behalf of the Estate the required estate tax return and
to represent the same in securing a Certificate of Tax
Clearance. Eventually, on April 17, 1990, Atty. Gonzales wrote
a letter[9] addressed to the BIR Regional Director for San Pablo
City and filed the estate tax return[10] with the same BIR
Regional Office, showing therein a NIL estate tax liability,
computed as follows:
COMPUTATION OF TAX
Conjugal Real Property (Sch. 1)
P10,855,020.00
Conjugal Personal Property (Sch.2)
3,460,591.34
Taxable Transfer (Sch. 3)
Gross Conjugal Estate
14,315,611.34
Less: Deductions (Sch. 4)
Net Conjugal Estate NIL

On April 27, 1990, BIR Regional Director for San Pablo City,
Osmundo G. Umali issued Certification Nos. 2052[12] and
2053[13] stating that the taxes due on the transfer of real and
personal properties[14] of Jose had been fully paid and said
properties may be transferred to his heirs. Sometime in August
1990, Justice Dizon passed away. Thus, on October 22, 1990,
the probate court appointed petitioner as the administrator of
the Estate.[15]
Petitioner requested the probate court's authority to sell
several properties forming part of the Estate, for the purpose
of paying its creditors, namely: Equitable Banking Corporation
(P19,756,428.31), Banque de L'Indochine et. de Suez
(US$4,828,905.90 as of January 31, 1988), Manila Banking
Corporation (P84,199,160.46 as of February 28, 1989) and
State Investment House, Inc. (P6,280,006.21). Petitioner
manifested that Manila Bank, a major creditor of the Estate
was not included, as it did not file a claim with the probate
court since it had security over several real estate properties
forming part of the Estate.[16]
However, on November 26, 1991, the Assistant Commissioner
for Collection of the BIR, Themistocles Montalban, issued
Estate Tax Assessment Notice No. FAS-E-87-91-003269,[17]
demanding the payment of P66,973,985.40 as deficiency
estate tax, itemized as follows:
Deficiency Estate Tax- 1987

187,822,576.06

Estate tax

P31,868,414.48

25% surcharge- late filing

7,967,103.62

Less: Share of Surviving Spouse NIL .

Net Share in Conjugal Estate NIL

late payment
7,967,103.62

xxx

Interest

Net Taxable Estate NIL .

Compromise-non filing

25,000.00

Estate Tax Due NIL .[11]

non payment

25,000.00

19,121,048.68

no notice of death

15.00

no CPA Certificate

300.00

Total amount due & collectible

P66,973,985.40[18]
In his letter[19] dated December 12, 1991, Atty. Gonzales
moved for the reconsideration of the said estate tax
assessment. However, in her letter[20] dated April 12, 1994,
the BIR Commissioner denied the request and reiterated that
the estate is liable for the payment of P66,973,985.40 as
deficiency estate tax. On May 3, 1994, petitioner received the
letter of denial. On June 2, 1994, petitioner filed a petition for
review[21] before respondent CTA. Trial on the merits ensued.
As found by the CTA, the respective parties presented the
following pieces of evidence, to wit:
In the hearings conducted, petitioner did not present
testimonial evidence but merely documentary evidence
consisting of the following:
Nature of Document (sic) Exhibits
1. Letter dated October 13, 1988 from Arsenio P. Dizon
addressed to the Commissioner of Internal Revenue informing
the latter of the special proceedings for the settlement of the
estate (p. 126, BIR records); "A"

4. Attachment to Exh. "C" which is the detailed and complete

listing of the properties of the deceased (pp. 89-105, BIR rec.);
"C-1" to "C-17"
5. Claims against the estate filed by Equitable Banking Corp.
With the probate Court in the amount of P19,756,428.31 as of
March 31, 1988, together with the Annexes to the claim (pp.
64-88, BIR records); "D" to "D-24"
6. Claim filed by Banque de L' Indochine et de Suez with the
probate Court in the amount of US $4,828,905.90 as of January
31, 1988 (pp. 262-265, BIR records); "E" to "E-3"
7. Claim of the Manila Banking Corporation (MBC) which as of
November 7, 1987 amounts to P65,158,023.54, but
recomputed as of February 28, 1989 at a total amount of
P84,199,160.46; together with the demand letter from MBC's
lawyer (pp. 194-197, BIR records); "F" to "F-3"
8. Demand letter of Manila Banking Corporation prepared by
Asedillo, Ramos and Associates Law Offices addressed to
Fernandez Hermanos, Inc., represented by Jose P. Fernandez,
as mortgagors, in the total amount of P240,479,693.17 as of
February 28, 1989 (pp. 186-187, BIR records); "G" & "G-1"
9. Claim of State Investment House, Inc. filed with the RTC,
Branch VII of Manila, docketed as Civil Case No. 86-38599
entitled "State nInvestment House, Inc., Plaintiff, versus
Maritime Company Overseas, Inc. and/or Jose P. Fernandez,
Defendants,"
(pp. 200-215, BIR records); "H" to "H-16"

2. Petition for the probate of the will and issuance of letter of

administration filed with the Regional Trial Court (RTC) of
Manila, docketed as Sp. Proc. No. 87-42980 (pp. 107-108, BIR
records); "B" & "B-1
3. Pleading entitled "Compliance" filed with the probate Court
submitting the final inventory of all the properties of the
deceased (p. 106, BIR records); "C"

10. Letter dated March 14, 1990 of Arsenio P. Dizon addressed

to Atty. Jesus M. Gonzales, (p. 184, BIR records); "I"
11. Letter dated April 17, 1990 from J.M. Gonzales addressed
to the Regional Director of BIR in San Pablo City (p. 183, BIR
records); "J"
12. Estate Tax Return filed by the estate of the late Jose P.
Fernandez through its authorized representative, Atty. Jesus M.

Gonzales, for Arsenio P. Dizon, with attachments (pp. 177-182,

BIR records); "K" to "K-5"

7. Signature of Maximino V. Tagle also appearing on p. 2 of

Exh. "2"; -do-

13. Certified true copy of the Letter of Administration issued by

RTC Manila, Branch 51, in Sp. Proc. No. 87-42980 appointing
Atty. Rafael S. Dizon as Judicial Administrator of the estate of
Jose P. Fernandez; (p. 102, CTA records) and "L"

8. Summary of revenue Enforcement Officers Audit Report,

dated July 19, 1991; p. 139

14. Certification of Payment of estate taxes Nos. 2052 and

2053, both dated April 27, 1990, issued by the Office of the
Regional Director, Revenue Region No. 4-C, San Pablo City,
with attachments (pp. 103-104, CTA records.). "M" to "M-5"
Respondent's [BIR] counsel presented on June 26, 1995 one
witness in the person of Alberto Enriquez, who was one of the
revenue examiners who conducted the investigation on the
estate tax case of the late Jose P. Fernandez. In the course of
the direct examination of the witness, he identified the
following:
Documents/ Signatures BIR Record

9. Signature of Alberto Enriquez at the lower portion of Exh.

"3"; -do10. Signature of Ma. Anabella A. Abuloc at the lower portion of
Exh. "3"; -do11. Signature of Raymond S. Gallardo at the lower portion of
Exh. "3"; -do12. Signature of Maximino V. Tagle at the lower portion of Exh.
"3"; -do13. Demand letter (FAS-E-87-91-00), signed by the Asst.
Commissioner for Collection for the Commissioner of Internal
Revenue, demanding payment of the amount of
P66,973,985.40; and p. 169

1. Estate Tax Return prepared by the BIR; p. 138

14. Assessment Notice FAS-E-87-91-00 pp. 169-170[22]
2. Signatures of Ma. Anabella Abuloc and Alberto Enriquez, Jr.
appearing at the lower Portion of Exh. "1"; -do-

The CTA's Ruling

3. Memorandum for the Commissioner, dated July 19, 1991,

prepared by
revenue examiners, Ma. Anabella A. Abuloc, Alberto S.
Enriquez and Raymund S. Gallardo; Reviewed by Maximino V.
Tagle pp. 143-144

On June 17, 1997, the CTA denied the said petition for review.
Citing this Court's ruling in Vda. de Oate v. Court of Appeals,
[23] the CTA opined that the aforementioned pieces of
evidence introduced by the BIR were admissible in evidence.
The CTA ratiocinated:

4. Signature of Alberto S. Enriquez appearing at the lower

portion on p. 2 of Exh. "2"; -do-

Although the above-mentioned documents were not formally

offered as evidence for respondent, considering that
respondent has been declared to have waived the presentation
thereof during the hearing on March 20, 1996, still they could
be considered as evidence for respondent since they were
properly identified during the presentation of respondent's
witness, whose testimony was duly recorded as part of the
records of this case. Besides, the documents marked as

5. Signature of Ma. Anabella A. Abuloc appearing at the lower

portion on p. 2 of Exh. "2"; -do6. Signature of Raymund S. Gallardo appearing at the Lower
portion on p. 2 of Exh. "2"; -do-

respondent's exhibits formed part of the BIR records of the

case.[24]
Nevertheless, the CTA did not fully adopt the assessment
made by the BIR and it came up with its own computation of
the deficiency estate tax, to wit:
Conjugal Real Property
5,062,016.00

Conjugal Personal Prop.

33,021,999.93

Add: 25% Surcharge for Late Filing

7,483,835.74
Add: Penalties for-No notice of death
15.00
No CPA certificate

300.00

Total deficiency estate tax

P 37,419,493.71

=============
Gross Conjugal Estate
38,084,015.93
Less: Deductions

exclusive of 20% interest from due date of its payment until

full payment thereof [Sec. 283 (b), Tax Code of 1987].[25]
26,250,000.00
Thus, the CTA disposed of the case in this wise:

Net Conjugal Estate

11,834,015.93

Less: Share of Surviving Spouse

5,917,007.96
Net Share in Conjugal Estate
5,917,007.96

Add: Capital/Paraphernal
Properties

WHEREFORE, viewed from all the foregoing, the Court finds the
petition unmeritorious and denies the same. Petitioner and/or
the heirs of Jose P. Fernandez are hereby ordered to pay to
respondent the amount of P37,419,493.71 plus 20% interest
from the due date of its payment until full payment thereof as
estate tax liability of the estate of Jose P. Fernandez who died
on November 7, 1987.
SO ORDERED.[26]

P44,652,813.66

Aggrieved, petitioner, on March 2, 1998, went to the CA via a

petition for review.[27]

Less: Capital/Paraphernal
The CA's Ruling
Deductions
Net Taxable Estate

44,652,813.66
P 50,569,821.62

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

Estate Tax Due

29,935,342.97

On April 30, 1999, the CA affirmed the CTA's ruling. Adopting

in full the CTA's findings, the CA ruled that the petitioner's act
of filing an estate tax return with the BIR and the issuance of
BIR Certification Nos. 2052 and 2053 did not deprive the BIR
Commissioner of her authority to re-examine or re-assess the
said return filed on behalf of the Estate.[28]

On May 31, 1999, petitioner filed a Motion for

Reconsideration[29] which the CA denied in its Resolution[30]
dated November 3, 1999.
Hence, the instant Petition raising the following issues:
1.
Whether or not the admission of evidence which were
not formally offered by the respondent BIR by the Court of Tax
Appeals which was subsequently upheld by the Court of
Appeals is contrary to the Rules of Court and rulings of this
Honorable Court;
2. Whether or not the Court of Tax Appeals and the Court of
Appeals erred in recognizing/considering the estate tax return
prepared and filed by respondent BIR knowing that the probate
court appointed administrator of the estate of Jose P.
Fernandez had previously filed one as in fact, BIR Certification
Clearance Nos. 2052 and 2053 had been issued in the estate's
favor;
3. Whether or not the Court of Tax Appeals and the Court of
Appeals erred in disallowing the valid and enforceable claims
of creditors against the estate, as lawful deductions despite
clear and convincing evidence thereof; and
4. Whether or not the Court of Tax Appeals and the Court of
Appeals erred in validating erroneous double imputation of
values on the very same estate properties in the estate tax
return it prepared and filed which effectively bloated the
estate's assets.[31]
The petitioner claims that in as much as the valid claims of
creditors against the Estate are in excess of the gross estate,
no estate tax was due; that the lack of a formal offer of
evidence is fatal to BIR's cause; that the doctrine laid down in
Vda. de Oate has already been abandoned in a long line of
cases in which the Court held that evidence not formally
offered is without any weight or value; that Section 34 of Rule
132 of the Rules on Evidence requiring a formal offer of
evidence is mandatory in character; that, while BIR's witness
Alberto Enriquez (Alberto) in his testimony before the CTA
identified the pieces of evidence aforementioned such that the
same were marked, BIR's failure to formally offer said pieces of
evidence and depriving petitioner the opportunity to cross-

examine Alberto, render the same inadmissible in evidence;

that assuming arguendo that the ruling in Vda. de Oate is still
applicable, BIR failed to comply with the doctrine's requisites
because the documents herein remained simply part of the BIR
records and were not duly incorporated in the court records;
that the BIR failed to consider that although the actual
payments made to the Estate creditors were lower than their
respective claims, such were compromise agreements reached
long after the Estate's liability had been settled by the filing of
its estate tax return and the issuance of BIR Certification Nos.
2052 and 2053; and that the reckoning date of the claims
against the Estate and the settlement of the estate tax due
should be at the time the estate tax return was filed by the
judicial administrator and the issuance of said BIR
Certifications and not at the time the aforementioned
Compromise Agreements were entered into with the Estate's
creditors.[32]
On the other hand, respondent counters that the documents,
being part of the records of the case and duly identified in a
duly recorded testimony are considered evidence even if the
same were not formally offered; that the filing of the estate tax
return by the Estate and the issuance of BIR Certification Nos.
2052 and 2053 did not deprive the BIR of its authority to
examine the return and assess the estate tax; and that the
factual findings of the CTA as affirmed by the CA may no
longer be reviewed by this Court via a petition for review.[33]
The Issues
There are two ultimate issues which require resolution in this
case:
First. Whether or not the CTA and the CA gravely erred in
allowing the admission of the pieces of evidence which were
not formally offered by the BIR; and
Second. Whether or not the CA erred in affirming the CTA in
the latter's determination of the deficiency estate tax imposed
against the Estate.
The Courts Ruling

The Petition is impressed with merit.

Under Section 8 of RA 1125, the CTA is categorically described
as a court of record. As cases filed before it are litigated de
novo, party-litigants shall prove every minute aspect of their
cases. Indubitably, no evidentiary value can be given the
pieces of evidence submitted by the BIR, as the rules on
documentary evidence require that these documents must be
formally offered before the CTA.[34] Pertinent is Section 34,
Rule 132 of the Revised Rules on Evidence which reads:
SEC. 34. Offer of evidence. The court shall consider no
evidence which has not been formally offered. The purpose for
which the evidence is offered must be specified.
The CTA and the CA rely solely on the case of Vda. de Oate,
which reiterated this Court's previous rulings in People v.
Napat-a[35] and People v. Mate[36] on the admission and
consideration of exhibits which were not formally offered
during the trial. Although in a long line of cases many of which
were decided after Vda. de Oate, we held that courts cannot
consider evidence which has not been formally offered,[37]
nevertheless, petitioner cannot validly assume that the
doctrine laid down in Vda. de Oate has already been
abandoned. Recently, in Ramos v. Dizon,[38] this Court,
applying the said doctrine, ruled that the trial court judge
therein committed no error when he admitted and considered
the respondents' exhibits in the resolution of the case,
notwithstanding the fact that the same
were not formally offered. Likewise, in Far East Bank & Trust
Company v. Commissioner of Internal Revenue,[39] the Court
made reference to said doctrine in resolving the issues therein.
Indubitably, the doctrine laid down in Vda. De Oate still
subsists in this jurisdiction. In Vda. de Oate, we held that:
From the foregoing provision, it is clear that for evidence to be
considered, the same must be formally offered. Corollarily, the
mere fact that a particular document is identified and marked
as an exhibit does not mean that it has already been offered
as part of the evidence of a party. In Interpacific Transit, Inc. v.
Aviles [186 SCRA 385], we had the occasion to make a
distinction between identification of documentary evidence

and its formal offer as an exhibit. We said that the first is done
in the course of the trial and is accompanied by the marking of
the evidence as an exhibit while the second is done only when
the party rests its case and not before. A party, therefore, may
opt to formally offer his evidence if he believes that it will
advance his cause or not to do so at all. In the event he
chooses to do the latter, the trial court is not authorized by the
Rules to consider the same.
However, in People v. Napat-a [179 SCRA 403] citing People v.
Mate [103 SCRA 484], we relaxed the foregoing rule and
allowed evidence not formally offered to be admitted and
considered by the trial court provided the following
requirements are present, viz.: first, the same must have been
duly identified by testimony duly recorded and, second, the
same must have been incorporated in the records of the case.
[40]
From the foregoing declaration, however, it is clear that Vda.
de Oate is merely an exception to the general rule. Being an
exception, it may be applied only when there is strict
compliance with the requisites mentioned therein; otherwise,
the general rule in Section 34 of Rule 132 of the Rules of Court
should prevail.
In this case, we find that these requirements have not been
satisfied. The assailed pieces of evidence were presented and
marked during the trial particularly when Alberto took the
witness stand. Alberto identified these pieces of evidence in
his direct testimony.[41] He was also subjected to crossexamination and re-cross examination by petitioner.[42] But
Albertos account and the exchanges between Alberto and
petitioner did not sufficiently describe the contents of the said
pieces of evidence presented by the BIR. In fact, petitioner
sought that the lead examiner, one Ma. Anabella A. Abuloc, be
summoned to testify, inasmuch as Alberto was incompetent to
answer questions relative to the working papers.[43] The lead
examiner never testified. Moreover, while Alberto's testimony
identifying the BIR's evidence was duly recorded, the BIR
documents themselves were not incorporated in the records of
the case.

A common fact threads through Vda. de Oate and Ramos that

does not exist at all in the instant case. In the aforementioned
cases, the exhibits were marked at the pre-trial proceedings to
warrant the pronouncement that the same were duly
incorporated in the records of the case. Thus, we held in
Ramos:
In this case, we find and so rule that these requirements have
been satisfied. The exhibits in question were presented and
marked during the pre-trial of the case thus, they have been
incorporated into the records. Further, Elpidio himself
explained the contents of these exhibits when he was
interrogated by respondents' counsel...
xxxx
But what further defeats petitioner's cause on this issue is that
respondents' exhibits were marked and admitted during the
pre-trial stage as shown by the Pre-Trial Order quoted earlier.
[44]
While the CTA is not governed strictly by technical rules of
evidence,[45] as rules of procedure are not ends in themselves
and are primarily intended as tools in the administration of
justice, the presentation of the BIR's evidence is not a mere
procedural technicality which may be disregarded considering
that it is the only means by which the CTA may ascertain and
verify the truth of BIR's claims against the Estate.[46] The
BIR's failure to formally offer these pieces of evidence, despite
CTA's directives, is fatal to its cause.[47] Such failure is
aggravated by the fact that not even a single reason was
advanced by the BIR to justify such fatal omission. This, we
take against the BIR.
Per the records of this case, the BIR was directed to present its
evidence[48] in the hearing of February 21, 1996, but BIR's
counsel failed to appear.[49] The CTA denied petitioner's
motion to consider BIR's presentation of evidence as waived,
with a warning to BIR that such presentation would be
considered waived if BIR's evidence would not be presented at
the next hearing. Again, in the hearing of March 20, 1996,
BIR's counsel failed to appear.[50] Thus, in its Resolution[51]

dated March 21, 1996, the CTA considered the BIR to have
waived presentation of its evidence. In the same Resolution,
the parties were directed to file their respective memorandum.
Petitioner complied but BIR failed to do so.[52] In all of these
proceedings, BIR was duly notified. Hence, in this case, we are
constrained to apply our ruling in Heirs of Pedro Pasag v.
Parocha:[53]
A formal offer is necessary because judges are mandated to
rest their findings of facts and their judgment only and strictly
upon the evidence offered by the parties at the trial. Its
function is to enable the trial judge to know the purpose or
purposes for which the proponent is presenting the evidence.
On the other hand, this allows opposing parties to examine the
evidence and object to its admissibility. Moreover, it facilitates
review as the appellate court will not be required to review
documents not previously scrutinized by the trial court.
Strict adherence to the said rule is not a trivial matter. The
Court in Constantino v. Court of Appeals ruled that the formal
offer of one's evidence is deemed waived after failing to
submit it within a considerable period of time. It explained that
the court cannot admit an offer of evidence made after a lapse
of three (3) months because to do so would "condone an
inexcusable laxity if not non-compliance with a court order
which, in effect, would encourage needless delays and derail
the speedy administration of justice."
Applying the aforementioned principle in this case, we find
that the trial court had reasonable ground to consider that
petitioners had waived their right to make a formal offer of
documentary or object evidence. Despite several extensions of
time to make their formal offer, petitioners failed to comply
with their commitment and allowed almost five months to
lapse before finally submitting it. Petitioners' failure to comply
with the rule on admissibility of evidence is anathema to the
efficient, effective, and expeditious dispensation of justice.
Having disposed of the foregoing procedural issue, we proceed
to discuss the merits of the case.

Ordinarily, the CTA's findings, as affirmed by the CA, are

entitled to the highest respect and will not be disturbed on
appeal unless it is shown that the lower courts committed
gross error in the appreciation of facts.[54] In this case,
however, we find the decision of the CA affirming that of the
CTA tainted with palpable error.
It is admitted that the claims of the Estate's aforementioned
creditors have been condoned. As a mode of extinguishing an
obligation,[55] condonation or remission of debt[56] is defined
as:
an act of liberality, by virtue of which, without receiving any
equivalent, the creditor renounces the enforcement of the
obligation, which is extinguished in its entirety or in that part
or aspect of the same to which the remission refers. It is an
essential characteristic of remission that it be gratuitous, that
there is no equivalent received for the benefit given; once
such equivalent exists, the nature of the act changes. It may
become dation in payment when the creditor receives a thing
different from that stipulated; or novation, when the object or
principal conditions of the obligation should be changed; or
compromise, when the matter renounced is in litigation or
dispute and in exchange of some concession which the
creditor receives.[57]
Verily, the second issue in this case involves the construction
of Section 79[58] of the National Internal Revenue Code[59]
(Tax Code) which provides for the allowable deductions from
the gross estate of the decedent. The specific question is
whether the actual claims of the aforementioned creditors may
be fully allowed as deductions from the gross estate of Jose
despite the fact that the said claims were reduced or
condoned through compromise agreements entered into by
the Estate with its creditors.
Claims against the estate, as allowable deductions from the
gross estate under Section 79 of the Tax Code, are basically a
reproduction of the deductions allowed under Section 89 (a)
(1) (C) and (E) of Commonwealth Act No. 466 (CA 466),
otherwise known as the National Internal Revenue Code of

1939, and which was the first codification of Philippine tax

laws. Philippine tax laws were, in turn, based on the federal tax
laws of the United States. Thus, pursuant to established rules
of statutory construction, the decisions of American courts
construing the federal tax code are entitled to great weight in
the interpretation of our own tax laws.[60]
It is noteworthy that even in the United States, there is some
dispute as to whether the deductible amount for a claim
against the estate is fixed as of the decedent's death which is
the general rule, or the same should be adjusted to reflect
post-death developments, such as where a settlement
between the parties results in the reduction of the amount
actually paid.[61] On one hand, the U.S. court ruled that the
appropriate deduction is the value that the claim had at the
date of the decedent's death.[62] Also, as held in Propstra v.
U.S., [63] where a lien claimed against the estate was certain
and enforceable on the date of the decedent's death, the fact
that the claimant subsequently settled for lesser amount did
not preclude the estate from deducting the entire amount of
the claim for estate tax purposes. These pronouncements
essentially confirm the general principle that post-death
developments are not material in determining the amount of
the deduction.
On the other hand, the Internal Revenue Service (Service)
opines that post-death settlement should be taken into
consideration and the claim should be allowed as a deduction
only to the extent of the amount actually paid.[64]
Recognizing the dispute, the Service released Proposed
Regulations in 2007 mandating that the deduction would be
limited to the actual amount paid.[65]
In announcing its agreement with Propstra,[66] the U.S. 5th
Circuit Court of Appeals held:
We are persuaded that the Ninth Circuit's decision...in Propstra
correctly apply the Ithaca Trust date-of-death valuation
principle to enforceable claims against the estate. As we
interpret Ithaca Trust, when the Supreme Court announced the
date-of-death valuation principle, it was making a judgment
about the nature of the federal estate tax specifically, that it is

a tax imposed on the act of transferring property by will or

intestacy and, because the act on which the tax is levied
occurs at a discrete time, i.e., the instance of death, the net
value of the property transferred should be ascertained, as
nearly as possible, as of that time. This analysis supports
broad application of the date-of-death valuation rule.[67]
We express our agreement with the date-of-death valuation
rule, made pursuant to the ruling of the U.S. Supreme Court in
Ithaca Trust Co. v. United States.[68] First. There is no law, nor
do we discern any legislative intent in our tax laws, which
disregards the date-of-death valuation principle and
particularly provides that post-death developments must be
considered in determining the net value of the estate. It bears
emphasis that tax burdens are not to be imposed, nor
presumed to be imposed, beyond what the statute expressly
and clearly imports, tax statutes being construed strictissimi
juris against the government.[69] Any doubt on whether a
person, article or activity is taxable is generally resolved
against taxation.[70] Second. Such construction finds
relevance and consistency in our Rules on Special Proceedings
wherein the term "claims" required to be presented against a
decedent's estate is generally construed to mean debts or
demands of a pecuniary nature which could have been
enforced against the deceased in his lifetime, or liability
contracted by the deceased before his death.[71] Therefore,
the claims existing at the time of death are significant to, and
should be made the basis of, the determination of allowable
deductions.
WHEREFORE, the instant Petition is GRANTED. Accordingly, the
assailed Decision dated April 30, 1999 and the Resolution
dated November 3, 1999 of the Court of Appeals in CA-G.R.
S.P. No. 46947 are REVERSED and SET ASIDE. The Bureau of
Internal Revenue's deficiency estate tax assessment against
the Estate of Jose P. Fernandez is hereby NULLIFIED. No costs.

G.R. No. L-9687

June 30, 1961

LIDDELL & CO., INC., petitioner-appellant,

vs.
THE COLLECTOR OF INTERNAL REVENUE, respondentappellee.
Statement. This is an appeal from the decision of the Court of
Tax Appeals imposing a tax deficiency liability of
P1,317,629.61 on Liddell & Co., Inc.
Said Company lists down several issues which may be boiled
to the following:
(a) Whether or not Judge Umali of the Tax Court below could
validly participate in the making of the decision;
(b) Whether or not Liddell & Co. Inc., and the Liddell Motors,
Inc. are (practically) identical corporations, the latter being
merely .the alter ego of the former;
(c) Whether or not, granting the identical nature of the
corporations, the assessment of tax liability, including the
surcharge thereon by the Court of Tax Appeals, is correct.
Undisputed Facts. The parties submitted a partial stipulation of
facts, each reserving the right to present additional evidence.

SO ORDERED.
Said undisputed facts are substantially as follows:
The petitioner, Liddell & Co. Inc., (Liddell & Co. for short) is a
domestic corporation establish in the Philippines on February

1, 1946, with an authorized capital of P100,000 divided into

1000 share at P100 each. Of this authorized capital, 196
shares valued at P19,600 were subscribed and paid by Frank
Liddell while the other four shares were in the name of Charles
Kurz, E.J. Darras, Angel Manzano and Julian Serrano at one
shares each. Its purpose was to engage in the business of
importing and retailing Oldsmobile and Chevrolet passenger
cars and GMC and Chevrolet trucks..

On March 8, 1949, stock dividends were again issued by

Liddell & Co. and in accordance with the agreements, Exhibits
A, B, and C, the stocks of said company stood as follows:
Name
No. of Shares
Amount

On January 31, 1947, with the limited paid-in capital of

P20,000, Liddell & Co. was able to declare a 90% stock
dividend after which declaration on, Frank Liddells holding in
the Company increased to 1,960 shares and the employees,
Charles Kurz E.J. Darras, Angel Manzano and Julian Serrano at
10 share each. The declaration of stock dividend was followed
by a resolution increasing the authorized capital of the
company to P1,000.000 which the Securities & Exchange
Commission approved on March 3, 1947. Upon such approval,
Frank Liddell subscribed to 3,000 additional shares, for which
he paid into the corporation P300,000 so that he had in his
own name 4,960 shares.

Per Cent
Frank Liddell
13,688
P1,368,800
72.00%
Irene Liddell

On May 24, 1957, Frank Liddell, on one hand and Messrs. Kurz,
Darras, Manzano and Serrano on the other, executed an
agreement (Exhibit A) which was further supplemented by two
other agreements (Exhibits B and C) dated May 24, 1947 and
June 3, 1948, wherein Frank Liddell transferred (On June 7,
1948) to various employees of Liddell & Co. shares of stock.
At the annual meeting of stockholders of Liddell & Co. held on
March 9, 1948, a 100% stock dividend was declared, thereby
increasing the issued capital stock of aid corporation from
P1,000.000 to P 3,000,000 which increase was duly approved
by the Securities and Exchange Commission on June 7, 1948.
Frank Liddell subscribed to and paid 20% of the increase of
P400,000. He paid 25% thereof in the amount of P100,000 and
the balance of P3,000,000 was merely debited to Frank LiddellDrawing Account and credited to Subscribed Capital Stock on
December 11, 1948.

1
100
.01%
Mercedes Vecin
1
100
.01%

Charles Kurz

3.74%
E. Hasim

1,225
500
122,500
50,000
6.45%
E.J. Darras

2.64%
G. W. Kernot

1,225
500
122,500
50,000
6.45%
Angel Manzano

2.64%

1,150
19,000
115,000
P1,900,000
6.06%
100.00%
Julian Serrano
710

On November 15, 1948, in accordance with a resolution of a

special meeting of the Board of Directors of Liddell & Co., stock
dividends were again declared. As a result of said declaration
and in accordance with the agreements, Exhibits, A, B, and C,
the stockholdings in the company appeared to be:

71,000
Name

Charles Kurz
No. of Shares
2,215
Amount
221,500
Per Cent
Frank Liddell

7.381%
E.J. Darras

19,738
2,215
P1,973,800
221,500
65.791%
Irene Liddell

7.381%
Angel Manzano

1
1,810
100
181,000
.003%
Mercedes Vecin

6.031%
Julian Serrano

1
1,700
100
170,000
.003%

5.670%
E. Hasim
830
83,000
2.770%
G. W. Kernot
1,490
149,000

1946. Frank Liddell reserved the right to reapportion the 45%

dividends pertaining to the employees in the future for the
purpose of including such other faithful and efficient
employees as he may subsequently designate. (As a matter of
fact, Frank Liddell did so designate two additional employees
namely: E. Hasim and G. W. Kernot). It was for such inclusion of
future faithful employees that Exhibits B-1 and C were
executed. As per Exhibit C, dated May 13, 1948, the 45% given
by Frank Liddell to his employees was reapportioned as
follows: C. Kurz 12,%; E. J. Darras 12%; A. Manzano
l2%; J. Serrano 3-1/2%; G. W. Kernot 2%.
Exhibit B contains the employees' definition in detail of the
manner by which they sought to prevent their share-holdings
from being transferred to others who may be complete
strangers to the business on Liddell & Co.
From 1946 until November 22, 1948 when the purpose clause
of the Articles of Incorporation of Liddell & Co. Inc., was
amended so as to limit its business activities to importations of
automobiles and trucks, Liddell & Co. was engaged in business
as an importer and at the same time retailer of Oldsmobile and
Chevrolet passenger cars and GMC and Chevrolet trucks.

4.970%

30,000

On December 20, 1948, the Liddell Motors, Inc. was organized

and registered with the Securities and Exchange Commission
with an authorized capital stock of P100,000 of which P20,000
was subscribed and paid for as follows: Irene Liddell wife of
Frank Liddell 19,996 shares and Messrs. Marcial P. Lichauco, E.
K. Bromwell, V. E. del Rosario and Esmenia Silva, 1 share each.

P3,000,000
100.000%
On the basis of the agreement Exhibit A, (May, 1947) "40%" of
the earnings available for dividends accrued to Frank Liddell
although at the time of the execution of aid instrument, Frank
Liddell owned all of the shares in said corporation. 45%
accrued to the employees, parties thereto; Kurz 12-1/2%;
Darras 12-1/2%; A. Manzano 12-1/2% and Julian Serrano 71/2%. The agreement Exhibit A was also made retroactive to

At about the end of the year 1948, Messrs. Manzano, Kurz and
Kernot resigned from their respective positions in the Retail
Dept. of Liddell & Co. and they were taken in and employed by
Liddell Motors, Inc.: Kurz as Manager-Treasurer, Manzano as
General Sales Manager for cars and Kernot as General Sales
Manager for trucks.
Beginning January, 1949, Liddell & Co. stopped retailing cars
and trucks; it conveyed them instead to Liddell Motors, Inc.
which in turn sold the vehicles to the public with a steep markup. Since then, Liddell & Co. paid sales taxes on the basis of its

sales to Liddell Motors Inc. considering said sales as its original

sales.
Upon review of the transactions between Liddell & Co. and
Liddell Motors, Inc. the Collector of Internal Revenue
determined that the latter was but an alter ego of Liddell & Co.
Wherefore, he concluded, that for sales tax purposes, those
sales made by Liddell Motors, Inc. to the public were
considered as the original sales of Liddell & Co. Accordingly,
the Collector of Internal Revenue assessed against Liddell &
Co. a sales tax deficiency, including surcharges, in the amount
of P1,317,629.61. In the computation, the gross selling price of
Liddell Motors, Inc. to the general public from January 1, 1949
to September 15, 1950, was made the basis without deducting
from the selling price, the taxes already paid by Liddell & Co.
in its sales to the Liddell Motors Inc.
The Court of Tax Appeals upheld the position taken by the
Collector of Internal Revenue.
A. Judge Umali: Appellant urges the disqualification on of Judge
Roman M. Umali to participate in the decision of the instant
case because he was Chief of the Law Division, then Acting
Deputy Collector and later Chief Counsel of the Bureau of
Internal Revenue during the time when the assessment in
question was made.1 In refusing to disqualify himself despite
admission that had held the aforementioned offices, Judge
Umali stated that he had not in any way participated, nor
expressed any definite opinion, on any question raised by the
parties when this case was presented for resolution before the
said bureau. Furthermore, after careful inspection of the
records of the Bureau, he (Judge Umali as well as the other
members of the court below), had not found any indication
that he had expressed any opinion or made any decision that
would tend to disqualify him from participating in the
consideration of the case in the Tax Court.
At this juncture, it is well to consider that petitioner did not
question the truth of Judge Umali's statements. In view
thereof, this Tribunal is not inclined to disqualify said judge.
Moreover, in furtherance of the presumption of the judge's
moral sense of responsibility this Court has adopted, and now

here repeats, the ruling that the mere participation of a judge

in prior proceedings relating to the subject in the capacity of
an administrative official does not necessarily disqualify him
from acting as judge.2
Appellant also contends that Judge Umali signed the said
decision contrary to the provision of Section 13, Republic Act
No. 1125;3 that whereas the case was submitted for decision
of the Court of Tax Appeals on July 12, 1955, and the decision
of Associate Judge Luciano and Judge Nable were both signed
on August 11, 1955 (that is, on the last day of the 30-day
period provided for in Section 13, Republic Act No. 1125),
Judge Umali signed the decision August 31, 1955 or 20 days
after the lapse of the 30-day period allotted by law.
By analogy it may be said that inasmuch as in Republic Act No.
1125 (law creating the Court of Tax Appeals) like the law
governing the procedure in the court of Industrial Relations,
there is no provision invalidating decisions rendered after the
lapse of 30 days, the requirement of Section 13, Republic Act
No. 1125 should be construed as directory.4
Besides as pointed out by appellee, the third paragraph of
Section 13 of Republic Act No. 1125 (quoted in the margin)5
confirms this view; because in providing for two thirty-day
periods, the law means that decision may still be rendered
within the second period of thirty days (Judge Umali signed his
decision within that period).
B. Identity of the two corporations: On the question whether or
not Liddell Motors, Inc. is the alter ego of Liddell & Co. Inc., we
are fully convinced that Liddell & Co. is wholly owned by Frank
Liddell. As of the time of its organization, 98% of the capital
stock belonged to Frank Liddell. The 20% paid-up subscription
with which the company began its business was paid by him.
The subsequent subscriptions to the capital stock were made
by him and paid with his own money.
These stipulations and conditions appear in Exhibit A: (1) that
Frank Liddell had the authority to designate in the future the
employee who could receive earnings of the corporation; to
apportion among the stock holders the share in the profits; (2)

that all certificates of stock in the names of the employees

should be deposited with Frank Liddell duly indorsed in blank
by the employees concerned; (3) that each employee was
required to sign an agreement with the corporation to the
effect that, upon his death or upon his retirement or
separation for any cause whatsoever from the corporation, the
said corporation should, within a period of sixty days therefor,
have the absolute and exclusive option to purchase and
acquire the whole of the stock interest of the employees so
dying, resigning, retiring or separating.
These stipulations in our opinion attest to the fact that Frank
Liddell also owned it. He supplied the original his complete
control over the corporation.
As to Liddell Motors, Inc. we are fully persuaded that Frank
Liddell also owned it. He supplied the original capital funds.6 It
is not proven that his wife Irene, ostensibly the sole
incorporator of Liddell Motors, Inc. had money of her own to
pay for her P20,000 initial subscription.7 Her income in the
United States in the years 1943 and 1944 and the savings
therefrom could not be enough to cover the amount of
subscription, much less to operate an expensive trade like the
retail of motor vehicles. The alleged sale of her property in
Oregon might have been true, but the money received
therefrom was never shown to have been saved or deposited
so as to be still available at the time of the organization of the
Liddell Motors, Inc.
The evidence at hand also shows that Irene Liddell had scant
participation in the affairs of Liddell Motors, Inc. She could
hardly be said to possess business experience. The income tax
forms record no independent income of her own. As a matter
of fact, the checks that represented her salary and bonus from
Liddell Motors, Inc. found their way into the personal account
of Frank Liddell. Her frequent absences from the country
negate any active participation in the affairs of the Motors
company.
There are quite a series of conspicuous circumstances that
militate against the separate and distinct personality of Liddell
Motors, Inc. from Liddell & Co.8 We notice that the bulk of the

business of Liddell & Co. was channeled through Liddell

Motors, Inc. On the other hand, Liddell Motors, Inc. pursued no
activities except to secure cars, trucks, and spare parts from
Liddell & Co. Inc. and then sell them to the general public.
These sales of vehicles by Liddell & Co. to Liddell Motors, Inc.
for the most part were shown to have taken place on the same
day that Liddell Motors, Inc. sold such vehicles to the public.
We may even say that the cars and trucks merely touched the
hands of Liddell Motors, Inc. as a matter of formality.
During the first six months of 1949, Liddell & Co. issued ten
(10) checks payable to Frank Liddell which were deposited by
Frank Liddell in his personal account with the Philippine
National Bank. During this time also, he issued in favor of
Liddell Motors, Inc. six (6) checks drawn against his personal
account with the same bank. The checks issued by Frank
Liddell to the Liddell Motors, Inc. were significantly for the
most part issued on the same day when Liddell & Co. Inc.
issued the checks for Frank Liddell9 and for the same
amounts.
It is of course accepted that the mere fact that one or more
corporations are owned and controlled by a single stockholder
is not of itself sufficient ground for disregarding separate
corporate entities. Authorities10 support the rule that it is
lawful to obtain a corporation charter, even with a single
substantial stockholder, to engage in a specific activity, and
such activity may co-exist with other private activities of the
stockholder. If the corporation is a substantial one, conducted
lawfully and without fraud on another, its separate identity is
to be respected.
Accordingly, the mere fact that Liddell & Co. and Liddell
Motors, Inc. are corporations owned and controlled by Frank
Liddell directly or indirectly is not by itself sufficient to justify
the disregard of the separate corporate identity of one from
the other. There is, however, in this instant case, a peculiar
consequence of the organization and activities of Liddell
Motors, Inc.
Under the law in force at the time of its incorporation the sales
tax on original sales of cars (sections 184, 185 and 186 of the

National Internal Revenue Code), was progressive, i.e. 10% of

the selling price of the car if it did not exceed P5000, and 15%
of the price if more than P5000 but not more than P7000, etc.
This progressive rate of the sales tax naturally would tempt
the taxpayer to employ a way of reducing the price of the first
sale. And Liddell Motors, Inc. was the medium created by
Liddell & Co. to reduce the price and the tax liability.
Let us illustrate: a car with engine motor No. 212381 was sold
by Liddell & Co. Inc. to Liddell Motors, Inc. on January 17, 1948
for P4,546,000.00 including tax; the price of the car was
P4,133,000.23, the tax paid being P413.22, at 10%. And when
this car was later sold (on the same day) by Liddell Motors, Inc.
to P.V. Luistro for P5500, no more sales tax was paid.11 In this
price of P5500 was included the P413.32 representing taxes
paid by Liddell & Co. Inc. in the sale to Liddell Motors, Inc.
Deducting P413.32 representing taxes paid by Liddell & Co.,
Inc. the price of P5500, the balance of P5,087.68 would have
been the net selling price of Liddell & Co., Inc. to the general
public (had Liddell Motors, Inc. not participated and intervened
in the sale), and 15% sales tax would have been due. In this
transaction, P349.68 in the form of taxes was evaded. All the
other transactions (numerous) examined in this light will
inevitably reveal that the Government coffers had been
deprived of a sizeable amount of taxes.
As opined in the case of Gregory v. Helvering,12 "the legal
right of a taxpayer to decrease the amount of what otherwise
would be his taxes, or altogether avoid them by means which
the law permits, cannot be doubted." But, as held in another
case,13 "where a corporation is a dummy, is unreal or a sham
and serves no business purpose and is intended only as a
blind, the corporate form may be ignored for the law cannot
countenance a form that is bald and a mischievous fiction."
Consistently with this view, the United States Supreme
Court14 held that "a taxpayer may gain advantage of doing
business thru a corporation if he pleases, but the revenue
officers in proper cases, may disregard the separate corporate
entity where it serves but as a shield for tax evasion and treat
the person who actually may take the benefits of the
transactions as the person accordingly taxable."

Thus, we repeat: to allow a taxpayer to deny tax liability on

the ground that the sales were made through an other and
distinct corporation when it is proved that the latter is virtually
owned by the former or that they are practically one and the
same is to sanction a circumvention of our tax laws.15
C. Tax liability computation: In the Yutivo case16 the same
question involving the computation of the alleged deficiency
sales tax has been raised. In accordance with our ruling in said
case we hold as correctly stated by Judge Nable in his
concurring and dissenting opinion on this case, that the
deficiency sales tax should be based on the selling price
obtained by Liddell Motors, Inc. to the public AFTER
DEDUCTING THE TAX ALREADY PAID BY LIDDELL & CO., INC. in
its sales to Liddell Motors, Inc.
On the imposition of the 50% surcharge by reason of fraud, we
see that the transactions between Liddell Motors Inc. and
Liddell & Co., Inc. have always been embodied in proper
documents, constantly subject to inspection by the tax
authorities. Liddell & Co., Inc. have always made a full report
of its income and receipts in its income tax returns.
Paraphrasing our decision in the Yutivo case, we may now say,
in filing its return on the basis of its sales to Liddell Motors, Inc.
and not on those by the latter to the public, it cannot be held
that the Liddell & Co., Inc. deliberately made a false return for
the purpose of defrauding the government of its revenue, and
should suffer a 50% surcharge. But penalty for late payment
(25%) should be imposed.
In view of the foregoing, the decision appealed from is hereby
modified: Liddell & Co., Inc. is declared liable only for the
amount of P426,811.67 with 25% surcharge for late payment
and 6% interest thereon from the time the judgment becomes
final.
As it appears that, during the pendency of this litigation
appellant paid under protest to the Government the total
amount assessed by the Collector, the latter is hereby required
to return the excess to the petitioner. No costs.

original sales of Liddell & Co. hence the imposition of tax

deficiency.
Lidell Co. v. Collector of Internal Revenue
Facts: The case is an appeal from the decision of the Court of
Tax Appeals imposing a tax deficiency liability of
P1,317,629.61 on Liddell & Co., Inc.
The petitioner, Liddell & Co. Inc., (Liddell & Co. for short)
is a domestic corporation establish in the Philippines on
February 1, 1946. From 1946 until November 22, 1948 when
the purpose clause of the Articles of Incorporation of Liddell &
Co. Inc., was amended so as to limit its business activities to
importations of automobiles and trucks, Liddell & Co. was
engaged in business as an importer and at the same time
retailer of Oldsmobile and Chevrolet passenger cars and GMC
and Chevrolet trucks.
On December 20, 1948, the Liddell Motors, Inc. was
organized and registered with the Securities and Exchange
Commission with an authorized capital stock of P100,000 of
which P20,000 was subscribed and paid for as follows: Irene
Liddell wife of Frank Liddell 19,996 shares and Messrs. Marcial
P. Lichauco, E. K. Bromwell, V. E. del Rosario and Esmenia
Silva, 1 share each.
Beginning January, 1949, Liddell & Co. stopped retailing
cars and trucks; it conveyed them instead to Liddell Motors,
Inc. which in turn sold the vehicles to the public with a steep
mark-up. Since then, Liddell & Co. paid sales taxes on the
basis of its sales to Liddell Motors Inc. considering said sales as
its original sales.
The Collector of Internal Revenue argued that the Lidell
Motors, Inc. was but an alter ego of Liddell & Co. and
concluded that for sales tax purposes, those sales made by
Liddell Motors, Inc. to the public were considered as the

Issue: Whether or not Lidell Motors, Inc. is an alter ego of

Lidell & Co. making it liable for the said tax deficiency?
Held: The Court held that Lidell Motors, Inc. is an alter ego of
Lidell & Co. hence makin it liable for tax deficiency based on
the principle that to allow a taxpayer to deny tax liability on
the ground that the sales were made through an other and
distinct corporation when it is proved that the latter is virtually
owned by the former or that they are practically one and the
same is to sanction a circumvention of our tax laws which is
consistent with the view of the US Supreme Court stating in
one case that "a taxpayer may gain advantage of doing
business thru a corporation if he pleases, but the revenue
officers in proper cases, may disregard the separate corporate
entity where it serves but as a shield for tax evasion and treat
the person who actually may take the benefits of the
transactions as the person accordingly taxable."
The bulk of the business of Liddell & Co. was channeled
through Liddell Motors, Inc. On the other hand, Liddell Motors,
Inc. pursued no activities except to secure cars, trucks, and
spare parts from Liddell & Co. Inc. and then sell them to the
general public. These sales of vehicles by Liddell & Co. to
Liddell Motors, Inc. for the most part were shown to have taken
place on the same day that Liddell Motors, Inc. sold such
vehicles to the public. We may even say that the cars and
trucks merely touched the hands of Liddell Motors, Inc. as a
matter of formality.
The mere fact that Liddell & Co. and Liddell Motors, Inc.
are corporations owned and controlled by Frank Liddell directly
or indirectly is not by itself sufficient to justify the disregard of
the separate corporate identity of one from the other. There is,
however, in this instant case, a peculiar consequence of the
organization and activities of Liddell Motors, Inc.

Under the law in force at the time of its incorporation

the sales tax on original sales of cars (sections 184, 185 and
186 of the National Internal Revenue Code), was progressive,
i.e. 10% of the selling price of the car if it did not exceed
P5000, and 15% of the price if more than P5000 but not more
than P7000, etc. This progressive rate of the sales tax
naturally would tempt the taxpayer to employ a way of
reducing the price of the first sale. And Liddell Motors, Inc. was
the medium created by Liddell & Co. to reduce the price and
the tax liability.
In Lidell & Co.:
(1) Frank Liddell had the authority to designate in the future
the employee who could receive earnings of the corporation;
to apportion among the stock holders the share in the profits;
(2) that all certificates of stock in the names of the employees
should be deposited with Frank Liddell duly indorsed in blank
by the employees concerned;
(3) that each employee was required to sign an agreement
with the corporation to the effect that, upon his death or upon
his retirement or separation for any cause whatsoever from
the corporation, the said corporation should, within a period of
sixty days therefor, have the absolute and exclusive option to
purchase and acquire the whole of the stock interest of the
employees so dying, resigning, retiring or separating.
As to Liddell Motors, Inc Frank Lidell also owned it.
He supplied the original capital funds. It is not proven
that his wife Irene, ostensibly the sole incorporator of Liddell
Motors, Inc. had money of her own to pay for her P20,000
initial subscription. Her income in the United States in the
years 1943 and 1944 and the savings therefrom could not be
enough to cover the amount of subscription, much less to
operate an expensive trade like the retail of motor vehicles.

The alleged sale of her property in Oregon might have been

true, but the money received therefrom was never shown to
have been saved or deposited so as to be still available at the
time of the organization of the Liddell Motors, Inc.
The evidence at hand also shows that Irene Liddell had
scant participation in the affairs of Liddell Motors, Inc. She
could hardly be said to possess business experience. The
income tax forms record no independent income of her own.
As a matter of fact, the checks that represented her salary and
bonus from Liddell Motors, Inc. found their way into the
personal account of Frank Liddell. Her frequent absences from
the country negate any active participation in the affairs of the
Motors company.

No. 80830, against the Commissioner of Internal Revenue and

the
Meralco
Securities
Corporation
to
compel
the
Commissioner to impose the alleged deficiency tax
assessment on the Meralco Securities Corporation and to
award to him the corresponding informer's reward under the
provisions of R.A. 2338. Respondent judge granted the said
petition and thereafter, denied the motions for reconsideration
filed by all the parties.
Issues: (1) Whether or not respondent judge has jurisdiction
over the subject matter of the case; (2) Whether or not
respondent heirs of Maniago are entitled to informers reward.

3. Meralco Securities Corporation vs. Savellano

GR No. L-36181

October 23, 1982

Facts: On May 22, 1967, the late Juan G. Maniago (substituted

in these proceedings by his wife and children) submitted to
petitioner Commissioner of Internal Revenue confidential
denunciation against the Meralco Securities Corporation for
tax evasion for having paid income tax only on 25 % of the
dividends it received from the Manila Electric Co. for the years
1962-1966, thereby allegedly shortchanging the government
of income tax due from 75% of the said dividends.
Petitioner Commissioner of Internal Revenue caused the
investigation of the denunciation after which he found and
held that no deficiency corporate income tax was due from the
Meralco Securities Corporation on the dividends it received
from the Manila Electric Co. and accordingly denied Maniago's
claim for informer's reward on a non-existent deficiency.
On August 28, 1970, Maniago filed a petition for mandamus,
and subsequently an amended petition for mandamus, in the
Court of First Instance of Manila, docketed therein as Civil Case

Held: (1) Respondent judge has no jurisdiction to take

cognizance of the case because the subject matter thereof
clearly falls within the scope of cases now exclusively within
the jurisdiction of the Court of Tax Appeals. Section 7 of
Republic Act No. 1125, enacted June 16, 1954, granted to the
Court of Tax Appeals exclusive appellate jurisdiction to review
by appeal, among others, decisions of the Commissioner of
Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other matters arising
under the National Internal Revenue Code or other law or part
of law administered by the Bureau of Internal Revenue. The
law transferred to the Court of Tax Appeals jurisdiction over all
cases involving said assessments previously cognizable by
courts of first instance, and even those already pending in said
courts. The question of whether or not to impose a deficiency
tax assessment on Meralco Securities Corporation undoubtedly
comes within the purview of the words "disputed assessments"
or of "other matters arising under the National Internal
Revenue Code . . . .In the case of Blaquera vs. Rodriguez, et al,
this Court ruled that "the determination of the correctness or
incorrectness of a tax assessment to which the taxpayer is not
agreeable, falls within the jurisdiction of the Court of Tax
Appeals and not of the Court of First Instance, for under the

provisions of Section 7 of Republic Act No. 1125, the Court of

Tax Appeals has exclusive appellate jurisdiction to review, on
appeal, any decision of the Collector of Internal Revenue in
cases involving disputed assessments and other matters
arising under the National Internal Revenue Code or other law
or part of law administered by the Bureau of Internal
Revenue."
(2) Considering then that respondent judge may not order by
mandamus the Commissioner to issue the assessment against
Meralco Securities Corporation when no such assessment has
been found to be due, no deficiency taxes may therefore be
assessed and collected against the said corporation. Since no
taxes are to be collected, no informer's reward is due to
private respondents as the informer's heirs. Informer's reward
is contingent upon the payment and collection of unpaid or
deficiency taxes. An informer is entitled by way of reward only
to a percentage of the taxes actually assessed and collected.
Since no assessment, much less any collection, has been
made in the instant case, respondent judge's writ for the
Commissioner to pay respondents 25% informer's reward is
gross error and without factual nor legal basis.
Petitions granted and the questioned decision of respondent
judge and order reversed and set aside.
15. Rafael Arsenio S. Dizon, v. CTA and CIR
G.R. No. 140944; April 30, 2008
Facts: Jose P. Fernandez died in November 7, 1987. Thereafter,
a petition for the probate of his will was filed. The probate
court appointed Atty. Rafael Arsenio P. Dizon as administrator
of the Estate of Jose Fernandez.
An estate tax return was filed later on which showed ZERO
estate tax liability. BIR thereafter issued a deficiency estate
tax assessment, demanding payment of Php 66.97 million as

deficiency estate tax. This was subsequently reduced by CTA

to Php 37.42 million. The CA affirmed the CTAs ruling, hence,
the instant petition.
The petitioner claims that in as much as the valid claims of
creditors against the Estate are in excess of the gross estate,
no estate tax was due. On the other hand, respondents argue
that since the claims of the Estates creditors have been
condoned, such claims may no longer be deducted from the
gross estate of the decedent.
Issue: Whether the actual claims of creditors may be fully
allowed as deductions from the gross estate of Jose despite the
fact that the said claims were reduced or condoned through
compromise agreements entered into by the Estate with its
creditors
Held: YES. Following the US Supreme Courts ruling in Ithaca
Trust Co. v. United States, the Court held that post-death
developments are not material in determining the amount of
deduction. This is because estate tax is a tax imposed on the
act of transferring property by will or intestacy and, because
the act on which the tax is levied occurs at a discrete time,
i.e., the instance of death, the net value of the property
transferred should be ascertained, as nearly as possible, as of
the that time. This is the date-of-death valuation rule.
The Court, in adopting the date-of-death valuation principle,
explained that: First. There is no law, nor do we discern any
legislative intent in our tax laws, which disregards the date-ofdeath valuation principle and particularly provides that postdeath developments must be considered in determining the
net value of the estate. It bears emphasis that tax burdens are
not to be imposed, nor presumed to be imposed, beyond what
the statute expressly and clearly imports, tax statutes being
construed strictissimi juris against the government. Second.
Such construction finds relevance and consistency in our Rules
on Special Proceedings wherein the term "claims" required to

be presented against a decedent's estate is generally

construed to mean debts or demands of a pecuniary nature
which could have been enforced against the deceased in his
lifetime, or liability contracted by the deceased before his
death. Therefore, the claims existing at the time of death are
significant to, and should be made the basis of, the
determination of allowable deductions.

The petitioner, Liddell & Co. Inc., (Liddell & Co. for short)
is a domestic corporation establish in the Philippines on
February 1, 1946. From 1946 until November 22, 1948 when
the purpose clause of the Articles of Incorporation of Liddell &
Co. Inc., was amended so as to limit its business activities to
importations of automobiles and trucks, Liddell & Co. was
engaged in business as an importer and at the same time
retailer of Oldsmobile and Chevrolet passenger cars and GMC
and Chevrolet trucks.
On December 20, 1948, the Liddell Motors, Inc. was
organized and registered with the Securities and Exchange
Commission with an authorized capital stock of P100,000 of
which P20,000 was subscribed and paid for as follows: Irene
Liddell wife of Frank Liddell 19,996 shares and Messrs. Marcial
P. Lichauco, E. K. Bromwell, V. E. del Rosario and Esmenia
Silva, 1 share each.
Beginning January, 1949, Liddell & Co. stopped retailing
cars and trucks; it conveyed them instead to Liddell Motors,
Inc. which in turn sold the vehicles to the public with a steep
mark-up. Since then, Liddell & Co. paid sales taxes on the
basis of its sales to Liddell Motors Inc. considering said sales as
its original sales.
The Collector of Internal Revenue argued that the Lidell
Motors, Inc. was but an alter ego of Liddell & Co. and
concluded that for sales tax purposes, those sales made by
Liddell Motors, Inc. to the public were considered as the
original sales of Liddell & Co. hence the imposition of tax
deficiency.

Lidell Co. v. Collector of Internal Revenue

Facts: The case is an appeal from the decision of the Court of
Tax Appeals imposing a tax deficiency liability of
P1,317,629.61 on Liddell & Co., Inc.

Issue: Whether or not Lidell Motors, Inc. is an alter ego of

Lidell & Co. making it liable for the said tax deficiency?
Held: The Court held that Lidell Motors, Inc. is an alter ego of
Lidell & Co. hence makin it liable for tax deficiency based on
the principle that to allow a taxpayer to deny tax liability on

the ground that the sales were made through an other and
distinct corporation when it is proved that the latter is virtually
owned by the former or that they are practically one and the
same is to sanction a circumvention of our tax laws which is
consistent with the view of the US Supreme Court stating in
one case that "a taxpayer may gain advantage of doing
business thru a corporation if he pleases, but the revenue
officers in proper cases, may disregard the separate corporate
entity where it serves but as a shield for tax evasion and treat
the person who actually may take the benefits of the
transactions as the person accordingly taxable."
The bulk of the business of Liddell & Co. was channeled
through Liddell Motors, Inc. On the other hand, Liddell Motors,
Inc. pursued no activities except to secure cars, trucks, and
spare parts from Liddell & Co. Inc. and then sell them to the
general public. These sales of vehicles by Liddell & Co. to
Liddell Motors, Inc. for the most part were shown to have taken
place on the same day that Liddell Motors, Inc. sold such
vehicles to the public. We may even say that the cars and
trucks merely touched the hands of Liddell Motors, Inc. as a
matter of formality.
The mere fact that Liddell & Co. and Liddell Motors, Inc.
are corporations owned and controlled by Frank Liddell directly
or indirectly is not by itself sufficient to justify the disregard of
the separate corporate identity of one from the other. There is,
however, in this instant case, a peculiar consequence of the
organization and activities of Liddell Motors, Inc.
Under the law in force at the time of its incorporation
the sales tax on original sales of cars (sections 184, 185 and
186 of the National Internal Revenue Code), was progressive,
i.e. 10% of the selling price of the car if it did not exceed
P5000, and 15% of the price if more than P5000 but not more
than P7000, etc. This progressive rate of the sales tax
naturally would tempt the taxpayer to employ a way of

reducing the price of the first sale. And Liddell Motors, Inc. was
the medium created by Liddell & Co. to reduce the price and
the tax liability.
In Lidell & Co.:
(1) Frank Liddell had the authority to designate in the future
the employee who could receive earnings of the corporation;
to apportion among the stock holders the share in the profits;
(2) that all certificates of stock in the names of the employees
should be deposited with Frank Liddell duly indorsed in blank
by the employees concerned;
(3) that each employee was required to sign an agreement
with the corporation to the effect that, upon his death or upon
his retirement or separation for any cause whatsoever from
the corporation, the said corporation should, within a period of
sixty days therefor, have the absolute and exclusive option to
purchase and acquire the whole of the stock interest of the
employees so dying, resigning, retiring or separating.
As to Liddell Motors, Inc Frank Lidell also owned it.
He supplied the original capital funds. It is not proven
that his wife Irene, ostensibly the sole incorporator of Liddell
Motors, Inc. had money of her own to pay for her P20,000
initial subscription. Her income in the United States in the
years 1943 and 1944 and the savings therefrom could not be
enough to cover the amount of subscription, much less to
operate an expensive trade like the retail of motor vehicles.
The alleged sale of her property in Oregon might have been
true, but the money received therefrom was never shown to
have been saved or deposited so as to be still available at the
time of the organization of the Liddell Motors, Inc.
The evidence at hand also shows that Irene Liddell had
scant participation in the affairs of Liddell Motors, Inc. She
could hardly be said to possess business experience. The

income tax forms record no independent income of her own.

As a matter of fact, the checks that represented her salary and
bonus from Liddell Motors, Inc. found their way into the
personal account of Frank Liddell. Her frequent absences from
the country negate any active participation in the affairs of the
Motors company.