ABAKADA GURO PARTY LIST VS PURISIMA

G.R. No. 166715 August 14, 2008

ABAKADA GURO PARTY LIST (formerly AASJS) OFFICERS/MEMBERS SAMSON S. ALCANTARA,
1

ED VINCENT S. ALBANO, ROMEO R. ROBISO, RENE B. GOROSPE and EDWIN R. SANDOVAL,

petitioners,
vs.
HON. CESAR V. PURISIMA, in his capacity as Secretary of Finance, HON. GUILLERMO L. PARAYNO,
JR., in his capacity as Commissioner of the Bureau of Internal Revenue, and HON. ALBERTO D. LINA, in
his Capacity as Commissioner of Bureau of Customs, respondents.

Facts:
Petitioners seeks to prevent respondents from implementing and enforcing Republic Act (RA) 9335. R.A. 9335
was enacted to optimize the revenue-generation capability and collection of the Bureau of Internal Revenue
(BIR) and the Bureau of Customs (BOC). The law intends to encourage BIR and BOC officials and employees
to exceed their revenue targets by providing a system of rewards and sanctions through the creation of a
Rewards and Incentives Fund (Fund) and a Revenue Performance Evaluation Board (Board). It covers all
officials and employees of the BIR and the BOC with at least six months of service, regardless of employment
status.
Petitioners, invoking their right as taxpayers filed this petition challenging the constitutionality of RA 9335, a
tax reform legislation. They contend that, by establishing a system of rewards and incentives, the law
“transforms the officials and employees of the BIR and the BOC into mercenaries and bounty hunters” as they
will do their best only in consideration of such rewards. Thus, the system of rewards and incentives invites
corruption and undermines the constitutionally mandated duty of these officials and employees to serve the
people with utmost responsibility, integrity, loyalty and efficiency.
Petitioners also claim that limiting the scope of the system of rewards and incentives only to officials and
employees of the BIR and the BOC violates the constitutional guarantee of equal protection. There is no valid
basis for classification or distinction as to why such a system should not apply to officials and employees of all
other government agencies.
In addition, petitioners assert that the law unduly delegates the power to fix revenue targets to the President as
it lacks a sufficient standard on that matter. While Section 7(b) and (c) of RA 9335 provides that BIR and BOC
officials may be dismissed from the service if their revenue collections fall short of the target by at least 7.5%,
the law does not, however, fix the revenue targets to be achieved. Instead, the fixing of revenue targets has
been delegated to the President without sufficient standards. It will therefore be easy for the President to fix an
unrealistic and unattainable target in order to dismiss BIR or BOC personnel.
Finally, petitioners assail the creation of a congressional oversight committee on the ground that it violates the
doctrine of separation of powers. While the legislative function is deemed accomplished and completed upon
the enactment and approval of the law, the creation of the congressional oversight committee permits
legislative participation in the implementation and enforcement of the law.

Issues:

1. Whether or not the scope of the system of rewards and incentives limitation to officials and employees of
the BIR and the BOC violates the constitutional guarantee of equal protection.
2. Whether or not there was an unduly delegation of power to fix revenue targets to the President.
3. Whether or not the doctrine of separation of powers has been violated in the creation of a congressional
oversight committee.

Discussions:

1. The Court referred to the ruling of Victoriano v. Elizalde Rope Workers’ Union, which states that “the
guaranty of equal protection of the laws is not a guaranty of equality in the application of the laws upon all
citizens of the State.

The equal protection of the laws clause of the Constitution allows classification. Classification in law, as in the
other departments of knowledge or practice, is the grouping of things in speculation or practice because they
agree with one another in certain particulars. A law is not invalid because of simple inequality. The very idea
of classification is that of inequality, so that it goes without saying that the mere fact of inequality in no
manner determines the matter of constitutionality.
The Court has held that the standard is satisfied if the classification or distinction is based on a reasonable
foundation or rational basis and is not palpably arbitrary. “

2. To determine the validity of delegation of legislative power, it needs the following: (1) the completeness
test and (2) the sufficient standard test. A law is complete when it sets forth therein the policy to be
executed, carried out or implemented by the delegate. It lays down a sufficient standard when it provides
adequate guidelines or limitations in the law to map out the boundaries of the delegate’s authority and
prevent the delegation from running riot. To be sufficient, the standard must specify the limits of the
delegate’s authority, announce the legislative policy and identify the conditions under which it is to be
implemented.
3. Based from the ruling under Macalintal v. Commission on Elections, it is clear that congressional
oversight is not unconstitutional per se, meaning, it neither necessarily constitutes an encroachment on the
executive power to implement laws nor undermines the constitutional separation of powers. Rather, it is
integral to the checks and balances inherent in a democratic system of government. It may in fact even
enhance the separation of powers as it prevents the over-accumulation of power in the executive branch.

Rulings:

1. The equal protection clause recognizes a valid classification, that is, a classification that has a reasonable
foundation or rational basis and not arbitrary. With respect to RA 9335, its expressed public policy is the
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 optimization of the revenue-generation capability and collection of the BIR and the BOC. Since the
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subject of the law is the revenue- generation capability and collection of the BIR and the BOC, the
incentives and/or sanctions provided in the law should logically pertain to the said agencies. Moreover, the
law concerns only the BIR and the BOC because they have the common distinct primary function of
generating revenues for the national government through the collection of taxes, customs duties, fees and
charges.

Both the BIR and the BOC principally perform the special function of being the instrumentalities through
which the State exercises one of its great inherent functions – taxation. Indubitably, such substantial distinction
is germane and intimately related to the purpose of the law. Hence, the classification and treatment accorded to
the BIR and the BOC under R.A. 9335 fully satisfy the demands of equal protection.

2. R.A. 9335 adequately states the policy and standards to guide the President in fixing revenue targets and
the implementing agencies in carrying out the provisions of the law under Sec 2 and 4 of the said Act.
Moreover, the Court has recognized the following as sufficient standards: “public interest,” “justice and
equity,” “public convenience and welfare” and “simplicity, economy and welfare.” In this case, the
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declared policy of optimization of the revenue-generation capability and collection of the BIR and the
BOC is infused with public interest.
3. The court declined jurisdiction on this case. The Joint Congressional Oversight Committee in RA 9335
was created for the purpose of approving the implementing rules and regulations (IRR) formulated by the
DOF, DBM, NEDA, BIR, BOC and CSC. On May 22, 2006, it approved the said IRR. From then on, it
became functus officio and ceased to exist. Hence, the issue of its alleged encroachment on the executive
function of implementing and enforcing the law may be considered moot and academic

2. G.R. No. 144104 LUNG CENTER OF THE PHIL v. ORTIGAS 717 SCRA 601
LUNG CENTER OF THE PHIL v. ORTIGAS
G.R. No. 144104
June 29, 2004
717 SCRA 601

FACTS: The petitioner Lung Center of the Philippines is the registered owner of a parcel of land located at
Quezon City and erected in the middle is a hospital known as the Lung Center of the Philippines.

The petitioner accepts paying and non-paying patients. It also renders medical services to out-patients,
both paying and non-paying, as well as private leases.

Both the land and the hospital building of the petitioner were assessed for real property taxes in the
amount of P4,554,860 by the City Assessor of Quezon City.

The petitioner filed a Claim for Exemption5 from real property taxes with the City Assessor, stating that it
is a charitable institution within the context of Section 28(3), Article VI of the 1987 Constitution.
ISSUES: (1) Whether the petitioner is a charitable institution within the context of Presidential Decree No.
1823 and the 1973 and 1987 Constitutions and Section 234(b) of Republic Act No. 7160; and (2) whether
the real properties of the petitioner are exempt from real property taxes.

RULING: (1) Yes. The Court held that the petitioner is a charitable institution within the context of the
1973 and 1987 Constitutions.

The test whether an enterprise is charitable or not is whether it exists to carry out a purpose reorganized
in law as charitable or whether it is maintained for gain, profit, or private advantage. Hence, the Lung
Center was organized for the welfare and benefit of the Filipino people.

As a general principle, a charitable institution does not lose its character as such and its exemption from
taxes simply because it derives income from paying patients, so long as the money received is devoted to
charitable objects and no money inures to the private benefit of the persons managing or operating the
institution. As well as the reason of donation in the form of subsidies granted by the government.

(2) No. Those portions of its real property that are leased to private entities are not exempt from real
property taxes as these are not actually, directly and exclusively used for charitable purposes.

The petitioner failed to prove that the entirety of its real property is actually, directly and exclusively used
for charitable purposes. While portions of the hospital are used for the treatment of patients and the
dispensation of medical services to them, whether paying or non-paying, other portions thereof are being
leased to private individuals for their clinics and a canteen.

Hence, the portions of the land leased to private entities as well as those parts of the hospital leased to
private individuals are not exempt from such taxes. On the other hand, the portions of the land occupied
by the hospital and portions of the hospital used for its patients, whether paying or non-paying, are
exempt from real property taxes.

3. PETRON vs. TIANGCO G.R. No. 158881 April 16, 2008 Taxation, LGC
JANUARY 16, 2018
FACTS:
Petron maintains a depot or bulk plant at the Navotas Fishport Complex, and through that depot, it has
engaged in the selling of diesel fuels to vessels used in commercial fishing in and around Manila Bay.
Petron received a letter from the office of Navotas Mayor, respondent Toby Tiangco, wherein the
corporation was assessed taxes relative to the figures covering sale of diesel, stating the total amount due
of P6,259,087.62, a figure derived from the gross sales of the depot from 1997 to 2001. The computation
sheets that were attached to the letter made reference to Ordinance 92-03, or the New Navotas Revenue
Code (Navotas Revenue Code), though such enactment was not cited in the letter itself.
Petron filed with the Malabon RTC a Complaint for Cancellation of Assessment for Deficiency Taxes with
Prayer for the Issuance of a Temporary Restraining Order (TRO) and/or Preliminary Injunction. The RTC
rendered its Decision dismissing Petron’s complaint and ordering the payment of the assessed amount.
Petron has opted to assail the RTC Decision directly before this Court since the matter at hand involves
pure questions of law, a characterization conceded by the RTC Decision itself. Particularly, the controversy
hinges on the correct interpretation of Section 133(h) of the LGC, and the applicability of Article 232 (h)
of the IRR.
Section 133(h) of the LGC reads as follows:
Sec. 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless otherwise
provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and Barangays shall
not extend to the levy of the following:
xxx
(h) Excise taxes on articles enumerated under the National Internal Revenue Code, as amended, and taxes,
fees or charges on petroleum products;

ISSUE:
Whether a local government unit is empowered under the Local Government Code to impose business
taxes on persons or entities engaged in the sale of petroleum products.

RULING:
Evidently, Section 133 prescribes the limitations on the capacity of local government units to exercise
their taxing powers otherwise granted to them under the LGC. Apparently, paragraph (h) of the Section
mentions two kinds of taxes which cannot be imposed by local government units, namely: excise taxes on
articles enumerated under the NIRC; and taxes, fees or charges on petroleum products.
The power of a municipality to impose business taxes is provided for in Section 143 of the LGC. Under the
provision, a municipality is authorized to impose business taxes on a whole host of business activities.
Suffice it to say, unless there is another provision of law which states otherwise, Section 143, broad in
scope as it is, would undoubtedly cover the business of selling diesel fuels, or any other petroleum product
for that matter.
As earlier observed, Section 133(h) provides two kinds of taxes which cannot be imposed by local
government units: excise taxes on articles enumerated under the NIRC, as amended; and taxes, fees or
charges on petroleum products. There is no doubt that among the excise taxes on articles enumerated
under the NIRC are those levied on petroleum products, per Section 148 of the NIRC.
The power of a municipality to impose business taxes derives from Section 143 of the Code that
specifically enumerates several types of business on which it may impose taxes, including manufacturers,
wholesalers, distributors, dealers of any article of commerce of whatever nature; those engaged in the
export or commerce of essential commodities; retailers; contractors and other independent contractors;
banks and financial institutions; and peddlers engaged in the sale of any merchandise or article of
commerce. This obviously broad power is further supplemented by paragraph (h) of Section 143 which
authorizes the sanggunian to impose taxes on any other businesses not otherwise specified under
Section 143 which the sanggunian concerned may deem proper to tax.

This ability of local government units to impose business or other local taxes is ultimately rooted in the
1987 Constitution. Section 5, Article X assures that [e]ach local government unit shall have the power to
create its own sources of revenues and to levy taxes, fees and charges, though the power is subject to
such guidelines and limitations as the Congress may provide. There is no doubt that following the 1987
Constitution and the Code, the fiscal autonomy of local government units has received greater affirmation
than ever. Previous decisions that have been skeptical of the viability, if not the wisdom of reposing fiscal
autonomy to local government units have fallen by the wayside.
Respondents cite our declaration in City Government of San Pablo v. Reyes that following the 1987
Constitution the rule thenceforth in interpreting statutory provisions on municipal fiscal powers, doubts
will have to be resolved in favor of municipal corporations. Such policy is also echoed in Section 5(a) of
the Code, which states that any provision on a power of a local government unit shall be liberally
interpreted in its favor, and in case of doubt, any question thereon shall be resolved in favor of devolution
of powers and of the lower local government unit. But somewhat conversely, Section 5(b) then proceeds
to assert that [i]n case of doubt, any tax ordinance or revenue measure shall be construed strictly against
the local government unit enacting it, and liberally in favor of the taxpayer. And this latter qualification
has to be respected as a constitutionally authorized limitation which Congress has seen fit to provide.
Evidently, local fiscal autonomy should not necessarily translate into abject deference to the power of
local government units to impose taxes
4. [G.R. No. 125508. July 19, 2000]
CHINA BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, COMMISSIONER OF INTERNAL
REVENUE and COURT OF TAX APPEALS, respondents.
DECISION
VITUG, J.:
The Commissioner of Internal Revenue denied the deduction from gross income of "securities becoming
worthless" claimed by China Banking Corporation (CBC). The Commissioners disallowance was sustained
by the Court of Tax Appeals ("CTA"). When the ruling was appealed to the Court of Appeals ("CA"), the
appellate court upheld the CTA. The case is now before us on a Petition for Review on Certiorari.
Sometime in 1980, petitioner China Banking Corporation made a 53% equity investment in the First CBC
Capital (Asia) Ltd., a Hongkong subsidiary engaged in financing and investment with "deposit-taking"
function. The investment amounted to P16,227,851.80, consisting of 106,000 shares with a par Value of
P100 per share.
In the course of the regular examination of the financial books and investment portfolios of petitioner
conducted by Bangko Sentral in 1986, it was shown that First CBC Capital (Asia), Ltd., has become
insolvent. With the approval of Bangko Sentral, petitioner wrote-off as being worthless its investment in
First CBC Capital (Asia), Ltd., in its 1987 Income Tax Return and treated it as a bad debt or as an ordinary
loss deductible from its gross income.
Respondent Commissioner of internal Revenue disallowed the deduction and assessed petitioner for
income tax deficiency in the amount of P8,533,328.04, inclusive of surcharge, interest and compromise
penalty. The disallowance of the deduction was made on the ground that the investment should not be
classified as being "worthless" and that, although the Hongkong Banking Commissioner had revoked the
license of First CBC Capital as a "deposit-taping" company, the latter could still exercise, however, its
financing and investment activities. Assuming that the securities had indeed become worthless,
respondent Commissioner of Internal Revenue held the view that they should then be classified as "capital
loss," and not as a bad debt expense there being no indebtedness to speak of between petitioner and its
subsidiary.
Petitioner contested the ruling of respondent Commissioner before the CTA. The tax court sustained the
Commissioner, holding that the securities had not indeed become worthless and ordered petitioner to
pay its deficiency income tax for 1987 of P8,533,328.04 plus 20% interest per annum until fully paid. When
the decision was appealed to the Court of Appeals, the latter upheld the CTA. In its instant petition for
review on certiorari, petitioner bank assails the CA decision.
The petition must fail.
The claim of petitioner that the shares of stock in question have become worthless is based on a Profit
and Loss Account for the Year-End 31 December 1987, and the recommendation of Bangko Sentral that
the equity investment be written-off due to the insolvency of the subsidiary. While the matter may not
be indubitable (considering that certain classes of intangibles, like franchises and goodwill, are not always
given corresponding values in financial statements1, there may really be no need, however, to go of length
into this issue since, even to assume the worthlessness of the shares, the deductibility thereof would still
be nil in this particular case. At all events, the Court is not prepared to hold that both the tax court and
the appellate court are utterly devoid of substantial basis for their own factual findings.
Subject to certain exceptions, such as the compensation income of individuals and passive income subject
to final tax, as well as income of non-resident aliens and foreign corporations not engaged in trade or
business in the Philippines, the tax on income is imposed on the net income allowing certain specified
deductions from gross income to be claimed by the taxpayer. Among the deductible items allowed by the
National Internal Revenue Code ("NIRC") are bad debts and losses.2
An equity investment is a capital, not ordinary, asset of the investor the sale or exchange of which results
in either a capital gain or a capital loss. The gain or the loss is ordinary when the property sold or
exchanged is not a capital asset.3 A capital asset is defined negatively in Section 33(1) of the NIRC; viz:
(1) Capital assets. - The term 'capital assets' means property held by the taxpayer (whether or not
connected with his trade or business), but does not include stock in trade of the taxpayer or other property
of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the
taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his
trade or business, or property used in the trade or business, of a character which is subject to the
allowance for depreciation provided in subsection (f) of section twenty-nine; or real property used in the
trade or business of the taxpayer.
Thus, shares of stock; like the other securities defined in Section 20(t)4 of the NIRC, would be ordinary
assets only to a dealer in securities or a person engaged in the purchase and sale of, or an active trader
(for his own account) in, securities. Section 20(u) of the NIRC defines a dealer in securities thus:
"(u) The term 'dealer in securities' means a merchant of stocks or securities, whether an individual,
partnership or corporation, with an established place of business, regularly engaged in the purchase of
securities and their resale to customers; that is, one who as a merchant buys securities and sells them to
customers with a view to the gains and profits that may be derived therefrom."
In the hands, however, of another who holds the shares of stock by way of an investment, the shares to
him would be capital assets. When the shares held by such investor become worthless, the loss is
deemed to be a loss from the sale or exchange of capital assets. Section 29(d)(4)(B) of the NIRC states:
"(B) Securities becoming worthless. - If securities as defined in Section 20 become worthless during the
tax" year and are capital assets, the loss resulting therefrom shall, for the purposes of his Title, be
considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets."
The above provision conveys that the loss sustained by the holder of the securities, which are capital
assets (to him), is to be treated as a capital loss as if incurred from a sale or exchange transaction. A
capital gain or a capital loss normally requires the concurrence of two conditions for it to result: (1) There
is a sale or exchange; and (2) the thing sold or exchanged is a capital asset. When securities become
worthless, there is strictly no sale or exchange but the law deems the loss anyway to be "a loss from the
sale or exchange of capital assets.5A similar kind of treatment is given, by the NIRC on the retirement of
certificates of indebtedness with interest coupons or in registered form, short sales and options to buy or
sell property where no sale or exchange strictly exists.6 In these cases, the NIRC dispenses, in effect, with
the standard requirement of a sale or exchange for the application of the capital gain and loss provisions
of the code.
Capital losses are allowed to be deducted only to the extent of capital gains, i.e., gains derived from the
sale or exchange of capital assets, and not from any other income of the taxpayer.
In the case at bar, First CBC Capital (Asia), Ltd., the investee corporation, is a subsidiary corporation of
petitioner bank whose shares in said investee corporation are not intended for purchase or sale but as an
investment. Unquestionably then, any loss therefrom would be a capital loss, not an ordinary loss, to the
investor.
Section 29(d)(4)(A), of the NIRC expresses:
"(A) Limitations. - Losses from sales or exchanges of capital assets shall be allowed only to the extent
provided in Section 33."
The pertinent provisions of Section 33 of the NIRC referred to in the aforesaid Section 29(d)(4)(A), read:
"Section 33. Capital gains and losses. -
xxx xxx x x x.
"(c) Limitation on capital losses. - Losses from sales or exchange of capital assets shall be allowed only
to the extent of the gains from such sales or exchanges. If a bank or trust company incorporated under
the laws of the Philippines, a substantial part of whose business is the receipt of deposits, sells any bond,
debenture, note, or certificate or other evidence of indebtedness issued by any corporation (including
one issued by a government or political subdivision thereof), with interest coupons or in registered form,
any loss resulting from such sale shall not be subject to the foregoing limitation an shall not be included
in determining the applicability of such limitation to other losses.
The exclusionary clause found in the foregoing text of the law does not include all forms of securities but
specifically covers only bonds, debentures, notes, certificates or other evidence of indebtedness, with
interest coupons or in registered form, which are the instruments of credit normally dealt with in the
usual lending operations of a financial institution. Equity holdings cannot come close to being, within the
purview of "evidence of indebtedness" under the second sentence of the aforequoted paragraph. Verily,
it is for a like thesis that the loss of petitioner bank in its equity in vestment in the Hongkong subsidiary
cannot also be deductible as a bad debt. The shares of stock in question do not constitute a loan extended
by it to its subsidiary (First CBC Capital) or a debt subject to obligatory repayment by the latter, essential
elements to constitute a bad debt, but a long term investment made by CBC.
One other item. Section 34(c)(1) of the NIRC , states that the entire amount of the gain or loss upon the
sale or exchange of property, as the case may be, shall be recognized. The complete text reads:
SECTION 34. Determination of amount of and recognition of gain or loss.-
"(a) Computation of gain or loss. - The gain from the sale or other disposition of property shall be the
excess of the amount realized therefrom over the basis or adjusted basis for determining gain and the loss
shall be the excess of the basis or adjusted basis for determining loss over the amount realized. The
amount realized from the sale or other disposition of property shall be to sum of money received plus the
fair market value of the property (other than money) received. (As amended by E.O. No. 37)
"(b) Basis for determining gain or loss from sale or disposition of property. - The basis of property shall be
- (1) The cost thereof in cases of property acquired on or before March 1, 1913, if such property was
acquired by purchase; or
"(2) The fair market price or value as of the date of acquisition if the same was acquired by inheritance;
or
"(3) If the property was acquired by gift the basis shall be the same as if it would be in the hands of the
donor or the last preceding owner by whom it was not acquired by gift, except that if such basis is greater
than the fair market value of the property at the time of the gift, then for the purpose of determining loss
the basis shall be such fair market value; or
"(4) If the property, other than capital asset referred to in Section 21 (e), was acquired for less than an
adequate consideration in money or moneys worth, the basis of such property is (i) the amount paid by
the transferee for the property or (ii) the transferor's adjusted basis at the time of the transfer whichever
is greater.
"(5) The basis as defined in paragraph (c) (5) of this section if the property was acquired in a transaction
where gain or loss is not recognized under paragraph (c) (2) of this section. (As amended by E.O. No. 37)
(c) Exchange of property.
"(1) General rule.- Except as herein provided, upon the sale or exchange of property, the entire amount
of the gain or loss, as the case may be, shall be recognized.
"(2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation
(a) a corporation which is a party to a merger or consolidation exchanges property solely for stock in a
corporation which is, a party to the merger or consolidation, (b) a shareholder exchanges stock in a
corporation which is a party to the merger or consolidation solely for the stock in another corporation
also a party to the merger or consolidation, or (c) a security holder of a corporation which is a party to the
merger or consolidation exchanges his securities in such corporation solely for stock or securities in
another corporation, a party to the merger or consolidation.
"No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange
for stock in such corporation of which as a result of such exchange said person, alone or together with
others, not exceeding four persons, gains control of said corporation: Provided, That stocks issued for
services shall not be considered as issued in return of property."
The above law should be taken within context on the general subject of the determination, and
recognition of gain or loss; it is not preclusive of, let alone renders completely inconsequential, the more
specific provisions of the code. Thus, pursuant, to the same section of the law, no such recognition shall
be made if the sale or exchange is made in pursuance of a plan of corporate merger or consolidation or,
if as a result of an exchange of property for stocks, the exchanger, alone or together with others not
exceeding four, gains control of the corporation.7 Then, too, how the resulting gain might be taxed, or
whether or not the loss would be deductible and how, are matters properly dealt with elsewhere in
various other sections of the NIRC.8 At all events, it may not be amiss to once again stress that the basic
rule is still that any capital loss can be deducted only from capital gains under Section 33(c) of the NIRC.
In sum -
(a) The equity investment in shares of stock held by CBC of approximately 53% in its Hongkong subsidiary,
the First CBC Capital (Asia), Ltd., is not an indebtedness, and it is a capital, not an ordinary, asset.9
(b) Assuming that the equity investment of CBC has indeed become "worthless," the loss sustained is a
capital, not an ordinary, loss.10 (c) The capital loss sustained by CBC can only be deducted from capital
gains if any derived by it during the same taxable year that the securities have become "worthless."11

5. Philex Mining Corp. v. Commissioner of Internal Revenue

G.R. No. 148187 April 16, 2008
Ynares-Santiago, J.
FACTS:

 Philex Mining Corp. entered into an agreement with Baguio Gold Mining Co. for the former to
manage and operate the latter’s
mining claim, known as the Sto. Nino Mine. The parties’ agreement was denominated as “Power
of Attorney” which provides
inter alia:
4. Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold) shall make available
to the MANAGERS
(Philex Mining) up to ELEVEN MILLION PESOS (P11,000,000.00), in such amounts as from time to
time may be required
by the MANAGERS within the said 3-year period, for use in the MANAGEMENT of the STO. NINO
MINE. The said
ELEVEN MILLION PESOS (P11,000,000.00) shall be deemed, for internal audit purposes, as the
owner’s account in the Sto.
Nino PROJECT. Any part of any income of the PRINCIPAL from the STO. NINO MINE, which is left
with the Sto. Nino
PROJECT, shall be added to such owner’s account.
5. Whenever the MANAGERS shall deem it necessary and convenient in connection with the
MANAGEMENT of the
STO. NINO MINE, they may transfer their own funds or property to the Sto. Nino PROJECT, in
accordance with the
following arrangements:
(a) The properties shall be appraised and, together with the cash, shall be carried by the Sto.
Nino PROJECT as a special
fund to be known as the MANAGERS’ account.
(b) The total of the MANAGERS’ account shall not exceed P11,000,000.00, except with
prior approval of the
PRINCIPAL; provided, however, that if the compensation of the MANAGERS as herein provided
cannot be paid in cash from
the Sto. Nino PROJECT, the amount not so paid in cash shall be added to the MANAGERS’ account.
(c) The cash and property shall not thereafter be withdrawn from the Sto. Nino PROJECT
until termination of this
Agency.
(d) The MANAGERS’ account shall not accrue interest. Since it is the desire of the PRINCIPAL
to extend to the
MANAGERS the benefit of subsequent appreciation of property, upon a projected termination of
this Agency, the ratio which
the MANAGERS’ account has to the owner’s account will be determined, and the corresponding
proportion of the entire assets
of the STO. NINO MINE, excluding the claims, shall be transferred to the MANAGERS, except that
such transferred assets
shall not include mine development, roads, buildings, and similar property which will be
valueless, or of slight value, to the
MANAGERS. The MANAGERS can, on the other hand, require at their option that property
originally transferred by them to
the Sto. Nino PROJECT be re-transferred to them. Until such assets are transferred to the
MANAGERS, this Agency shall
remain subsisting.
xxxx
12. The compensation of the MANAGER shall be fifty per cent (50%) of the net profit of the
Sto. Nino PROJECT before
income tax. It is understood that the MANAGERS shall pay income tax on their compensation,
while the PRINCIPAL shall
pay income tax on the net profit of the Sto. Nino PROJECT after deduction therefrom of the
MANAGERS’ compensation.

 Philex Mining made advances of cash and property in accordance with paragraph 5 of the
agreement. However, the mine
suffered continuing losses over the years which resulted to Philex Mining’s withdrawal as
manager of the mine and in the
eventual cessation of mine operations.

 The parties executed a “Compromise with Dation in Payment” wherein Baguio Gold admitted
an indebtedness to petitioner in
the amount of P179,394,000.00 and agreed to pay the same in three segments by first assigning
Baguio Gold’s tangible assets
to Philex Mining, transferring to the latter Baguio Gold’s equitable title in its Philodrill assets and
finally settling the remaining
liability through properties that Baguio Gold may acquire in the future.

 The parties executed an “Amendment to Compromise with Dation in Payment” where the
parties determined that Baguio
Gold’s indebtedness to petitioner actually amounted to P259,137,245.00, which sum included
liabilities of Baguio Gold to
other creditors that petitioner had assumed as guarantor. These liabilities pertained to
long-term loans amounting to
US$11,000,000.00 contracted by Baguio Gold from the Bank of America NT & SA and Citibank
N.A. This time, Baguio Gold
undertook to pay petitioner in two segments by first assigning its tangible assets for
P127,838,051.00 and then transferring its
equitable title in its Philodrill assets for P16,302,426.00. The parties then ascertained that Baguio
Gold had a remaining
outstanding indebtedness to petitioner in the amount of P114,996,768.00.

 Philex Mining wrote off in its 1982 books of account the remaining outstanding indebtedness
of Baguio Gold by charging
P112,136,000.00 to allowances and reserves that were set up in 1981 and P2,860,768.00 to the
1982 operations.

 In its 1982 annual income tax return, Philex Mining deducted from its gross income the amount
of P112,136,000.00 as “loss
on settlement of receivables from Baguio Gold against reserves and allowances.” However, the
BIR disallowed the amount as
deduction for bad debt and assessed petitioner a deficiency income tax of P62,811,161.39. Philex
Mining protested before the
BIR arguing that the deduction must be allowed since all requisites for a bad debt deduction were
satisfied, to wit: (a) there
was a valid and existing debt; (b) the debt was ascertained to be worthless; and (c) it was charged
off within the taxable year
when it was determined to be worthless. BIR denied petitioner’s protest. It held that the alleged
debt was not ascertained to be
worthless since Baguio Gold remained existing and had not filed a petition for bankruptcy; and
that the deduction did not
consist of a valid and subsisting debt considering that, under the management contract,
petitioner was to be paid 50% of the
project’s net profit.
ISSUE: WON the parties entered into a contract of agency coupled with an interest which is not
revocable at will
HELD: No. An examination of the “Power of Attorney” reveals that a partnership or joint venture
was indeed intended by the
parties.

 In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by the
principal due to an interest of a
third party that depends upon it, or the mutual interest of both principal and agent. In this case,
the non-revocation or non-
withdrawal under paragraph 5(c) applies to the advances made by petitioner who is supposedly
the agent and not the principal
under the contract. Thus, it cannot be inferred from the stipulation that the parties’ relation
under the agreement is one of
agency coupled with an interest and not a partnership.

 Neither can paragraph 16 of the agreement be taken as an indication that the relationship of
the parties was one of agency and
not a partnership. Although the said provision states that “this Agency shall be irrevocable while
any obligation of the
PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the MANAGERS’ account,” it
does not necessarily
follow that the parties entered into an agency contract coupled with an interest that cannot be
withdrawn by Baguio Gold.
 The main object of the “Power of Attorney” was not to confer a power in favor of petitioner to
contract with third persons on
behalf of Baguio Gold but to create a business relationship between petitioner and Baguio Gold,
in which the former was to
manage and operate the latter’s mine through the parties’ mutual contribution of material
resources and industry. The essence
of an agency, even one that is coupled with interest, is the agent’s ability to represent his principal
and bring about business
relations between the latter and third persons.

 The strongest indication that petitioner was a partner in the Sto. Nino Mine is the fact that it
would receive 50% of the net
profits as “compensation” under paragraph 12 of the agreement. The entirety of the parties’
contractual stipulations simply
leads to no other conclusion than that petitioner’s “compensation” is actually its share in the
income of the joint venture.
Article 1769 (4) of the Civil Code explicitly provides that the “receipt by a person of a share in the
profits of a business is
prima facie evidence that he is a partner in the business.
6.

COMMISSIONER OF INTERNAL REVENUE, G.R. No. 177279

Petitioner,
Present:

CARPIO MORALES, J.,

- versus - Chairperson,
BRION,
BERSAMIN,
VILLARAMA, JR., and
SERENO, JJ.

HON. RAUL M. GONZALEZ, Secretary of

Justice, L. M. CAMUS ENGINEERING
Promulgated:
CORPORATION (represented by LUIS M.
CAMUS and LINO D. MENDOZA),
Respondents. October 13, 2010
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

VILLARAMA, JR., J.:

This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, assailing the Decision10 dated October 31, 2006 and Resolution10 dated March 6, 2007
of the Court of Appeals (CA) in CA-G.R. SP No. 93387 which affirmed the Resolution10 dated
December 13, 2005 of respondent Secretary of Justice in I.S. No. 2003-774 for violation of Sections
254 and 255 of the National Internal Revenue Code of 1997 (NIRC).
The facts as culled from the records:
Pursuant to Letter of Authority (LA) No. 00009361 dated August 25, 2000 issued by then
Commissioner of Internal Revenue (petitioner) Dakila B. Fonacier, Revenue Officers Remedios C.
Advincula, Jr., Simplicio V. Cabantac, Jr., Ricardo L. Suba, Jr. and Aurelio Agustin T. Zamora
supervised by Section Chief Sixto C. Dy, Jr. of the Tax Fraud Division (TFD), National Office,
conducted a fraud investigation for all internal revenue taxes to ascertain/determine the tax
liabilities of respondent L. M. Camus Engineering Corporation (LMCEC) for the taxable years 1997,
1998 and 1999.10 The audit and investigation against LMCEC was precipitated by the information
provided by an informer that LMCEC had substantial underdeclared income for the said period.
For failure to comply with the subpoena duces tecum issued in connection with the tax fraud
investigation, a criminal complaint was instituted by the Bureau of Internal Revenue (BIR) against
LMCEC on January 19, 2001 for violation of Section 266 of the NIRC (I.S. No. 00-956 of the Office of
the City Prosecutor of Quezon City).10
Based on data obtained from an informer and various clients of LMCEC,10 it was discovered that
LMCEC filed fraudulent tax returns with substantial underdeclarations of taxable income for the
years 1997, 1998 and 1999. Petitioner thus assessed the company of total deficiency taxes
amounting to P430,958,005.90 (income tax - P318,606,380.19 and value-added tax [VAT] -
P112,351,625.71) covering the said period. The Preliminary Assessment Notice (PAN) was
received by LMCEC on February 22, 2001.10
LMCECs alleged underdeclared income was summarized by petitioner as follows:

Year Income Income Undeclared Percentage of

Per ITR Per Investigation Income Underdeclaration

1997 96,638,540.00 283,412,140.84 186,733,600.84 193.30%

1998 86,793,913.00 236,863,236.81 150,069,323.81 172.90%

1999 88,287,792.00 251,507,903.13 163,220,111.13 184.90%10

In view of the above findings, assessment notices together with a formal letter of demand dated
August 7, 2002 were sent to LMCEC through personal service on October 1, 2002.10 Since the
company and its representatives refused to receive the said notices and demand letter, the
revenue officers resorted to constructive service10 in accordance with Section 3, Revenue
Regulations (RR) No. 12-9910.
On May 21, 2003, petitioner, through then Commissioner Guillermo L. Parayno, Jr., referred to
the Secretary of Justice for preliminary investigation its complaint against LMCEC, Luis M. Camus
and Lino D. Mendoza, the latter two were sued in their capacities as President and Comptroller,
respectively. The case was docketed as I.S. No. 2003-774. In the Joint Affidavit executed by the
revenue officers who conducted the tax fraud investigation, it was alleged that despite the
receipt of the final assessment notice and formal demand letter on October 1, 2002, LMCEC failed
and refused to pay the deficiency tax assessment in the total amount of P630,164,631.61,
inclusive of increments, which had become final and executory as a result of the said taxpayers
failure to file a protest thereon within the thirty (30)-day reglementary period.10
Camus and Mendoza filed a Joint Counter-Affidavit contending that LMCEC cannot be held liable
whatsoever for the alleged tax deficiency which had become due and demandable. Considering
that the complaint and its annexes all showed that the suit is a simple civil action for collection
and not a tax evasion case, the Department of Justice (DOJ) is not the proper forum for BIRs
complaint. They also assail as invalid the assessment notices which bear no serial numbers and
should be shown to have been validly served by an Affidavit of Constructive Service executed and
sworn to by the revenue officers who served the same. As stated in LMCECs letter-protest dated
December 12, 2002 addressed to Revenue District Officer (RDO) Clavelina S. Nacar of RD No. 40,
Cubao, Quezon City, the company had already undergone a series of routine examinations for
the years 1997, 1998 and 1999; under the NIRC, only one examination of the books of accounts
is allowed per taxable year.10
LMCEC further averred that it had availed of the Bureaus Tax Amnesty Programs (Economic
Recovery Assistance Payment [ERAP] Program and the Voluntary Assessment Program [VAP]) for
1998 and 1999; for 1997, its tax liability was terminated and closed under Letter of Termination10
dated June 1, 1999 issued by petitioner and signed by the Chief of the Assessment Division.10
LMCEC claimed it made payments of income tax, VAT and expanded withholding tax (EWT), as
follows:

TAXABLE AMOUNT OF TAXES

YEAR PAID

1997 Termination Letter Under EWT - P 6,000.00

Letter of Authority No. 174600
VAT -
Dated November 4, 1998
540,605.02
IT -
3,000.00
 1998 ERAP Program pursuant WC -
38,404.55
to RR #2-99
VAT -
61,635.40

1999 VAP Program pursuant IT -

878,495.28
to RR #8-2001
VAT -
1,324,317.0010

LMCEC argued that petitioner is now estopped from further taking any action against it and its
corporate officers concerning the taxable years 1997 to 1999. With the grant of immunity from
audit from the companys availment of ERAP and VAP, which have a feature of a tax amnesty, the
element of fraud is negated the moment the Bureau accepts the offer of compromise or payment
of taxes by the taxpayer. The act of the revenue officers in finding justification under Section 6(B)
of the NIRC (Best Evidence Obtainable) is misplaced and unavailing because they were not able
to open the books of the company for the second time, after the routine examination, issuance
of termination letter and the availment of ERAP and VAP. LMCEC thus maintained that unless
there is a prior determination of fraud supported by documents not yet incorporated in the
docket of the case, petitioner cannot just issue LAs without first terminating those previously
issued. It emphasized the fact that the BIR officers who filed and signed the Affidavit-Complaint
in this case were the same ones who appeared as complainants in an earlier case filed against
Camus for his alleged failure to obey summons in violation of Section 5 punishable under Section
266 of the NIRC of 1997 (I.S. No. 00-956 of the Office of the City Prosecutor of Quezon City). After
preliminary investigation, said case was dismissed for lack of probable cause in a Resolution
issued by the Investigating Prosecutor on May 2, 2001.10
LMCEC further asserted that it filed on April 20, 2001 a protest on the PAN issued by petitioner
for having no basis in fact and law. However, until now the said protest remains unresolved. As
to the alleged informant who purportedly supplied the confidential information, LMCEC believes
that such person is fictitious and his true identity and personality could not be produced. Hence,
this case is another form of harassment against the company as what had been found by the
Office of the City Prosecutor of Quezon City in I.S. No. 00-956. Said case and the present case
both have something to do with the audit/examination of LMCEC for taxable years 1997, 1998
and 1999 pursuant to LA No. 00009361.10
In the Joint Reply-Affidavit executed by the Bureaus revenue officers, petitioner disagreed with
the contention of LMCEC that the complaint filed is not criminal in nature, pointing out that
LMCEC and its officers Camus and Mendoza were being charged for the criminal offenses defined
and penalized under Sections 254 (Attempt to Evade or Defeat Tax) and 255 (Willful Failure to
Pay Tax) of the NIRC. This finds support in Section 205 of the same Code which provides for
administrative (distraint, levy, fine, forfeiture, lien, etc.) and judicial (criminal or civil action)
remedies in order to enforce collection of taxes. Both remedies may be pursued either
independently or simultaneously. In this case, the BIR decided to simultaneously pursue both
remedies and thus aside from this criminal action, the Bureau also initiated administrative
proceedings against LMCEC.10
On the lack of control number in the assessment notice, petitioner explained that such is a mere
office requirement in the Assessment Service for the purpose of internal control and monitoring;
hence, the unnumbered assessment notices should not be interpreted as irregular or anomalous.
Petitioner stressed that LMCEC already lost its right to file a protest letter after the lapse of the
thirty (30)-day reglementary period. LMCECs protest-letter dated December 12, 2002 to RDO
Clavelina S. Nacar, RD No. 40, Cubao, Quezon City was actually filed only on December 16, 2002,
which was disregarded by the petitioner for being filed out of time. Even assuming for the sake
of argument that the assessment notices were invalid, petitioner contended that such could not
affect the present criminal action,10 citing the ruling in the landmark case of Ungab v. Cusi, Jr.10
As to the Letter of Termination signed by Ruth Vivian G. Gandia of the Assessment Division,
Revenue Region No. 7, Quezon City, petitioner pointed out that LMCEC failed to mention that
the undated Certification issued by RDO Pablo C. Cabreros, Jr. of RD No. 40, Cubao, Quezon City
stated that the report of the 1997 Internal Revenue taxes of LMCEC had already been submitted
for review and approval of higher authorities. LMCEC also cannot claim as excuse from the
reopening of its books of accounts the previous investigations and examinations. Under Section
235 (a), an exception was provided in the rule on once a year audit examination in case of fraud,
irregularity or mistakes, as determined by the Commissioner. Petitioner explained that the
distinction between a Regular Audit Examination and Tax Fraud Audit Examination lies in the fact
that the former is conducted by the district offices of the Bureaus Regional Offices, the authority
emanating from the Regional Director, while the latter is conducted by the TFD of the National
Office only when instances of fraud had been determined by the petitioner.10
Petitioner further asserted that LMCECs claim that it was granted immunity from audit when it
availed of the VAP and ERAP programs is misleading. LMCEC failed to state that its availment of
ERAP under RR No. 2-99 is not a grant of absolute immunity from audit and investigation, aside
from the fact that said program was only for income tax and did not cover VAT and withholding
tax for the taxable year 1998. As for LMCECS availment of VAP in 1999 under RR No. 8-2001 dated
August 1, 2001 as amended by RR No. 10-2001 dated September 3, 2001, the company failed to
state that it covers only income tax and VAT, and did not include withholding tax. However,
LMCEC is not actually entitled to the benefits of VAP under Section 1 (1.1 and 1.2) of RR No. 10-
2001. As to the principle of estoppel invoked by LMCEC, estoppel clearly does not lie against the
BIR as this involved the exercise of an inherent power by the government to collect taxes.10
Petitioner also pointed out that LMCECs assertion correlating this case with I.S. No. 00-956 is
misleading because said case involves another violation and offense (Sections 5 and 266 of the
NIRC). Said case was filed by petitioner due to the failure of LMCEC to submit or present its books
of accounts and other accounting records for examination despite the issuance of subpoena
duces tecum against Camus in his capacity as President of LMCEC. While indeed a Resolution was
issued by Asst. City Prosecutor Titus C. Borlas on May 2, 2001 dismissing the complaint, the same
is still on appeal and pending resolution by the DOJ. The determination of probable cause in said
case is confined to the issue of whether there was already a violation of the NIRC by Camus in
not complying with the subpoena duces tecum issued by the BIR.10
Petitioner contended that precisely the reason for the issuance to the TFD of LA No. 00009361 by
the Commissioner is because the latter agreed with the findings of the investigating revenue
officers that fraud exists in this case. In the conduct of their investigation, the revenue officers
observed the proper procedure under Revenue Memorandum Order (RMO) No. 49-2000 wherein
it is required that before the issuance of a Letter of Authority against a particular taxpayer, a
preliminary investigation should first be conducted to determine if a prima facie case for tax fraud
exists. As to the allegedly unresolved protest filed on April 20, 2001 by LMCEC over the PAN, this
has been disregarded by the Bureau for being pro forma and having been filed beyond the 15-day
reglementary period. A subsequent letter dated April 20, 2001 was filed with the TFD and signed
by a certain Juan Ventigan. However, this was disregarded and considered a mere scrap of paper
since the said signatory had not shown any prior authorization to represent LMCEC. Even assuming
said protest letter was validly filed on behalf of the company, the issuance of a Formal Demand
Letter and Assessment Notice through constructive service on October 1, 2002 is deemed an
implied denial of the said protest. Lastly, the details regarding the informer being confidential, such
information is entitled to some degree of protection, including the identity of the informant against
LMCEC.10
In their Joint Rejoinder-Affidavit,10 Camus and Mendoza reiterated their argument that the
identity of the alleged informant is crucial to determine if he/she is qualified under Section 282
of the NIRC. Moreover, there was no assessment that has already become final, the validity of its
issuance and service has been put in issue being anomalous, irregular and oppressive. It is
contended that for criminal prosecution to proceed before assessment, there must be a prima
facie showing of a willful attempt to evade taxes. As to LMCECs availment of the VAP and ERAP
programs, the certificate of immunity from audit issued to it by the BIR is plain and simple, but
petitioner is now saying it has the right to renege with impunity from its undertaking. Though
petitioner deems LMCEC not qualified to avail of the benefits of VAP, it must be noted that if it is
true that at the time the petitioner filed I.S. No. 00-956 sometime in January 2001 it had already
in its custody that Confidential Information No. 29-2000 dated July 7, 2000, these revenue
officers could have rightly filed the instant case and would not resort to filing said criminal
complaint for refusal to comply with a subpoena duces tecum.
On September 22, 2003, the Chief State Prosecutor issued a Resolution10 finding no sufficient
evidence to establish probable cause against respondents LMCEC, Camus and Mendoza. It was
held that since the payments were made by LMCEC under ERAP and VAP pursuant to the
provisions of RR Nos. 2-99 and 8-2001 which were offered to taxpayers by the BIR itself, the latter
is now in estoppel to insist on the criminal prosecution of the respondent taxpayer. The voluntary
payments made thereunder are in the nature of a tax amnesty. The unnumbered assessment
notices were found highly irregular and thus their validity is suspect; if the amounts indicated
therein were collected, it is uncertain how these will be accounted for and if it would go to the
coffers of the government or elsewhere. On the required prior determination of fraud, the Chief
State Prosecutor declared that the Office of the City Prosecutor in I.S. No. 00-956 has already
squarely ruled that (1) there was no prior determination of fraud, (2) there was indiscriminate
issuance of LAs, and (3) the complaint was more of harassment. In view of such findings, any
ensuing LA is thus defective and allowing the collection on the assailed assessment notices would
already be in the context of a fishing expedition or witch-hunting. Consequently, there is nothing
to speak of regarding the finality of assessment notices in the aggregate amount of
P630,164,631.61.
Petitioner filed a motion for reconsideration which was denied by the Chief State Prosecutor.10
Petitioner appealed to respondent Secretary of Justice but the latter denied its petition for review
under Resolution dated December 13, 2005.10
The Secretary of Justice found that petitioners claim that there is yet no finality as to LMCECs
payment of its 1997 taxes since the audit report was still pending review by higher authorities, is
unsubstantiated and misplaced. It was noted that the Termination Letter issued by the
Commissioner on June 1, 1999 is explicit that the matter is considered closed. As for taxable year
1998, respondent Secretary stated that the record shows that LMCEC paid VAT and withholding
tax in the amount of P61,635.40 and P38,404.55, respectively. This eventually gave rise to the
issuance of a certificate of immunity from audit for 1998 by the Office of the Commissioner of
Internal Revenue. For taxable year 1999, respondent Secretary found that pursuant to earlier LA
No. 38633 dated July 4, 2000, LMCECs 1999 tax liabilities were still pending investigation for
which reason LMCEC assailed the subsequent issuance of LA No. 00009361 dated August 25, 2000
calling for a similar investigation of its alleged 1999 tax deficiencies when no final determination
has yet been arrived on the earlier LA No. 38633.10
On the allegation of fraud, respondent Secretary ruled that petitioner failed to establish the
existence of the following circumstances indicating fraud in the settlement of LMCECs tax
liabilities: (1) there must be intentional and substantial understatement of tax liability by the
taxpayer; (2) there must be intentional and substantial overstatement of deductions or
exemptions; and (3) recurrence of the foregoing circumstances. First, petitioner miserably failed
to explain why the assessment notices were unnumbered; second, the claim that the tax fraud
investigation was precipitated by an alleged informant has not been corroborated nor was it
clearly established, hence there is no other conclusion but that the Bureau engaged in a fishing
expedition; and furthermore, petitioners course of action is contrary to Section 235 of the NIRC
allowing only once in a given taxable year such examination and inspection of the taxpayers
books of accounts and other accounting records. There was no convincing proof presented by
petitioner to show that the case of LMCEC falls under the exceptions provided in Section 235.
Respondent Secretary duly considered the issuance of Certificate of Immunity from Audit and
Letter of Termination dated June 1, 1999 issued to LMCEC.10
Anent the earlier case filed against the same taxpayer (I.S. No. 00-956), the Secretary of Justice
found petitioner to have engaged in forum shopping in view of the fact that while there is still
pending an appeal from the Resolution of the City Prosecutor of Quezon City in said case,
petitioner hurriedly filed the instant case, which not only involved the same parties but also
similar substantial issues (the joint complaint-affidavit also alleged the issuance of LA No.
00009361 dated August 25, 2000). Clearly, the evidence of litis pendentia is present. Finally,
respondent Secretary noted that if indeed LMCEC committed fraud in the settlement of its tax
liabilities, then at the outset, it should have been discovered by the agents of petitioner, and
consequently petitioner should not have issued the Letter of Termination and the Certificate of
Immunity From Audit. Petitioner thus should have been more circumspect in the issuance of said
documents.10
Its motion for reconsideration having been denied, petitioner challenged the ruling of respondent
Secretary via a certiorari petition in the CA.
On October 31, 2006, the CA rendered the assailed decision10 denying the petition and
concurred with the findings and conclusions of respondent Secretary. Petitioners motion for
reconsideration was likewise denied by the appellate court.10 It appears that entry of judgment
was issued by the CA stating that its October 31, 2006 Decision attained finality on March 25,
2007.10 However, the said entry of judgment was set aside upon manifestation by the petitioner
that it has filed a petition for review before this Court subsequent to its receipt of the Resolution
dated March 6, 2007 denying petitioners motion for reconsideration on March 20, 2007.10
The petition is anchored on the following grounds:
I.
The Honorable Court of Appeals erroneously sustained the findings of the Secretary of Justice
who gravely abused his discretion by dismissing the complaint based on grounds which are not
even elements of the offenses charged.
II.
The Honorable Court of Appeals erroneously sustained the findings of the Secretary of Justice
who gravely abused his discretion by dismissing petitioners evidence, contrary to law.
III.
The Honorable Court of Appeals erroneously sustained the findings of the Secretary of Justice
who gravely abused his discretion by inquiring into the validity of a Final Assessment Notice which
has become final, executory and demandable pursuant to Section 228 of the Tax Code of 1997
for failure of private respondent to file a protest against the same.10
The core issue to be resolved is whether LMCEC and its corporate officers may be prosecuted for
violation of Sections 254 (Attempt to Evade or Defeat Tax) and 255 (Willful Failure to Supply
Correct and Accurate Information and Pay Tax).
Petitioner filed the criminal complaint against the private respondents for violation of the
following provisions of the NIRC, as amended:
SEC. 254. Attempt to Evade or Defeat Tax. Any person who willfully attempts in any manner to
evade or defeat any tax imposed under this Code or the payment thereof shall, in addition to
other penalties provided by law, upon conviction thereof, be punished by a fine of not less than
Thirty thousand pesos (P30,000) but not more than One hundred thousand pesos (P100,000) and
suffer imprisonment of not less than two (2) years but not more than four (4) years: Provided,
That the conviction or acquittal obtained under this Section shall not be a bar to the filing of a
civil suit for the collection of taxes.
SEC. 255. Failure to File Return, Supply Correct and Accurate Information, Pay Tax, Withhold and
Remit Tax and Refund Excess Taxes Withheld on Compensation. Any person required under this
Code or by rules and regulations promulgated thereunder to pay any tax, make a return, keep
any record, or supply any correct and accurate information, who willfully fails to pay such tax,
make such return, keep such record, or supply such correct and accurate information, or
withhold or remit taxes withheld, or refund excess taxes withheld on compensations at the time
or times required by law or rules and regulations shall, in addition to other penalties provided by
law, upon conviction thereof, be punished by a fine of not less than Ten thousand pesos (P10,000)
and suffer imprisonment of not less than one (1) year but not more than ten (10) years.

x x x x (Emphasis supplied.)
Respondent Secretary concurred with the Chief State Prosecutors conclusion that there is
insufficient evidence to establish probable cause to charge private respondents under the above
provisions, based on the following findings: (1) the tax deficiencies of LMCEC for taxable years
1997, 1998 and 1999 have all been settled or terminated, as in fact LMCEC was issued a
Certificate of Immunity and Letter of Termination, and availed of the ERAP and VAP programs;
(2) there was no prior determination of the existence of fraud; (3) the assessment notices are
unnumbered, hence irregular and suspect; (4) the books of accounts and other accounting
records may be subject to audit examination only once in a given taxable year and there is no
proof that the case falls under the exceptions provided in Section 235 of the NIRC; and (5)
petitioner committed forum shopping when it filed the instant case even as the earlier criminal
complaint (I.S. No. 00-956) dismissed by the City Prosecutor of Quezon City was still pending
appeal.
Petitioner argues that with the finality of the assessment due to failure of the private respondents
to challenge the same in accordance with Section 228 of the NIRC, respondent Secretary has no
jurisdiction and authority to inquire into its validity. Respondent taxpayer is thereby allowed to
do indirectly what it cannot do directly to raise a collateral attack on the assessment when even
a direct challenge of the same is legally barred. The rationale for dismissing the complaint on the
ground of lack of control number in the assessment notice likewise betrays a lack of awareness
of tax laws and jurisprudence, such circumstance not being an element of the offense. Worse,
the final, conclusive and undisputable evidence detailing a crime under our taxation laws is swept
under the rug so easily on mere conspiracy theories imputed on persons who are not even the
subject of the complaint.
We grant the petition.
There is no dispute that prior to the filing of the complaint with the DOJ, the report on the tax
fraud investigation conducted on LMCEC disclosed that it made substantial underdeclarations in
its income tax returns for 1997, 1998 and 1999. Pursuant to RR No. 12-99,10 a PAN was sent to
and received by LMCEC on February 22, 2001 wherein it was notified of the proposed assessment
of deficiency taxes amounting to P430,958,005.90 (income tax - P318,606,380.19 and VAT -
P112,351,625.71) covering taxable years 1997, 1998 and 1999.10 In response to said PAN, LMCEC
sent a letter-protest to the TFD, which denied the same on April 12, 2001 for lack of legal and
factual basis and also for having been filed beyond the 15-day reglementary period.10
As mentioned in the PAN, the revenue officers were not given the opportunity to examine
LMCECs books of accounts and other accounting records because its officers failed to comply
with the subpoena duces tecum earlier issued, to verify its alleged underdeclarations of income
reported by the Bureaus informant under Section 282 of the NIRC. Hence, a criminal complaint
was filed by the Bureau against private respondents for violation of Section 266 which provides:
SEC. 266. Failure to Obey Summons. Any person who, being duly summoned to appear to testify,
or to appear and produce books of accounts, records, memoranda, or other papers, or to furnish
information as required under the pertinent provisions of this Code, neglects to appear or to
produce such books of accounts, records, memoranda, or other papers, or to furnish such
information, shall, upon conviction, be punished by a fine of not less than Five thousand pesos
(P5,000) but not more than Ten thousand pesos (P10,000) and suffer imprisonment of not less
than one (1) year but not more than two (2) years.
It is clear that I.S. No. 00-956 involves a separate offense and hence litis pendentia is not
present considering that the outcome of I.S. No. 00-956 is not determinative of the issue as to
whether probable cause exists to charge the private respondents with the crimes of attempt to
evade or defeat tax and willful failure to supply correct and accurate information and pay tax
defined and penalized under Sections 254 and 255, respectively. For the crime of tax evasion in
particular, compliance by the taxpayer with such subpoena, if any had been issued, is irrelevant.
As we held in Ungab v. Cusi, Jr.,10 [t]he crime is complete when the [taxpayer] has x x x knowingly
and willfully filed [a] fraudulent [return] with intent to evade and defeat x x x the tax. Thus,
respondent Secretary erred in holding that petitioner committed forum shopping when it filed
the present criminal complaint during the pendency of its appeal from the City Prosecutors
dismissal of I.S. No. 00-956 involving the act of disobedience to the summons in the course of the
preliminary investigation on LMCECs correct tax liabilities for taxable years 1997, 1998 and 1999.
In the Details of Discrepancies attached as Annex B of the PAN,10 private respondents
were already notified that inasmuch as the revenue officers were not given the opportunity to
examine LMCECs books of accounts, accounting records and other documents, said revenue
officers gathered information from third parties. Such procedure is authorized under Section 5
of the NIRC, which provides:
SEC. 5. Power of the Commissioner to Obtain Information, and to Summon, Examine, and Take
Testimony of Persons. In ascertaining the correctness of any return, or in making a return when
none has been made, or in determining the liability of any person for any internal revenue tax,
or in collecting any such liability, or in evaluating tax compliance, the Commissioner is authorized:
(A) To examine any book, paper, record or other data which may be relevant or material to such
inquiry;
(B) To obtain on a regular basis from any person other than the person whose internal revenue
tax liability is subject to audit or investigation, or from any office or officer of the national and
local governments, government agencies and instrumentalities, including the Bangko Sentral ng
Pilipinas and government-owned or -controlled corporations, any information such as, but not
limited to, costs and volume of production, receipts or sales and gross incomes of taxpayers, and
the names, addresses, and financial statements of corporations, mutual fund companies,
insurance companies, regional operating headquarters of multinational companies, joint
accounts, associations, joint ventures or consortia and registered partnerships, and their
members;
(C) To summon the person liable for tax or required to file a return, or any officer or employee of
such person, or any person having possession, custody, or care of the books of accounts and
other accounting records containing entries relating to the business of the person liable for tax,
or any other person, to appear before the Commissioner or his duly authorized representative at
a time and place specified in the summons and to produce such books, papers, records, or other
data, and to give testimony;
(D) To take such testimony of the person concerned, under oath, as may be relevant or material
to such inquiry; x x x
x x x x (Emphasis supplied.)
Private respondents assertions regarding the qualifications of the informer of the Bureau deserve
scant consideration. We have held that the lack of consent of the taxpayer under investigation
does not imply that the BIR obtained the information from third parties illegally or that the
information received is false or malicious. Nor does the lack of consent preclude the BIR from
assessing deficiency taxes on the taxpayer based on the documents.10 In the same vein, herein
private respondents cannot be allowed to escape criminal prosecution under Sections 254 and
255 of the NIRC by mere imputation of a fictitious or disqualified informant under Section 282
simply because other than disclosure of the official registry number of the third party informer,
the Bureau insisted on maintaining the confidentiality of the identity and personal circumstances
of said informer.
Subsequently, petitioner sent to LMCEC by constructive service allowed under Section 3
of RR No. 12-99, assessment notice and formal demand informing the said taxpayer of the law
and the facts on which the assessment is made, as required by Section 228 of the NIRC.
Respondent Secretary, however, fully concurred with private respondents contention that the
assessment notices were invalid for being unnumbered and the tax liabilities therein stated have
already been settled and/or terminated.
We do not agree.
A notice of assessment is:
[A] declaration of deficiency taxes issued to a [t]axpayer who fails to respond to a Pre-Assessment
Notice (PAN) within the prescribed period of time, or whose reply to the PAN was found to be
without merit. The Notice of Assessment shall inform the [t]axpayer of this fact, and that the
report of investigation submitted by the Revenue Officer conducting the audit shall be given due
course.
The formal letter of demand calling for payment of the taxpayers deficiency tax or taxes shall
state the fact, the law, rules and regulations or jurisprudence on which the assessment is based,
otherwise the formal letter of demand and the notice of assessment shall be void.10
As it is, the formality of a control number in the assessment notice is not a requirement
for its validity but rather the contents thereof which should inform the taxpayer of the
declaration of deficiency tax against said taxpayer. Both the formal letter of demand and the
notice of assessment shall be void if the former failed to state the fact, the law, rules and
regulations or jurisprudence on which the assessment is based, which is a mandatory
requirement under Section 228 of the NIRC.
Section 228 of the NIRC provides that the taxpayer shall be informed in writing of the law and
the facts on which the assessment is made. Otherwise, the assessment is void. To implement the
provisions of Section 228 of the NIRC, RR No. 12-99 was enacted. Section 3.1.4 of the revenue
regulation reads:
3.1.4. Formal Letter of Demand and Assessment Notice. The formal letter of demand and
assessment notice shall be issued by the Commissioner or his duly authorized representative.
The letter of demand calling for payment of the taxpayers deficiency tax or taxes shall state
the facts, the law, rules and regulations, or jurisprudence on which the assessment is based,
otherwise, the formal letter of demand and assessment notice shall be void. The same shall be
sent to the taxpayer only by registered mail or by personal delivery. x x x.10 (Emphasis supplied.)
The Formal Letter of Demand dated August 7, 2002 contains not only a detailed computation of
LMCECs tax deficiencies but also details of the specified discrepancies, explaining the legal and
factual bases of the assessment. It also reiterated that in the absence of accounting records and
other documents necessary for the proper determination of the companys internal revenue tax
liabilities, the investigating revenue officers resorted to the Best Evidence Obtainable as provided
in Section 6(B) of the NIRC (third party information) and in accordance with the procedure laid
down in RMC No. 23-2000 dated November 27, 2000. Annex A of the Formal Letter of Demand
thus stated:
Thus, to verify the validity of the information previously provided by the informant, the assigned
revenue officers resorted to third party information. Pursuant to Section 5(B) of the NIRC of 1997,
access letters requesting for information and the submission of certain documents (i.e.,
Certificate of Income Tax Withheld at Source and/or Alphabetical List showing the income
payments made to L.M. Camus Engineering Corporation for the taxable years 1997 to 1999) were
sent to the various clients of the subject corporation, including but not limited to the following:
1. Ayala Land Inc.
2. Filinvest Alabang Inc.
3. D.M. Consunji, Inc.
4. SM Prime Holdings, Inc.
5. Alabang Commercial Corporation
6. Philam Properties Corporation
7. SM Investments, Inc.
8. Shoemart, Inc.
9. Philippine Securities Corporation
10. Makati Development Corporation
From the documents gathered and the data obtained therein, the substantial underdeclaration
as defined under Section 248(B) of the NIRC of 1997 by your corporation of its income had been
confirmed. x x x x10 (Emphasis supplied.)
In the same letter, Assistant Commissioner Percival T. Salazar informed private respondents that
the estimated tax liabilities arising from LMCECs underdeclaration amounted to P186,773,600.84
in 1997, P150,069,323.81 in 1998 and P163,220,111.13 in 1999. These figures confirmed that the
non-declaration by LMCEC for the taxable years 1997, 1998 and 1999 of an amount exceeding
30% income10 declared in its return is considered a substantial underdeclaration of income,
which constituted prima facie evidence of false or fraudulent return under Section 248(B)10 of
the NIRC, as amended.10
On the alleged settlement of the assessed tax deficiencies by private respondents,
respondent Secretary found the latters claim as meritorious on the basis of the Certificate of
Immunity From Audit issued on December 6, 1999 pursuant to RR No. 2-99 and Letter of
Termination dated June 1, 1999 issued by Revenue Region No. 7 Chief of Assessment Division
Ruth Vivian G. Gandia. Petitioner, however, clarified that the certificate of immunity from audit
covered only income tax for the year 1997 and does not include VAT and withholding taxes, while
the Letter of Termination involved tax liabilities for taxable year 1997 (EWT, VAT and income
taxes) but which was submitted for review of higher authorities as per the Certification of RD No.
40 District Officer Pablo C. Cabreros, Jr.10 For 1999, private respondents supposedly availed of
the VAP pursuant to RR No. 8-2001.
RR No. 2-99 issued on February 7, 1999 explained in its Policy Statement that considering
the scarcity of financial and human resources as well as the time constraints within which the
Bureau has to clean the Bureaus backlog of unaudited tax returns in order to keep updated and
be focused with the most current accounts in preparation for the full implementation of a
computerized tax administration, the said revenue regulation was issued providing for last
priority in audit and investigation of tax returns to accomplish the said objective without,
however, compromising the revenue collection that would have been generated from audit and
enforcement activities. The program named as Economic Recovery Assistance Payment (ERAP)
Program granted immunity from audit and investigation of income tax, VAT and percentage tax
returns for 1998. It expressly excluded withholding tax returns (whether for income, VAT, or
percentage tax purposes). Since such immunity from audit and investigation does not preclude
the collection of revenues generated from audit and enforcement activities, it follows that the
Bureau is likewise not barred from collecting any tax deficiency discovered as a result of tax fraud
investigations. Respondent Secretarys opinion that RR No. 2-99 contains the feature of a tax
amnesty is thus misplaced.
 Tax amnesty is a general pardon to taxpayers who want to start a clean tax slate. It also
gives the government a chance to collect uncollected tax from tax evaders without having to go
through the tedious process of a tax case.10 Even assuming arguendo that the issuance of RR No.
2-99 is in the nature of tax amnesty, it bears noting that a tax amnesty, much like a tax exemption,
is never favored nor presumed in law and if granted by statute, the terms of the amnesty like
that of a tax exemption must be construed strictly against the taxpayer and liberally in favor of
the taxing authority.10
For the same reason, the availment by LMCEC of VAP under RR No. 8-2001 as amended
by RR No. 10-2001, through payment supposedly made in October 29, 2001 before the said
program ended on October 31, 2001, did not amount to settlement of its assessed tax
deficiencies for the period 1997 to 1999, nor immunity from prosecution for filing fraudulent
return and attempt to evade or defeat tax. As correctly asserted by petitioner, from the express
terms of the aforesaid revenue regulations, LMCEC is not qualified to avail of the VAP granting
taxpayers the privilege of last priority in the audit and investigation of all internal revenue taxes
for the taxable year 2000 and all prior years under certain conditions, considering that first, it
was issued a PAN on February 19, 2001, and second, it was the subject of investigation as a result
of verified information filed by a Tax Informer under Section 282 of the NIRC duly recorded in the
BIR Official Registry as Confidential Information (CI) No. 29-200010 even prior to the issuance of
the PAN.
Section 1 of RR No. 8-2001 provides:
SECTION 1. COVERAGE. x x x
Any person, natural or juridical, including estates and trusts, liable to pay any of the above-cited
internal revenue taxes for the above specified period/s who, due to inadvertence or otherwise,
erroneously paid his internal revenue tax liabilities or failed to file tax return/pay taxes may avail
of the Voluntary Assessment Program (VAP), except those falling under any of the following
instances:
1.1 Those covered by a Preliminary Assessment Notice (PAN), Final Assessment Notice (FAN),
or Collection Letter issued on or before July 31, 2001; or
1.2 Persons under investigation as a result of verified information filed by a Tax Informer under
Section 282 of the Tax Code of 1997, duly processed and recorded in the BIR Official Registry
Book on or before July 31, 2001;
1.3 Tax fraud cases already filed and pending in courts for adjudication; and
x x x x (Emphasis supplied.)
Moreover, private respondents cannot invoke LMCECs availment of VAP to foreclose any
subsequent audit of its account books and other accounting records in view of the strong finding
of underdeclaration in LMCECs payment of correct income tax liability by more than 30% as
supported by the written report of the TFD detailing the facts and the law on which such finding
is based, pursuant to the tax fraud investigation authorized by petitioner under LA No. 00009361.
This conclusion finds support in Section 2 of RR No. 8-2001 as amended by RR No. 10-2001
provides:
SEC. 2. TAXPAYERS BENEFIT FROM AVAILMENT OF THE VAP. A taxpayer who has availed of the
VAP shall not be audited except upon authorization and approval of the Commissioner of Internal
Revenue when there is strong evidence or finding of understatement in the payment of taxpayers
correct tax liability by more than thirty percent (30%) as supported by a written report of the
appropriate office detailing the facts and the law on which such finding is based: Provided,
however, that any VAP payment should be allowed as tax credit against the deficiency tax due, if
any, in case the concerned taxpayer has been subjected to tax audit.
xxxx
Given the explicit conditions for the grant of immunity from audit under RR No. 2-99, RR No. 8-
2001 and RR No. 10-2001, we hold that respondent Secretary gravely erred in declaring that
petitioner is now estopped from assessing any tax deficiency against LMCEC after issuance of the
aforementioned documents of immunity from audit/investigation and settlement of tax
liabilities. It is axiomatic that the State can never be in estoppel, and this is particularly true in
matters involving taxation. The errors of certain administrative officers should never be allowed
to jeopardize the governments financial position.10
Respondent Secretarys other ground for assailing the course of action taken by petitioner in
proceeding with the audit and investigation of LMCEC -- the alleged violation of the general rule
in Section 235 of the NIRC allowing the examination and inspection of taxpayers books of
accounts and other accounting records only once in a taxable year -- is likewise untenable. As
correctly pointed out by petitioner, the discovery of substantial underdeclarations of income by
LMCEC for taxable years 1997, 1998 and 1999 upon verified information provided by an informer
under Section 282 of the NIRC, as well as the necessity of obtaining information from third parties
to ascertain the correctness of the return filed or evaluation of tax compliance in collecting taxes
(as a result of the disobedience to the summons issued by the Bureau against the private
respondents), are circumstances warranting exception from the general rule in Section 235.10
As already stated, the substantial underdeclared income in the returns filed by LMCEC for 1997,
1998 and 1999 in amounts equivalent to more than 30% (the computation in the final assessment
notice showed underdeclarations of almost 200%) constitutes prima facie evidence of fraudulent
return under Section 248(B) of the NIRC. Prior to the issuance of the preliminary and final notices
of assessment, the revenue officers conducted a preliminary investigation on the information
and documents showing substantial understatement of LMCECs tax liabilities which were
provided by the Informer, following the procedure under RMO No. 15-95.10 Based on the prima
facie finding of the existence of fraud, petitioner issued LA No. 00009361 for the TFD to conduct
a formal fraud investigation of LMCEC.10 Consequently, respondent Secretarys ruling that the
filing of criminal complaint for violation of Sections 254 and 255 of the NIRC cannot prosper
because of lack of prior determination of the existence of fraud, is bereft of factual basis and
contradicted by the evidence on record.
Tax assessments by tax examiners are presumed correct and made in good faith, and all
presumptions are in favor of the correctness of a tax assessment unless proven otherwise.10 We
have held that a taxpayers failure to file a petition for review with the Court of Tax Appeals within
the statutory period rendered the disputed assessment final, executory and demandable,
thereby precluding it from interposing the defenses of legality or validity of the assessment and
prescription of the Governments right to assess.10 Indeed, any objection against the assessment
should have been pursued following the avenue paved in Section 229 (now Section 228) of the
NIRC on protests on assessments of internal revenue taxes.10
Records bear out that the assessment notice and Formal Letter of Demand dated August 7, 2002
were duly served on LMCEC on October 1, 2002. Private respondents did not file a motion for
reconsideration of the said assessment notice and formal demand; neither did they appeal to the
Court of Tax Appeals. Section 228 of the NIRC10 provides the remedy to dispute a tax assessment
within a certain period of time. It states that an assessment may be protested by filing a request for
reconsideration or reinvestigation within 30 days from receipt of the assessment by the taxpayer.
No such administrative protest was filed by private respondents seeking reconsideration of the
August 7, 2002 assessment notice and formal letter of demand. Private respondents cannot
belatedly assail the said assessment, which they allowed to lapse into finality, by raising issues as to
its validity and correctness during the preliminary investigation after the BIR has referred the matter
for prosecution under Sections 254 and 255 of the NIRC.
As we held in Marcos II v. Court of Appeals10:
It is not the Department of Justice which is the government agency tasked to determine the
amount of taxes due upon the subject estate, but the Bureau of Internal Revenue, whose
determinations and assessments are presumed correct and made in good faith. The taxpayer has
the duty of proving otherwise. In the absence of proof of any irregularities in the performance
of official duties, an assessment will not be disturbed. Even an assessment based on estimates
is prima facie valid and lawful where it does not appear to have been arrived at arbitrarily or
capriciously. The burden of proof is upon the complaining party to show clearly that the
assessment is erroneous. Failure to present proof of error in the assessment will justify the
judicial affirmance of said assessment. x x x.
Moreover, these objections to the assessments should have been raised, considering the ample
remedies afforded the taxpayer by the Tax Code, with the Bureau of Internal Revenue and the
Court of Tax Appeals, as described earlier, and cannot be raised now via Petition for Certiorari,
under the pretext of grave abuse of discretion. The course of action taken by the petitioner
reflects his disregard or even repugnance of the established institutions for governance in the
scheme of a well-ordered society. The subject tax assessments having become final, executory
and enforceable, the same can no longer be contested by means of a disguised protest. In the
main, Certiorari may not be used as a substitute for a lost appeal or remedy. This judicial policy
becomes more pronounced in view of the absence of sufficient attack against the actuations of
government. (Emphasis supplied.)
The determination of probable cause is part of the discretion granted to the investigating
prosecutor and ultimately, the Secretary of Justice. However, this Court and the CA possess the
power to review findings of prosecutors in preliminary investigations. Although policy
considerations call for the widest latitude of deference to the prosecutors findings, courts should
never shirk from exercising their power, when the circumstances warrant, to determine whether
the prosecutors findings are supported by the facts, or by the law. In so doing, courts do not act
as prosecutors but as organs of the judiciary, exercising their mandate under the Constitution,
relevant statutes, and remedial rules to settle cases and controversies.10 Clearly, the power of
the Secretary of Justice to review does not preclude this Court and the CA from intervening and
exercising our own powers of review with respect to the DOJs findings, such as in the exceptional
case in which grave abuse of discretion is committed, as when a clear sufficiency or insufficiency
of evidence to support a finding of probable cause is ignored.10
WHEREFORE, the petition is GRANTED. The Decision dated October 31, 2006 and
Resolution dated March 6, 2007 of the Court of Appeals in CA-G.R. SP No. 93387 are hereby
REVERSED and SET ASIDE. The Secretary of Justice is hereby DIRECTED to order the Chief
State Prosecutor to file before the Regional Trial Court of Quezon City, National Capital Judicial
Region, the corresponding Information against L. M. Camus Engineering Corporation,
represented by its President Luis M. Camus and Comptroller Lino D. Mendoza, for Violation of
Sections 254 and 255 of the National Internal Revenue Code of 1997.
No costs.
SO ORDERED.

7.
G.R. No. 160949 April 4, 2011
COMMISSIONER OF INTERNAL REVENUE Petitioner,
vs.
PL MANAGEMENT INTERNATIONAL PHILIPPINES, INC., Respondent.
DECISION
BERSAMIN, J.:
How may the respondent taxpayer still recover its unutilized creditable withholding tax for
taxable year 1997 after its written claim for refund was not acted upon by the petitioner, whose
inaction was upheld by the Court of Tax Appeals (CTA) on the ground of the claim for tax refund
being already barred by prescription?
Nature of the Case
The inaction of petitioner Commissioner of Internal Revenue (Commissioner) on the
respondent's written claim for tax refund or tax credit impelled the latter to commence judicial
action for that purpose in the CTA. However, the CTA denied the claim on December 10, 2001 for
being brought beyond two years from the accrual of the claim.
On appeal, the Court of Appeals (CA) reversed the CTA's denial through the decision promulgated
in C.A.-G.R. Sp. No. 68461 on November 28, 2002, and directed the petitioner to refund the
unutilized creditable withholding tax to the respondent.1
Hence, the petitioner appeals.
Antecedents
In 1997, the respondent, a Philippine corporation, earned an income of ₱24,000,000.00 from its
professional services rendered to UEM-MARA Philippines Corporation (UMPC), from which
income UMPC withheld ₱1,200,000.00 as the respondent's withholding agent. 2
In its 1997 income tax return (ITR) filed on April 13, 1998, the respondent reported a net loss of
₱983,037.00, but expressly signified that it had a creditable withholding tax of ₱1,200,000.00 for
taxable year 1997 to be claimed as tax credit in taxable year 1998.3
On April 13, 1999, the respondent submitted its ITR for taxable year 1998, in which it declared a
net loss of ₱2,772,043.00. Due to its net-loss position, the respondent was unable to claim the
₱1,200,000.00 as tax credit.
On April 12, 2000, the respondent filed with the petitioner a written claim for the refund of the
₱1,200,000.00 unutilized creditable withholding tax for taxable year 1997. 4 However, the
petitioner did not act on the claim.
Ruling of the CTA
Due to the petitioner's inaction, the respondent filed a petition for review in the CTA (CTA Case
No. 6107) on April 14, 2000, thereby commencing its judicial action.
On December 10, 2001, the CTA denied the respondent's claim on the ground of prescription, 5
to wit:
Records reveal that Petitioner filed its Annual Income Tax Return for taxable year 1997 on April
13, 1998 (Exhibit "A") and its claim for refund with the BIR on April 12, 2000 (Exhibit "D" and No.
2 of the Statement of Admitted Facts and Issues). Several days thereafter, or on April 14, 2000,
Petitioner filed an appeal with this Court.
The aforementioned facts clearly show that the judicial claim for refund via this Petition for
Review was already filed beyond the two-year prescriptive period mandated by Sections 204 (C)
and 229 of the Tax Code xxx
xxx
As earlier mentioned, Petitioner filed its Annual ITR on April 13, 1998 and filed its judicial claim
for refund only on April 14, 2000 which is beyond the two-year period earlier discussed. The
aforequoted Sections 204 (C) and 229 of the Tax Code mandates that both the administrative
and judicial claims for refund must be filed within the two-year period, otherwise the taxpayer's
cause of action shall be barred by prescription. Unfortunately, this lapse on the part of Petitioner
proved fatal to its claim.
xxx
WHEREFORE, in view of the foregoing the Petition for Review is hereby DENIED due to
prescription.
Ruling of the CA
Aggrieved, the respondent appealed to the CA, assailing the correctness of the CTA's denial of its
judicial claim for refund on the ground of bar by prescription.
As earlier mentioned, the CA promulgated its decision on November 28, 2002, holding that the
two-year prescriptive period, which was not jurisdictional (citing Oral and Dental College v. Court
of Tax Appeal6and Commissioner of Internal Revenue v. Philippine American Life Insurance
Company7), might be suspended for reasons of equity.8 The CA thus disposed as follows:
WHEREFORE, the petition is partly GRANTED and the assailed CTA Decision partly ANNULLED.
Respondent Commissioner of Internal Revenue is hereby ordered to refund to petitioner PL
Management International Phils., Inc., the amount of ₱1,200,000.00 representing its unutilized
creditable withholding tax in taxable year 1997.9
The CA rejected the petitioner's motion for reconsideration.10
Issues
In this appeal, the petitioner insists that:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE TWO-YEAR PRESCRIPTIVE PERIOD
UNDER SECTION 229 OF THE TAX CODE IS NOT JURISDICTIONAL, THUS THE CLAIM FOR REFUND
OF RESPONDENT IS SUSPENDED FOR REASONS OF EQUITY.
II. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT'S JUDICIAL RIGHT TO CLAIM
FOR REFUND BROUGHT BEFORE THE COURT OF APPEALS ON APRIL 14, 2000 WAS ONE DAY LATE
ONLY.11
The petitioner argues that the decision of the CA suspending the running of the two-year period
set by Section 229 of the National Internal Revenue Code of 1997 (NIRC of 1997) on ground of
equity was erroneous and had no legal basis; that equity could not supplant or replace a clear
mandate of a law that was still in force and effect; that a claim for a tax refund or tax credit, being
in the nature of a tax exemption to be treated as in derogation of sovereign authority, must be
construed in strictissimi juris against the taxpayer; that the respondent's two-year prescriptive
period under Section 229 of the NIRC of 1997 commenced to run on April 13, 1998, the date it
filed its ITR for taxable year 1997; that by reckoning the period from April 13, 1998, the
respondent had only until April 12, 2000 within which to commence its judicial action for refund
with the CTA, the year 2000 being a leap year; that its filing of the judicial action on April 14, 2000
was already tardy; and that the factual findings of the CTA, being supported by substantial
evidence, should be accorded the highest respect.
In its comment, the respondent counters that it filed its judicial action for refund within the
statutory two-year period because the correct reckoning started from April 15, 1998, the last day
for the filing of the ITR for taxable year 1997; that the two-year prescriptive period was also not
jurisdictional and might be relaxed on equitable reasons; and that a disallowance of its claim for
refund would result in the unjust enrichment of the Government at its expense.1avvphi1
Ruling of the Court
We reverse and set aside the decision of the CA to the extent that it orders the petitioner to
refund to the respondent the ₱1,200,000.00 representing the unutilized creditable withholding
tax in taxable year 1997, but permit the respondent to apply that amount as tax credit in
succeeding taxable years until fully exhausted.
Section 76 of the NIRC of 1997 provides:
Section 76. Final Adjustment Return. - Every corporation liable to tax under Section 27 shall file
a final adjustment return covering the total taxable income for the preceding calendar or fiscal
year. If the sum of the quarterly tax payments made during the said taxable year is not equal to
the total tax due on the entire taxable income of that year the corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a refund of the excess estimated quarterly income taxes
paid, the refundable amount shown on its final adjustment return may be credited against the
estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years.
Once the option to carry-over and apply the excess quarterly income tax against income tax due
for the taxable quarters of the succeeding taxable years has been made, such option shall be
considered irrevocable for that taxable period and no application for tax refund or issuance of a
tax credit certificate shall be allowed therefor.
The predecessor provision of Section 76 of the NIRC of 1997 is Section 79 of the NIRC of 1985,
which provides:
Section 79. Final Adjustment Return. - Every corporation liable to tax under Section 24 shall file
a final adjustment return covering the total net income for the preceding calendar or fiscal year.
If the sum of the quarterly tax payments made during the said taxable year is not equal to the
total tax due on the entire taxable net income of that year the corporation shall either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may be.
In case the corporation is entitled to a refund of the excess estimated quarterly income taxes-
paid, the refundable amount shown on its final adjustment return may be credited against the
estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year.
As can be seen, Congress added a sentence to Section 76 of the NIRC of 1997 in order to lay down
the irrevocability rule, to wit:
xxx Once the option to carry-over and apply the excess quarterly income tax against income tax
due for the taxable quarters of the succeeding taxable years has been made, such option shall be
considered irrevocable for that taxable period and no application for tax refund or issuance of a
tax credit certificate shall be allowed therefor.
In Philam Asset Management, Inc. v. Commissioner of Internal Revenue,12 the Court expounds
on the two alternative options of a corporate taxpayer whose total quarterly income tax
payments exceed its tax liability, and on how the choice of one option precludes the other, viz:
The first option is relatively simple. Any tax on income that is paid in excess of the amount due
the government may be refunded, provided that a taxpayer properly applies for the refund.
The second option works by applying the refundable amount, as shown on the FAR of a given
taxable year, against the estimated quarterly income tax liabilities of the succeeding taxable year.
These two options under Section 76 are alternative in nature. The choice of one precludes the
other. Indeed, in Philippine Bank of Communications v. Commissioner of Internal Revenue, the
Court ruled that a corporation must signify its intention - whether to request a tax refund or claim
a tax credit - by marking the corresponding option box provided in the FAR. While a taxpayer is
required to mark its choice in the form provided by the BIR, this requirement is only for the
purpose of facilitating tax collection.
One cannot get a tax refund and a tax credit at the same time for the same excess income taxes
paid. xxx
In Commissioner of Internal Revenue v. Bank of the Philippine Islands,13 the Court, citing the
aforequoted pronouncement in Philam Asset Management, Inc., points out that Section 76 of the
NIRC of 1997 is clear and unequivocal in providing that the carry-over option, once actually or
constructively chosen by a corporate taxpayer, becomes irrevocable. The Court explains:
Hence, the controlling factor for the operation of the irrevocability rule is that the taxpayer chose
an option; and once it had already done so, it could no longer make another one. Consequently,
after the taxpayer opts to carry-over its excess tax credit to the following taxable period, the
question of whether or not it actually gets to apply said tax credit is irrelevant. Section 76 of the
NIRC of 1997 is explicit in stating that once the option to carry over has been made, "no
application for tax refund or issuance of a tax credit certificate shall be allowed therefor."
The last sentence of Section 76 of the NIRC of 1997 reads: "Once the option to carry-over and
apply the excess quarterly income tax against income tax due for the taxable quarters of the
succeeding taxable years has been made, such option shall be considered irrevocable for that
taxable period and no application for tax refund or issuance of a tax credit certificate shall be
allowed therefor." The phrase "for that taxable period" merely identifies the excess income tax,
subject of the option, by referring to the taxable period when it was acquired by the taxpayer. In
the present case, the excess income tax credit, which BPI opted to carry over, was acquired by
the said bank during the taxable year 1998. The option of BPI to carry over its 1998 excess income
tax credit is irrevocable; it cannot later on opt to apply for a refund of the very same 1998 excess
income tax credit.
The Court of Appeals mistakenly understood the phrase "for that taxable period" as a prescriptive
period for the irrevocability rule. This would mean that since the tax credit in this case was
acquired in 1998, and BPI opted to carry it over to 1999, then the irrevocability of the option to
carry over expired by the end of 1999, leaving BPI free to again take another option as regards
its 1998 excess income tax credit. This construal effectively renders nugatory the irrevocability
rule. The evident intent of the legislature, in adding the last sentence to Section 76 of the NIRC
of 1997, is to keep the taxpayer from flip-flopping on its options, and avoid confusion and
complication as regards said taxpayer's excess tax credit. The interpretation of the Court of
Appeals only delays the flip-flopping to the end of each succeeding taxable period.
The Court similarly disagrees in the declaration of the Court of Appeals that to deny the claim for
refund of BPI, because of the irrevocability rule, would be tantamount to unjust enrichment on
the part of the government. The Court addressed the very same argument in Philam, where it
elucidated that there would be no unjust enrichment in the event of denial of the claim for refund
under such circumstances, because there would be no forfeiture of any amount in favor of the
government. The amount being claimed as a refund would remain in the account of the taxpayer
until utilized in succeeding taxable years, as provided in Section 76 of the NIRC of 1997. It is
worthy to note that unlike the option for refund of excess income tax, which prescribes after two
years from the filing of the FAR, there is no prescriptive period for the carrying over of the same.
Therefore, the excess income tax credit of BPI, which it acquired in 1998 and opted to carry over,
may be repeatedly carried over to succeeding taxable years, i.e., to 1999, 2000, 2001, and so on
and so forth, until actually applied or credited to a tax liability of BPI.
Inasmuch as the respondent already opted to carry over its unutilized creditable withholding tax
of ₱1,200,000.00 to taxable year 1998, the carry-over could no longer be converted into a claim
for tax refund because of the irrevocability rule provided in Section 76 of the NIRC of 1997.
Thereby, the respondent became barred from claiming the refund.
However, in view of it irrevocable choice, the respondent remained entitled to utilize that
amount of ₱1,200,000.00 as tax credit in succeeding taxable years until fully exhausted. In this
regard, prescription did not bar it from applying the amount as tax credit considering that there
was no prescriptive period for the carrying over of the amount as tax credit in subsequent taxable
years.14
The foregoing result has rendered unnecessary any discussion of the assigned errors committed
by the CA.
WHEREFORE, we reverse and set aside the decision dated November 28, 2002 promulgated in
C.A.-G.R. Sp. No. 68461 by the Court of Appeals, and declare that PL Management International
Phils., Inc. is not entitled to the refund of the unutilized creditable withholding tax of
₱1,200,000.00 on account of the irrevocability rule provided in Section 76 of the National Internal
Revenue Code of 1997.
We rule that PL Management International Phils., Inc. may still use the creditable withholding tax
of ₱1,200,000.00 as tax credit in succeeding taxable years until fully exhausted.
No pronouncement on costs of suit.
SO ORDERED.
WHEREFORE, the Petition is DENIED. The decision of the Court of Appeals disallowing the claimed
deduction of P16,227,851.80 is AFFIRMED.
SO ORDERED.

8.
San Agustin v. CIR GR No. 138485
SAN AGUSTIN v. CIR
Doctrine:

Facts:
Atty. Jose San Agustin leaving his wife Dra. Felisa L. San Agustin as sole heir. He left a holographic will
giving all his estate to his widow, and naming retired Justice Jose Y. Feria as Executor thereof.

Probate proceedings were instituted. Pursuantly, notice of decedent's death was sent to the CIR on August
30, 1990.

An estate tax return reporting an estate tax due of P1,676,432.00 was filed on behalf of the estate, with
a request for an extension of two years for the payment of the tax, inasmuch as the decedent's widow
(did) not personally have sufficient funds, and that the payment (would) have to come from the estate.

BIR Deputy Commissioner granted the heirs an extension of only six (6) months, subject to the imposition
of penalties and interests under Sections 248 and 249 of the National Internal Revenue Code, as amended.

The RTC allowed the will and appointed Jose Feria as Executor of the estate. The executor submitted to
the probate court an inventory of the estate with a motion for authority to withdraw funds for the
payment of the estate tax. Such authority was granted by the probate court.

Thereafter, the executor paid the estate tax in the amount of P1,676,432 as reported in the Tax Return
filed with the BIR. This was well within the six (6) months extension period granted by the BIR.

Felisa received a Pre-Assessment Notice from the BIR, dated August 29, 1991, showing a deficiency estate
tax of P538,509.50, which, including surcharge, interest and penalties, amounted to P976,540.00.

On October 1, 1991, within the ten-day period given in the pre- assessment notice, the executor filed a
letter with the petitioner Commissioner expressing readiness to pay the basic deficiency estate tax of
P538,509.50 as soon as the Regional Trial Court approves withdrawal thereof, but, requesting that the
surcharge, interest, and other penalties, amounting to P438,040.38 be waived, considering that the
assessed deficiency arose only on account of the difference in zonal valuation used by the Estate and the
BIR, and that the estate tax due per return of P1,676,432.00 was already paid in due time within the
extension period.

The Commissioner accepted payment of the basic deficiency tax in the amount of P538,509.50 through
its Receivable Accounts Billing Division.
The request for reconsideration was not acted upon until January 21, 1993, when the executor received
a letter, dated September 21, 1992, signed by the Commissioner, stating that there is no legal justification
for the waiver of the interests, surcharge and compromise penalty in this case, and requiring full payment
of P438,040.38 representing such charges within ten (10) days from receipt thereof.

In view thereof, the respondent estate paid the amount of P438,040.38 under protest on January 25,
1993.

On February 18, 1993, a Petition for Review was filed by the executor with the CTA with the prayer that
the Commissioner's letter/decision, dated September 21, 1992 be reversed and that a refund of the
amount of P438,040.38 be ordered.

The Commissioner opposed the said petition, alleging that the CTA's jurisdiction was not properly
invoked inasmuch as no claim for a tax refund of the deficiency tax collected was filed with the Bureau
of Internal Revenue before the petition was filed, in violation of Sections 204 and 230 of the National
Internal Revenue Code. Moreover, there is no statutory basis for the refund of the deficiency surcharges,
interests and penalties charged by the Commissioner upon the estate of the decedent.

The CTA modified the CIR's assessment for surcharge, interests and other penalties from P438,040.38 to
P13,462.74, representing interest on the deficiency estate tax, for which reason the CTA ordered the
reimbursement to the respondent estate the balance of P423,577.64

The decision of the Court of Tax Appeals was appealed by the Commissioner of Internal Revenue to the
Court of Appeals. The Court of Appeals granted the petition of the Commissioner of Internal Revenue and
held that the Court of Tax Appeals did not acquire jurisdiction over the subject matter and that,
accordingly, its decision was null and void.

Issues:
1. The filing of a claim for refund [is] not essential before the filing of the petition for review.
2. The imposition by the respondent of surcharge, interest and penalties on the deficiency estate tax is
not in accord with the law and therefore illegal.

Ruling:
The Court finds the petition partly meritorious.
The case has a striking resemblance to the controversy in Roman Catholic Archbishop of Cebu vs. Collector
of Internal Revenue. The petitioner in that case paid under protest the sum of P5,201.52 by way of income
tax, surcharge and interest and, forthwith, filed a petition for review before the Court of Tax Appeals.
Then respondent Collector (now Commissioner) of Internal Revenue set up several defenses, one of which
was that petitioner had failed to first file a written claim for refund, pursuant to Section 306 of the Tax
Code, of the amounts paid. Convinced that the lack of a written claim for refund was fatal to petitioner's
recourse to it, the Court of Tax Appeals dismissed the petition for lack of jurisdiction. On appeal to this
Court, the tax court's ruling was reversed; the Court held:

It would appear that, as early as 23 September 1991, the estate already received a pre-assessment notice
indicating a deficiency estate tax of P538,509.50. Within the ten-day period given in the pre-assessment
notice, respondent Commissioner received a letter from petitioner expressing the latter's readiness to
pay the basic deficiency estate tax of P538,509.50 as soon as the trial court would have approved the
withdrawal of that sum from the estate but requesting that the surcharge, interests and penalties be
waived. On 04 October 1991, however, petitioner received from the Commissioner notice insisting
payment of the tax due on or before the lapse of thirty (30) days from receipt thereof. The deficiency
estate tax of P538,509.50 was not paid until 19 December
1991.
The delay in the payment of the deficiency tax within the time prescribed for its payment in the notice of
assessment justifies the imposition of a 25% surcharge in consonance with Section 248A(3) of the Tax
Code. The basic deficiency tax in this case being P538,509.50, the twenty-five percent thereof comes to
P134,627.37. Section 249 of the Tax Code states that any deficiency in the tax due would be subject to
interest at the rate of twenty percent (20%) per annum, which interest shall be assessed and collected
from the date prescribed for its payment until full payment is made.

In sum, the tax liability of the estate includes a surcharge of P134,627.37 and interest of P13,462.74 or a
total of P148,090.00.

The deficiency assessment for surcharge, interest and penalties is modified and recomputed to be in the
amount of P148,090.00 surcharge of P134,627.37 and interest of P13,462.74. Petitioner estate having
since paid the sum of P438,040.38, respondent Commissioner is hereby ordered to refund to the Estate
of Jose San Agustin the overpaid amount of P289,950.38